Connecticut, Already Strapped, Is Coming Up Short Again

By FeaturesDow Jones Newswires

Connecticut is once again coming up short on cash, and its rainy-day fund is already strained.

About halfway into the budget year, sales and income tax revenues have come in about $208 million under projections. That comes even after lawmakers enacted deep spending cuts, raised fees on motor-vehicle registrations and required teachers to contribute more to their pensions to pass a two-year budget in a bruising process that took 10 months.

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Shortfalls have "caused us to tap our rainy-day fund, our budget-reserve funds," Paul Potamianos, the state's executive budget officer, said on a conference call. "This is a problem for us because our reserves are not growing," even though the nation is not in a recession, he said.

The state's reserves of $213 million currently comprise about 1.1% of expenditures. That compares with a forecasted median of 5.1% around the U.S. this fiscal year, according to a report released Thursday by the National Association of State Budget Officers, or Nasbo.

Connecticut Gov. Dannel Malloy, a Democrat, sent lawmakers a proposal Wednesday to close its budget hole. Mr. Malloy is recommending a mix of spending cuts and tax increases including on sales and cigarettes.

Despite a growing national economy, Connecticut is one of a few outlier states that have dipped into their reserves -- funds saved to help buffer against the next economic downturn, according to the Nasbo report.

Many of the other states that tapped their reserves have done so in reaction to a drop in commodity and oil prices. Alaska, for instance, is projecting a $2.3 billion decline in its reserves in fiscal 2018, after a drop of $10.9 billion from fiscal 2014 to fiscal 2017.

In total, 17 states reported using rainy-day funds to help manage their budget in the last fiscal year, and 10 are forecast to this year, Nasbo said. Still, most states have managed to boost these reserve balances in recent years, the group said. For instance, California is projected to expand its reserves by more than $2.6 billion over three fiscal years ending June 30.

"We're very concerned about when the next recession is coming going to come, so we've been building up," the funds, Michael Cohen, California's finance department director said on the conference call.

Most states across the U.S. tightened their belts this year and adopted cautious budgets that are projected to grow about 2.3%, the lowest increase since 2010 when states were dealing with effects from the last recession, according to the Nasbo report. This confirms the restrained outlook seen earlier this year in budget proposals from governors.

"State budgets for fiscal 2018 reflect substantial caution on the part of policy makers following two consecutive years of sluggish revenue growth coupled with mounting spending demands," the report said.

Connecticut, where economic growth has been weak and the population has been in decline, continues to struggle. This year, two major companies Aetna Inc. and Alexion Pharmaceuticals Inc. announced plans to leave the state, seeking to tap talent pools in bigger cities like Boston and New York.

The two-year budget agreement that state lawmakers and the governor reached in October closed a projected two-year $3.5 billion deficit, but didn't get the state out of difficulty. The nonpartisan budget office projects that lawmakers will have to patch increasing budget shortfalls in the three years beginning in fiscal 2020 and rising to $3.1 billion in 2022.

The state is struggling to balance the rising costs of pension obligations and debt service with sluggish revenue, said Mr. Potamianos, who is also the Nasbo president.

"Revenue is sluggish," he said. "Next year we face the same trends."

Write to Joseph De Avila at joseph.deavila@wsj.com and Jon Kamp at jon.kamp@wsj.com

(END) Dow Jones Newswires

December 14, 2017 07:14 ET (12:14 GMT)