Connecticut’s $3 Billion Budget Reserve May be Gone in 14 Months

(Bloomberg) -- Just as Connecticut was getting its fiscal house back in order, the coronavirus is wrecking it.

In 2017, lawmakers passed a bill requiring the state, which is heavily reliant on Wall Street for income-tax revenue, to stock its rainy-day fund with any capital gains and bonus taxes that exceed a certain threshold. A record setting stock-market and strong securities-industry profits allowed the state to build a $2.8 billion rainy day reserve. Investors rewarded Connecticut with its smallest yield penalties since 2014 and rating companies boosted the outlook on the state's debt.

On Thursday, officials projected the budget reserve may be depleted by the end of the next fiscal year, if the state doesn't get any additional federal aid or change tax and spending policy. The Legislature's Office of Fiscal Analysis estimates that Connecticut's revenue will plummet by almost $3.2 billion in the next 14 months as income and sales taxes evaporate because of the coronavirus shutdown. Connecticut's annual budget is about $19.5 billion.

“The COVID-19 pandemic has created a budget environment that is providing new challenges to every state in the country, and that's especially true of Connecticut,” Office of Policy and Management Secretary Melissa McCaw said in a news release. “Connecticut is in a stronger position entering this pandemic storm as a direct result of the fiscal discipline associated with the robust balance of the state's rainy day fund, however, it may not be adequate.”

Connecticut estimates that general-fund revenue will decline by 11% in fiscal 2021 and 11.8% in fiscal 2022. The estimates are conservative, McCaw said.

The economic contraction wrought by the coronavirus is hitting Connecticut before it fully recovered from the last one. The state never fully recouped all the jobs lost from the Great Recession and Connecticut's economy hasn't grown in the last decade. Fixed costs for debt, health care and employee pensions eat up more than 30% of state spending.

Yields on Connecticut's 10-year general obligation bonds have surged to 2.5%, or 1.1 percentage point more than AAA rated securities and the widest spread since at least 2013, according to data compiled by Bloomberg. In February, that spread was about 0.3 percentage point.