Lamont leans on reserves to cover deficit

Gov. Ned Lamont recommended Thursday that Connecticut tap 60 percent of its record-setting, $3 billion budget reserve to solve the bulk of the $2 billion deficit it faces — a problem due largely to the coronavirus pandemic.

And while Congress has been slow to adopt a third wave of economic assistance, the Lamont administration estimates existing federal relief will cover $100 million of Connecticut’s problems this fiscal year.

The rest of the shortfall would be covered by canceling previously approved tax relief for businesses, restricting hiring, and ordering a series of small cuts across most state agencies.

“The size and scope of the budget shortfall we are anticipating this year due to the COVID-19 pandemic leaves us few options,” said Office of Policy and Management Secretary Melissa McCaw, Lamont’s budget director. “Fortunately, we were able to save more than $3 billion over the last few years that allows us to avoid the drastic actions some states across the country have needed to take such as short-term borrowing or tax increases.”

Connecticut’s $3 billion rainy day fund, amassed largely due to surging state income tax receipts over the past three years, is at it’s legal maximum, represents 15 percent of General Fund expenditures.

The reserve actually exceeded 15 percent by $61 million when the last fiscal year ended on June 30. Lamont and state Treasurer Shawn Wooden announced Thursday that the $61 million excess would be transferred into the pension fund for retired state employees.

How much will the state need?

But Thursday the administration recommended drawing $1.83 billion from the reserve to balance the books — if necessary over the remaining nine months of the current fiscal year.

It remains uncertain, though, whether Connecticut will need to draw the full amount.

Administration officials have acknowledged that the stock market has recovered much of the value it lost immediately after the pandemic began in March.

While the current deficit projection of $2 billion is huge — representing more than 10 percent of General Fund spending — administration officials were anticipating a much larger gap for the 2020-21 fiscal year, about $2.7 billion, just a few months ago.

And Comptroller Kevin P. Lembo revised his deficit projection Thursday to a relatively-rosier-but-stillimposing $1.87 billion.

The Senate’s top Republican, Minority Leader Len Fasano, R-North Haven, criticized the Democratic governor for relying too heavily on the rainy day fund and for not identifying more spending cuts now.

“The governor’s administration is failing in its responsibility and using a dangerous ‘wait-and-see’ strategy to avoid a difficult conversation,” Fasano said. “The law is clear that when faced with the current budget problems, the governor must present a true deficit mitigation plan ‘to modify such allotments to the extent necessary to prevent a deficit.’ What the governor’s administration put forward today does not meet that requirement. It is incomplete.”

Connecticut officials believe the state can obtain another $100 million in additional federal aid from existing pandemic relief programs, and Lamont has said he remains hopeful that Congress will enact a third wave of assistance either later this year or early in 2021. Negotiations between U.S. House Democrats and the White House over the next stimulus package have been taking place this week.

But McCaw noted Connecticut’s economy remains fragile. The hospitality sector, particularly restaurants, was hit hard, and could be left in worse shape if the pandemic worsens as flu season and the winter approaches.

The question is, will the positive trend continue?” McCaw said. “We have to be a little more measured and prudent.”

Given that risk, she added, the deficit numbers are daunting enough that state officials must at least prepare some measures to mitigate the gap further.

The governor’s plan calls for legislators to cancel almost $30 million in previously approved tax relief for businesses that hasn’t yet taken effect, including the planned removal of a 10 percent surcharge on the corporation tax.