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Lembo Says Wall Street, Other Factors, Could Strain Budget

HARTFORD — Though the new state budget is just two months old, Connecticut’s chief fiscal watchdog already is warning about several problems that could push state finances into the red.

Comptroller Kevin P. Lembo warned that not only unstable financial markets, but also aggressive savings targets and revenue from new keno gaming all increase the budgetary uncertainty.

Lembo officially certified Tuesday that this fiscal year’s general fund – which covers the bulk of operating costs in the $19.8 billion overall budget – is on pace to finish $800,000 in the black.

This is the fiscal cushion built into the budget by Gov. Dannel P. Malloy and the legislature, and an official projection that matches the budget’s bottom line is common during the first two months of the fiscal year, which began on July 1.

But there already are signs that keeping the budget in balance will be a challenge, according to the comptroller, starting with the recent market correction on Wall Street.

“The current volatility in the financial markets has also complicated the budget outlook for Fiscal Year 2016,” the comptroller said. “Over the past several years, the state has experienced significant fluctuations in capital gains-related receipts.”

State government’s single-largest source of revenue, the personal income tax, is expected to raise $9.7 billion this fiscal year. About 40 percent of those receipts come from returns filed quarterly – much of which involves capital gains, dividends and other investment-related income.

thumb_connecticut-budget-update1Unlike income tax receipts from paycheck withholding, investment-related payments traditionally fluctuate greatly from year to year, with the annual percentage change often stretching into double digits. The Dow Jones Industrial Average, the leading indicator of the health of blue-chip stocks, suffered its first 10 percent correction since 2010 in August.

“Its important to remember that the stock market is not the economy,” Malloy’s budget director, Office of Policy and Management Secretary Benjamin Barnes, said Tuesday. “Unemployment is down, and Connecticut’s economy continues to strengthen.  Nevertheless, we do partly depend on taxes based on capital gains to support state government in Connecticut.  We will monitor our revenues closely and take action to keep the budget in balance as needed.”

Lembo noted that in late 2012, investors took significant capital gains to take advantage of an expiring 15 percent rate within the federal income tax. But while Connecticut experienced a one-time surge in state income tax receipts because of that in 2013, it was more than offset by a sharp drop one year later as investor confidence remained somewhat shaken.

And the comptroller added that Connecticut didn’t meet its goal last fiscal year for investment-related income tax receipts.

“It remains to be seen if the increase in gains related to sales will help to mitigate the negative impact of the present market decline,” Lembo said.

The situation on Wall Street isn’t the comptroller’s only concern with this year’s budget.

Every budget includes built-in savings targets that agencies must achieve throughout the year. But this budget relies on almost $190 million in agency savings – about $30 million more than last year’s budget.

Lembo also cited a new revenue component in the budget – the launch of keno at many Connecticut bars and restaurants. This game, which is expected to begin around January, is expected to raise $13.6 million.

These and other revenue assumptions need to be monitored closely, he said, adding that “undoubtedly, revenues will be adjusted in future months as trends become better defined.”

The comptroller is expected to close the books later this month on the 2014-15 fiscal year, a budget that is on pace to feature the first deficit of Malloy’s administration, albeit a small one.

The last projection from both the governor’s budget staff and from Lembo placed that likely shortfall at $70.9 million, or just under one-half of 1 percent of the general fund.

The legislature already has determined that any 2015 deficit will be closed by drawing on the emergency reserve – commonly known as the Rainy Day Fund – which currently holds about $520 million.

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