By Kevin McNabola
Orange Board of Finance
Kevin McNabola
Having spent close to 20 years within corporate and public finance, where fiscal discipline and delivering bottom line results are the expected on an annual basis, we are finally starting to see positive financial results and the state of Connecticut taking the necessary steps to ensure fiscal stability. It is important that the gains that have been made over the last five years are not compromised going forward with budget gimmicks and financial maneuvers that could place $400 million of spending outside the state spending cap.
The latest projection on the 2024 state budget is for continued growth; revenues are currently outperforming expenditures with a $1.4 billion projected surplus for the fiscal year ending in 2023. Revenue for the current year is already ahead by $893 million, largely due to continued growth within the sales and use tax based on the high demand for goods and services on top of historically high inflation. Another key area of growth within state revenues has been within investment income, again based on rising interest rates.
The governor and state comptroller have done an excellent job of using the surplus and paying down Connecticut’s $86.8 billion in long-term liabilities, which includes paying down pension debt. The governor and comptroller are on the same page with respect to ensuring that Connecticut stays on the right path to fiscal stability and sustainability.
The state legislature also recently took the right steps by renewing the budgetary controls put in place in 2017 by increasing the budget reserve fund cap for the general fund from 15 percent to 18 percent. They also renewed the bond lock for the next 10 years.
The following fiscal guardrails, enacted in 2017, are leading to positive financial results and continued fiscal sustainability:
– The volatility cap requires that all revenue from the estimates and final portion of the personal income tax and pass-through entity tax are deposited into the budget reserve fund, and if the reserve fund is maxed out, revenue is used to pay down pension debt.
– The revenue cap limits general fund and Special Transportation Fund appropriations to a certain percentage of estimated revenues; 98.75 percent in fiscal year 2023, 98.5 percent in fiscal year 2024, 98.25 percent in fiscal 2025, then 98 percent in fiscal 2026 and each year after.
– The spending cap limits general budget expenditures to the level of spending in the previous year plus a percent increase based on either average income growth in the last five years or the consumer price index over the last year – whichever is greater.
– The bond cap limits the issuance of general obligation or credit revenue bonds in excess of $1.9 billion per fiscal year, which grows as indexed to the Consumer Price Index.
Governor Ned Lamont’s budget plan includes an across-the-board cut in the state income tax designed to help the middle class, which at both the state and federal level has proven results. The plan would save taxpayers more money at multiple income levels. For example, for single filers earning $50,000 per year, the governor’s plan would save $270 per year. Couples earning between $175,000 and $275,000 per year would receive the same tax break under the governor’s plan at $500 per year.
The tax savings would be even larger for those who qualify for the earned income tax credit, which is designed to help working families with children. The governor is pushing to boost the state credit to 40 percent of the federal credit, while Democrats within the legislature want to raise it to 45 percent. The amount of the credit varies, depending on the family’s income and number of children.
There has also been a lot of discussion within the state legislature on potentially allocating funds outside the spending cap, which would go against the fiscal controls that were instituted in 2017.
The governor has taken the right steps to move Connecticut forward and I would recommend that the state legislature work with the governor to stay within the spending cap, adhering to the fiscal controls that they instituted. Going back to the old way of doing business in Connecticut is not an option. The governor’s proposed tax plan and fiscal discipline demonstrates to residents and the rating agencies that Connecticut is serious and committed to fiscal reform, which is long overdue.
Kevin McNabola is the chief financial officer for the city of Meriden and a member of the Orange Board of Finance.