Christine Stuart photo
State Comptroller Kevin Lembo (Christine Stuart photo)

The volatility of the financial markets is complicating budget forecasting, but state Comptroller Kevin Lembo estimated Tuesday that the 2016 budget will end with an $800,000 surplus.

Lembo said he agreed with Gov. Dannel P. Malloy’s budget office regarding the budget estimates and he shares its concerns about potential revenue shortfalls.

“The revenue accruals for Fiscal Year 2015 were not as strong as expected, and there is concern that this trend could continue into Fiscal Year 2016,” Lembo said. “There are also numerous revenue policy changes in Fiscal Year 2016, including an estimated $13.6 million in new revenue from the roll-out of Keno gaming, which will be carefully monitored in the coming months. Undoubtedly, revenues will be adjusted in future months as trends become better defined.”

The 2016 budget relies upon $200.6 million in forced savings from state agencies, which Lembo said could be challenging given the savings extracted from agency budgets in prior fiscal years. Office of Policy and Management Secretary Ben Barnes even admitted in his Aug. 20 letter to Lembo that finding those forced savings, also called lapses, will be challenging.

“On the expenditure side, the adopted budget includes aggressive lapse assumptions, the achievement of which will present significant management challenges to agency heads,” Barnes wrote.

On the revenue side, stock market fluctuations make predicting revenue from income taxes and capital gains difficult, according to a report by the Nelson A. Rockefeller Institute of Government.

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

Lembo noted that in late 2012, investors turned over a large volume of long-term capital gains to take advantage of the expiring 15-percent tax rate, which increased to a top long-term rate of 23.8 percent on Jan. 1, 2013. As a result, the state realized a windfall on the capital gains driven portion of the income tax in 2013. Because this left little in unrealized gains, this significant component of the income tax experienced a sharp drop in 2014. As the market surged, investors were reluctant to take short-term gains because such gains are taxed at a higher ordinary income rate, Lembo said. In 2015, estimated and final tax receipts were below initial budget estimates.

“The recent downturn in the market increased sales volume,” Lembo said. “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.”

Pointing to a rebound in retail sales, automobile purchases, and other indicators, Lembo said, “The fundamentals of the national economy continue to point to future economic growth.”

However, he also pointed out the “one notable drag on both the nation and state economy has been stagnant wage growth.”

Lembo continued: “Wages have not been able to attain their pre-recession growth rates. This has had a significant impact on household consumption, which accounts for about two-thirds of the national economy as measured by GDP. Between 1947 and 2007 annual real household consumption grew by 3.6 percent, on average. Since 2008, growth has been closer to 1.5 percent.”

He added that there have been “sporadic signs that wage growth may begin to strengthen. This bears close watching given the impact of wages on the larger economy and more specifically on Connecticut’s budget outlook.”