As legislative leaders and Gov. Dannel P. Malloy meet to solve the budget shortfall, state Comptroller Kevin Lembo called on them to look at reducing the 2016 budget by at least $350 million.
Lembo said he supports the use of $350 million as a reasonable deficit mitigation target.
Lawmakers and Malloy will meet Tuesday afternoon to see if they can’t reach an agreement on a deficit mitigation plan.
In his monthly letter to Malloy, Lembo pointed to troubling economic trends as a reason to look at reducing the 2016 budget by $350 million.
“Of greatest concern are the last two consecutive months of state job losses and the related negative impact on the withholding portion of the income tax,” Lembo said.
Withholding receipts are the largest single general fund revenue source. They account for over 60 percent of total income tax receipts and about 40 percent of total general fund revenue, Lembo wrote in his monthly letter to Malloy.
Over the past three fiscal years, the growth in withholding portion of the income tax has been below 4 percent. And, on a year-to-date basis through October, it was up just 1.4 percent. If this trend does not improve in the near term, additional downward adjustments to revenue will be required, Lembo wrote.
With a recent revenue forecast, general fund revenues for 2016 have been revised down by $217.5 million from the initial budget plan. The largest single revenue revision is to the income tax, which is down $189.4 million.
On the other side of the ledger, the Office of Policy and Management has estimated achieving $303.4 million in savings this fiscal year – a feasible target considering that the state has achieved an average of $326.4 million in general fund budget savings per year over the past three fiscal years. Lembo said significant savings have been realized in debt service due to low borrowing costs and the related bond premiums received by the state Treasurer.
“An increase in interest rates will limit the state’s ability to realize future savings in debt service,” Lembo said. “I am hopeful that the ongoing budget negotiations will produce the policy revisions necessary for OPM to attain the lapse target included in the current projections.”
Lembo said there are several economic factors that will continue to influence the state budget going forward and must be watched.
“The state is likely to continue to experience significant budget pressure until the withholding portion of the income tax resumes a normal expansionary growth trend,” Lembo said. “Part of the state’s slow withholding growth can be attributed to the distribution of job gains by employment sector during this recovery. The financial services sector pays wages that are more than 50 percent above the statewide average for all sectors – however, the financial services sector remains 14,700 jobs (10 percent) below its pre-recession level.”
Then there’s the leisure and hospitality sector which pays wages 46 percent below the statewide average that has added 19,200 jobs to its pre-recession level.
“There are additional budgetary risk factors that bear watching,” Lembo said. “Our state economy is linked to the national economy which, in turn, is dependent on the global economy. Global economic events have generally constrained domestic growth.”
Lembo also certified a $122.4 million deficit, which is a $4 million increase over last month.