HARTFORD, CT—Connecticut is still staring down a $1.5 billion deficit in 2018, but state Comptroller Kevin Lembo said Wednesday that the state is running a small $8.7 million surplus this year.
That’s less than the $23.3 million surplus reported on Jan. 20 by the governor’s budget office, but it’s still a surplus.
Lembo said his estimate is lower than the governor’s budget office “due to a variance in estimated claims expenditures in the adjudicated claims account related to settlement payments in the SEBAC v. Rowland case.”
Lembo is anticipating that the state will have to pay more than $9 million to former state employees under the deal. He said it could go as high as $23.6 million if there’s no delay in releasing the money for employees impacted by the 2003 layoffs under former Republican Gov. John G. Rowland, who is currently serving an unrelated second prison sentence. The federal court found Rowland illegally targeted union employees and Attorney General George Jepsen negotiated a settlement, which includes cash payouts in some cases.
Meanwhile, the state’s revenues have improved due mostly to unanticipated legal settlements, but Lembo remains cautious.
“A surplus projection is always good news, though it comes with caution – both for the short and long-term outlook – because it is largely driven by one-time revenue windfalls from legal settlements and possibly optimistic views about final income tax payments,” Lembo said. “I am concerned that the January consensus forecast relies on strong April income tax receipts.”
The picture for income tax receipts at the moment is mixed and it’s unclear, according to Lembo, what that means for April returns.
“Estimated income tax payments through January were below last fiscal year’s receipts,” Lembo said. “Typically, final April payments trend in the same direction as estimated payments – however, because of stock market corrections and subdued bonus payments in the 2015 tax year, a large number of taxpayers may be eligible to utilize safe harbor provisions in the tax code, which allows taxpayers to delay the payment of their full 2016 tax liability until April of 2017, rather than incorporating the payment into their fourth-quarter 2016 estimated payments.”
He said that would explain why estimated payments remain negative despite a strong stock market.
But another troubling sign is that the payroll-driven withholding portion of the income tax has also been slowing.
At the same times, “Connecticut’s overall budget performance is ultimately dependent upon the performance of the national and state economies,” Lembo said.
While initial reports show that Connecticut lost about 2,000 jobs in 2016, the numbers won’t be adjusted until mid-March.
Don Klepper-Smith, an economist with DataCore Partners, has warned against using the year-over-year job loss figure.
He said using an average annual number shows that Connecticut gained 11,600 jobs or 0.7 percent in 2016. This growth rate of 0.7 percent is still about two-thirds of Connecticut’s long-term average annual growth rate of 1.1 percent seen between 1960 and 2015.