HARTFORD, CT — State Comptroller Kevin Lembo agreed with Gov. Ned Lamont’s budget office that the state is on track to end the fiscal year with a $126.1 million surplus.
In his monthly letter to Lamont, Lembo agreed that an unexpected $15 million in the “adjudicated claims” account, which pays out legal settlements, was responsible for lowering the surplus to $126.1 million.
“Our early surplus projection for Fiscal Year 2020 should be treated with cautious optimism because while there are positive early trends, they are just that — early,” Lembo said. “It should also be noted that Connecticut’s budget results are ultimately dependent upon the performance of the national and state economies. For now, economic indicators for the national and state economies are sending mixed messages, with some positive movement on income tax revenue and home price appreciation among lower-price tiers — but also some trends in the bond market that could be recession indicators.”
Lembo said Connecticut is unable to control volatility in the global financial markets or the U.S. trade war with China, but it has built a Rainy Day Fund to help it weather any ups or downs. Lembo suggested that if Connecticut sets more money aside then it will be better off in the future.
Lembo said the current balance in the fund is $1.18 billion. An estimated $949.7 million is expected to be transferred into it in addition to a $195.9 million surplus from this fiscal year which would bring the fund to $2.45 billion, or about 12.1% of the general fund for 2020.
“In order to help protect against future economic downturns, Connecticut must maintain financial discipline and continue building the Budget Reserve Fund balance to the statutory target of 15%,” Lembo said.
Lembo noted that withholding taxes grew 8.4% between 2018 and 2019.
“This is especially significant because the withholding portion of the income tax is the largest single General Fund revenue source,” Lembo said.
The final numbers won’t be ready until Sept. 30.
“Early indications for FY 2020 show a similar trend as the FY 2019 preliminary results, with withholding collections in July 2019 growing at a similar rate over July 2018,” Lembo said.
But there is cause for concern.
“Significant, job growth continues to be in negative territory for calendar 2019,” Lembo said.
Connecticut has only recovered 79.7% of the jobs lost in the Great Recession. The state needs an additional 24,400 new net jobs to reach an overall employment expansion.
At the same time, “Connecticut’s population is smaller than it was eight years ago. While the decline is small (approximately 6,500), Connecticut is one of only three states to lose population since the 2010 Census,” Lembo noted.
He said it could hinder Connecticut’s potential for economic expansion.
Lembo also noted the volatility in the stock market starting in mid-May. In June and July, the markets trended back upward with all three major indices touching historic highs. However, volatility returned in August, as a number of issues weighed on investors.
“The trade war with China remains unresolved with tensions escalating as both countries threaten additional tariffs,” Lembo said. “Fears of recession increased as a number of national economies showed signs of slowing and the so-called yield curve inverted.”
The reason for concern is that an inverted yield curve can be a sign that investors are more pessimistic about the economy’s long-term prospects. On the other hand, the national job market remains strong and consumer spending rebounded in the second quarter of 2019.
“Therefore, it is possible the yield curve inversion is just an anomaly and not a sign of a coming recession,” Lembo said.
Don Klepper-Smith, an economist with DataCore Partners LLC, has pegged the odds of a recession above 50% in 2019, and at 70% between now and the end of 2020,
“The odds are that both Connecticut and the nation are apt to be encountering a full-blown national recession prior to full job recovery in Connecticut, which raises serious questions about the state’s fiscal health over the near-term,” Klepper-Smith said last month.