Still struggling to pay its debt from the last recession, Connecticut might have avoided that emergency borrowing - and have double its current reserves - had it followed a new savings strategy unveiled last week by Comptroller Kevin P. Lembo. But to beef up its bank account as Lembo suggests, Connecticut must recognize that some of its most lucrative taxes - levies on investment income and corporations - drop most quickly when times get tough.

Lembo's plan would:

• Increase the maximum savings allowed by the state;

• Trigger automatic deposits into the budget reserve, commonly known as the Rainy Day Fund;

• And waive savings requirements during economic slumps and initial periods of recovery.

"Had such a deposit formula been in place since the inception of the income tax, Connecticut would have more easily weathered the most recent recessions," Lembo wrote in a position paper submitted to the General Assembly.

Current law allows the legislature and governor to build reserves up to 10 percent of the general fund. Based on the current budget, that represents a limit of $1.75 billion.

But Connecticut has never amassed reserves greater than 8 percent of annual operating costs. And those reserves never matched the revenue losses sustained during the last two recessions as tax receipts plummeted.

For example, the state had $595 million in its Rainy Day Fund entering the recession of 2001-to-2003, yet faced a revenue shortfall of about $1.7 billion over that period. Similarly, Connecticut had a record-setting $1.38 billion in reserve entering The Great Recession in 2009, then watched revenues plunge by more than $2.4 billion.

Not surprisingly, legislatures and governors raised taxes after both economic downturns.

Gov. Dannel P. Malloy and the legislature have struggled to rebuild the reserve since the last recession. It currently holds $519 million, which is equal to about 3 percent of annual operating costs.

The first step, according to Lembo, is to raise the maximum Rainy Day Fund reserve to 15 percent of annual operating expenses. That would represent about $2.63 billion based on the current budget. Connecticut needs a big cushion given its heavy reliance on the fiscal rollercoaster that is Wall Street and the financial services sector of the economy. That income tends to "rise and fall with economic booms and busts," the comptroller wrote.

In 2009, capital gains dropped 60 percent, leading to a $904 million decline in quarterly state income tax payments.

Raising the savings limit is just the first step, the comptroller said, noting that Connecticut has a history of not saving when it had the chance. Since 1990, the state has had over $5 billion in revenue windfalls, yet deposited less than half of that amount into the Rainy Day Fund.

"In essence, Connecticut has used temporary windfalls to fund both one-time and recurring state budget expenditures instead of putting them aside to cover inevitable revenue declines during economic downturns," Lembo wrote.

In order to save more, Lembo proposes a formula that relies not only on average corporation and income tax receipts over the last 10 years, but also calculates average annual growth in these volatile taxes. When receipts are projected to grow beyond the average for the previous decade, Connecticut would automatically save those funds.

Had Connecticut followed this savings approach - and made the corresponding sacrifices in annual spending - its reserves before the last recession would have topped $3.4 billion. Instead, Connecticut exhausted its $1.38 billion Rainy Day Fund and still had to borrow another $1 billion to balance its books in 2009.

But this doesn't mean Connecticut must save every single year, said the comptroller. If the goal of a budget reserve is to smooth out the economic highs and lows of a budget based on volatile taxes, then deposits sometimes must be waived when times are tough. If the choice is to make deposits or to cut vital programs that eventually will be rebuilt when times are better, then deposits could be deferred, he said.

Lembo added that increasing government's power to save money always is politically tricky, and will be challenged by some as evidence that taxes are too high. Yet if utilized, it can take the state off of the fiscal equivalent of a binge-diet dynamic.

"This system preserves a progressive tax environment while putting some rational thinking on the budget-making process," Lembo said, adding he's optimistic that officials who recall the budgetary challenges of the last recession will consider his proposal.

"These concepts should be compelling for anyone who has had to sign, or cast a vote on, a budget in the last few years," he said.

Keith M. Phaneuf is a reporter for The Connecticut Mirror (www.ctmirror.org). Copyright 2015 &Copy; The Connecticut Mirror. kphaneuf@ctmirror.org