Don't squander unexpected revenues, stick with 'volatility cap'

In early November, after the state legislature had finally passed a budget that gained the signature of Gov. Dannel P. Malloy — nearly four months into the fiscal year — the editorial board sat down with the Senate co-chairs of the Appropriations Committee.

Both are local and should be familiar to Day readers: Sen. Cathy Osten, D-Sprague, who represents the 19th District, and Sen. Paul Formica, R-East Lyme, who represents the 20th District.

They were particularly proud of a budgetary reform that passed with bipartisan support — the “volatility cap.” Too often in the past, legislatures would squander sudden spikes in tax revenue and base future spending on a bubble that was sure to pop, producing yet more deficits.

The volatility cap formula instead directs revenue from such windfalls into the state’s emergency reserve, commonly known as the Rainy Day Fund, and as necessary use it to address long-term obligations, like debt service. It forces the legislature to take a more conservative, realistic approach to budgeting based on an averaging of revenues over time.

It is a good reform. The senators were right to be proud of having played a hand in implementing it.

Now the legislature, perhaps quicker than it could have expected, faces its first situation in which the volatility cap comes into play. It must resist the temptation to work around it.

On Monday, the Malloy administration announced that collections of personal income taxes in December and January will exceed budgetary projections by more than $900 million. Unfortunately, this is not an indication that Connecticut has turned a corner. It is not tied to some sudden jump in high-income earners moving into the state or to existing millionaires seeing their taxable incomes spike.

Instead, the big jump in tax revenues can be attributed to one-time payments tied to a law Congress passed back in 2008, explained Benjamin Barnes, secretary of the Office of Policy and Management. The federal law required hedge fund managers, of which Connecticut has more than a few, to bring overseas profits back to the United States by the end of 2017.

Also playing a role, but likely to a lesser degree, said Barnes, are increased collections attributable to taxpayer efforts to accelerate tax payments they would normally pay in 2018, thus taking best advantage of, or minimizing damage from, the new tax laws Congress passed last month.

In other words, this spike in revenue will largely be one-time money. It could result in lower tax revenues in 2018 because some wealthy taxpayers accelerated payments.

It is exactly what the legislature designed the volatility cap to guard against.

Under the cap, only about $10 million of the estimated $900 million in higher-than-expected tax revenues can be used to offset the $224 million budget deficit projected in the current fiscal year, which runs through June 30. The rest of the money must go into the Rainy Day Fund, according to provisions of the cap.

It could be tempting, certainly, for the legislature to ignore the cap and direct some of that new-found cash to close the deficit without having to make painful choices. Worst yet, the legislature could spend the one-time money on other unmet needs and pet projects.

That would be another Band-Aid fix, again demonstrating that our elected leaders are not serious about making the structural changes necessary to address the on-going fiscal crisis confronting our state.

Malloy, now in his last year in office, praised the legislature for installing the volatility cap and made it clear he wants them to stick to it.

“If we … use these one-time revenues to build our Rainy Day Fund, we will give Connecticut residents and businesses the fiscal responsibility they have been demanding,” Malloy said.

Ideally, the legislature would abide by the cap and work with the governor to close the deficit this year. The more likely political course, however, is that the legislature will no longer face the urgency to close the existing $224 million budget deficit because it knows a replenished Rainy Day Fund can cover it when the fiscal year ends in six months.

That would be better that than repealing or suspending the volatility cap it only recently passed.

If the legislature passes on addressing the deficit, Barnes said the Malloy administration would do what it could to control spending. But, he added, adjustments will have to be made by the legislature to close a deficit that will project at hundreds of millions of dollars for the fiscal year that follows. Relief from this cycle of budgetary problems is not in sight.

The editorial board is composed of the publisher and four journalists of varied editing and reporting backgrounds. The board's discussions and information gained from its meetings with political, civic, and business leaders drive the institutional voice of The Day, as expressed in its editorials. The editorial department operates separately from the newsroom.


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