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Ending state's boom and bust budgets

The story is a familiar one in Connecticut. When times are good, revenue flows in from its income and corporate taxes. This is true in all states, but the spikes are bigger in Connecticut because a significant portion of income reported by its high earners comes from capital gains, which grow with rising markets. Corporate taxes similarly swell with a growing economy.

When that happens, politicians and the public forget the hard times. Instead, legislators celebrate relief from having to make hard choices. The windfall is squandered on one-time expenditures and a spending level that cannot be sustained.

From 2006 to 2008, for example, with a Republican governor and Democratic state legislature, state budgets grew in consecutive years at rates of 6.1 percent, 6.8 percent and 4.9 percent.

Of course, in time, the economy will dip. Connecticut's volatile income and corporate taxes dive as sharply as they grow, sometimes more so. From 2002-2004, tax revenues fell short by $1.7 billion and Connecticut quickly ate through a $595 million Rainy Day Fund, officially known as the Budget Reserve Fund.

In the Great Recession, the revenue shortfall from 2009-2011 reached $2.4 billion, again in excess of a Rainy Day Fund that before the bottom dropped out had stood at $1.4 billion. Worse yet, those years of unsustainable spending growth had left Connecticut staring at a massive deficit hole.

So what happens? Elected leaders say they have no choice but to cut programs and raise our taxes.

State Comptroller Kevin J. Lembo is offering a solution to end this boom and bust cycle. It will be difficult to implement and will call for political courage and more tough choices. But once implemented, it could end the state's cycle of lavish spending when times are good and higher taxes and painful cuts when times turn bad.

Copied from other states, it would help establish the fiscal sustainability necessary to make the state more competitive in attracting business. Businesses don't like unpredictability, particularly when it results in tax spikes they did not plan on or the abandonment of tax relief they were promised. Similarly, nonprofits that provide services for the state's most needy won't be asked for deeper sacrifices every time markets dip.

Mr. Lembo's idea is to require automatic deposits in the Rainy Day Fund when tax revenues exceed projections. In other words, the legislature would be required to save the money in good times, not squander it. The comptroller says the state also needs to work toward establishing a Rainy Day Fund that equals 15 percent of net General Fund appropriations. The cap is now 10 percent.

It would have a leveling effect. In flush times, the state would save. When hard times returned, those savings would help weather the storm.

"Making changes to the (Rainy Day) deposit formula now will put the state in a better position leading into the next recession, requiring fewer budget cuts and reducing the need for future tax increases," wrote Mr. Lembo in a report to the legislature.

There are big challenges. Coming out of the last deep recession, the legislature is having trouble balancing its budgets, never mind saving. At the end of the last fiscal year, the Rainy Day Fund stood at $519 million, just 3 percent of net appropriations, not enough to weather even a slight downturn.

Even if the legislature implements such a plan to begin in two or three years, as Mr. Lembo proposes, it would be tempted to undo the mandate and spend the money if the economy picks up. However, with a mandate in place, legislators and the governor would be risking the public's wrath to ignore it.

This is an idea the public should demand that the legislature pursue.

The Day editorial board meets regularly with political, business and community leaders and convenes weekly to formulate editorial viewpoints. It is composed of President and Publisher Tim Dwyer, Managing Editor Izaskun E. Larrañeta, staff writer Erica Moser and retired deputy managing editor Lisa McGinley. However, only the publisher and editorial page editor are responsible for developing the editorial opinions. The board operates independently from the Day newsroom.


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