Connecticut's high concentrations of individual wealth and significant number of corporate headquarters result in large fluctuations in revenue as economic conditions change. Revenue fluctuations result in significant revenue shortfalls when the economy is under-performing, requiring cuts in programs, reductions in aid to cities and towns, tax increases or all of the above.
The Budget Reserve Fund (also known as the Rainy Day Fund) can be used as an important tool for stabilizing the state’s revenue stream to protect against large fluctuations in revenue.
Previously, the state only made deposits into the Budget Reserve Fund when there was a surplus not set aside for another purpose.
The fund will better manage revenue fluctuations if excess revenue from the state’s most volatile revenue sources are automatically deposited into the fund during periods of strong economic growth and used to offset revenue shortfalls during economic downturns.
NUTS & BOLTS
A PICTURE OF POSSIBILITY
The Budget Reserve Fund was amended in Public Act 15-244 to create a deposit formula that calculates a fund threshold every fiscal year, above which any additional funds from specified revenue streams will be mandated to be transferred to the Budget Reserve Fund.
The purpose of the Budget Reserve Fund, as is described in Public Act 15-244, is to maintain and invest its funds for the purposes of reducing volatility in the General Fund and reducing the need for increases in tax revenue and reductions in state aid due to economic changes.
Connecticut will increase its reserves and reduce revenue volatility by following the new formula’s requirement of automatic deposits to the Budget Reserve Fund whenever the most volatile tax revenue streams bring in revenue above the deposit threshold.
Two tax revenue streams that are particularly volatile due to the demographic and economic makeup of Connecticut are the estimated and final payments portion of the income tax and the corporation business tax, which is why these are the two revenue streams that will be tied to the Budget Reserve Fund deposit formula.
In the past two recessions, reserves have been inadequate to fill revenue shortfalls.
However, had Connecticut had this new Budget Reserve Fund deposit formula in place beginning in 1992, reserves may have looked more like this:
The Comptroller is not required by P.A. 15-244 to certify the threshold level for deposits to the Budget Reserve Fund until Fiscal Year 2020, however, the Comptroller will begin reporting the threshold level in the Annual Report of the State Comptroller on a Budgetary Basis in Fiscal Year 2016. The actual transfer of funds according to the threshold deposit formula will not commence until Fiscal Year 2021.
Download a summary of the initial proposal here
NEWS & INFO:
"Virginia’s reserve rebuilding mechanism is a strong feature of its Aaa rating and will help to prepare it for future downturns."
-Moody's Investors Service
According to a MassINC study in 2008, Connecticut was the second most at risk in the country if capital gains income within the state declined.