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Saving for a Rainy Day
Tue January 28, 2014
Connecticut's Reserve Fund is Among the Lowest in the U.S., But Why?
Last year, The Pew Charitable Trusts studied fiscal data from the 50 states to see how each could survive on its respective reserve fund. The results were diverse, depending largely on each state’s population and resources.
For Connecticut, the study’s outcome did not look promising. New England’s Constitution State was found to have one of the lowest-ranking reserve funds in the nation. Alaska, on the other hand, came out on top. But why?
Barbara Rosewicz, Research Director at The Pew Charitable Trusts, spoke to WNPR’s Where We Live to provide a more detailed account of Pew’s analysis. According to Rosewicz, several factors were taken into consideration during the study, including the recession’s impact on state tax revenue, and reserve fund viability.
Plunging Tax Revenue, Slow Recovery
“All states took a hit in tax revenues when the great recession hit. In many states, their tax revenue plunged,” Rosewicz said. “Connecticut is one of those in which the revenue plunged quite considerably. In fact, it fell as much as 20 percent from the high that it had before the recession.”
While Rosewicz said each of the 50 states has seen an overall increase in total revenue following the recession, she paid heed to the amount of time it has taken to see this sort of recovery take effect.
“In total revenue, [the 50 states’] revenue is coming back up. In fact, in the very most recent data, they had finally regained all the losses, in inflation-adjusted terms, that they’d had since the recession,” she said. “That sounds really good. But when you think about it, it’s been four years since the end of the recession. It’s taken that long for states to just get back to where they were before the great recession hit.”
Like the rest of the county, Rosewicz said Connecticut built up its reserves in the years preceding the recession. However, such efforts proved no match for the recession’s unanticipated length and depth.
“So, in Connecticut’s case, its reserves fell considerably,” she said. “That just means they used the rainy day funds for what they were meant for. They used them to get through the difficult times.”
History of an Unwillingness to Save
According to Keith Phaneuf, budget reporter for The Connecticut Mirror, Connecticut now has about $270 million in its reserve fund, accounting for just over one percent of the state’s annual operating budget.
“Connecticut as a state has a history of not really saving much for a rainy day -- not even prioritizing it very much. For years, by the law, we could not set aside any amount greater than five percent of our budget,” said Phaneuf. “I should point out the current comptroller, Kevin Lembo, supports a new limit of 15 percent. That’s only half the battle. It’s one thing to give yourself permission to save; the other task is to actually save.”
How Alaska Did It
Now, in the midst of this savings predicament, many in Connecticut are left wondering how Alaska managed to get so far ahead.
“Some good thinking by legislators,” said Alaska State Senator John Coghill, by way of explanation. In the late 1970s and early 1980s -- the same time Alaska became an oil province -- legislators opted to designate 25 percent of the state’s oil royalty into a permanent fund.
“So it’s been building, and some years when prices of oil went high we were able to put more cash in,” said Sen. Coghill. “So, even though the market has had good and bad years -- about four times over those 30 years -- we’ve been able to keep a fund, probably north of $30 billion.”
Rosewicz of Pew said that even states with rich resources, like oil, must be wary of their fiscal standing. “They’re not without their own problems,” she said. Factors such as declining oil revenues, she said, can pose a threat to states with oil-dependent economies.
As for Connecticut’s primary resource, something Phaneuf terms its “Wall Street income,” the future is looking equally stark. He said heavy reliance on Wall Street money -- in other words, the income tax paid on dividends and capital gains -- only establishes a more volatile and unstable state tax system.
“This is the first recovery where economists are saying, not that Wall Street is gone, but that it may be structurally changed,” said Phaneuf. “It may never roar as loudly as it did before.”
Where We Live