OLR BILL ANALYSIS

sSB 1135

AN ACT CONCERNING THE MANAGEMENT OF REVENUE VOLATILITY.

SUMMARY:

This bill establishes a mechanism for diverting projected surpluses in certain tax revenues to the Budget Reserve (“Rainy Day”) Fund (BRF). It establishes a (1) formula and process for calculating the revenue diversion and (2) Restricted Grants Fund (RGF) to hold the diverted funds until after the close of General Fund accounts each fiscal year, at which point they transfer to the BRF.

The bill applies to revenue (referred to as “combined revenue”) from the (1) corporation income tax and (2) personal income tax's estimated and final payments (i.e., income tax revenue generated from taxpayers who make estimated income tax payments on a quarterly basis). It establishes a formula for calculating a threshold level, based on the average revenue from these two sources over 10 years, that forms the basis for the revenue diversions. It requires the (1) state comptroller to begin certifying the threshold in FY 16 and (2) state treasurer to begin diverting the revenue in FY 17. It establishes narrow conditions for transferring funds out of the RGF.

The bill increases the BRF's maximum balance, from 10% to 15% of net General Fund appropriations for the current fiscal year but appears to allow the balance to exceed 15% under certain circumstances. It also expands the BRF's allowable uses. Current law restricts the use of money in the BRF to cover any deficit that remains after the end of a fiscal year. The bill additionally allows money in the BRF to be used in the three fiscal years that follow a year in which the Office of Policy and Management (OPM) and Office of Fiscal Analysis (OFA) project a decline in General Fund tax revenue larger than a specified level. It also requires that a portion of the funds transferred to the BRF be used to pay the State Employee Retirement Fund's unfunded liability. This portion ranges from 5% to 15% of the amount deposited in the BRF, depending on the BRF's balance.

The bill requires (1) consensus revenue estimates (see BACKGROUND) and the revenue statement included in the state budget act to itemize the withholding, estimated, and final payment components of personal income tax revenue and (2) the fiscal note on any bill impacting the personal or corporation income tax to clearly identify any impact to BRF deposits.

Lastly, beginning by December 15, 2020, the bill requires the OPM secretary, OFA director, and state comptroller to report every five years to the legislature and the governor on the bill's BRF deposit formula and include any recommended changes.

The bill also makes technical changes.

EFFECTIVE DATE: July 1, 2015

THRESHOLD LEVEL FOR BRF DEPOSITS

Beginning in FY 16, the bill requires the state comptroller to annually certify the threshold level for BRF deposits using a formula based on (1) a 10-year average of the state's combined revenue and (2) the rate of growth in combined revenue. Under the bill, a “10-year average” is the average amount of combined revenue in the 10 fiscal years preceding a given fiscal year.

Formula

The comptroller must determine the threshold using a three-step calculation. The first step is to calculate the 10-year average for the current fiscal year.

The second step is to calculate the rate of growth in combined revenue over the preceding 10 years. To do so, the comptroller must:

1. calculate the 10-year average for each fiscal year preceding the current fiscal year;

2. calculate, for each of these years, the difference between the actual combined revenue for the given fiscal year and the 10-year average for that same fiscal year, divided by the 10-year average for that fiscal year (“differential”); and

3. take the average of these 10 differentials and add one.

The last step is to multiply the two numbers derived from steps one and two. The threshold level for BRF deposits is the product of this multiplication.

Certifying and Reporting the Threshold Level

Comptroller's Certification. Beginning in FY 16, the bill requires the comptroller to include a statement certifying the threshold level for the current fiscal year in the annual report he submits to the governor on the state's financial condition. By law, he must submit this report by September 30 and make a published copy available to the public by December 31.

OPM and OFA Report. The bill requires the OPM secretary and OFA director to annually report the comptroller's certified threshold level by November 10, after adjusting for enacted laws projected to impact the estimated and final portion of the income tax or corporation income tax revenue by more than 1%. Presumably, the threshold is adjusted upward by the amount of a projected revenue increase and downward by the amount of a projected revenue decrease.

The OPM secretary and OFA director may (1) recalculate their threshold level adjustments to reflect any consensus revenue revisions in January and April impacting these revenue sources and (2) continue making the adjustments (a) for up to 10 fiscal years following the implementation of the law that created the revenue impact or (b) until there is no longer a revenue impact of more than 1%, whichever comes first. They must report any such revisions in their January and April consensus revenue estimates and include information on how (1) they determined the revenue impact and (2) used that information to adjust the threshold level.

The bill also requires the OPM secretary and OFA director to each report the estimated threshold level, using the bill's formula, for the three fiscal years following the current fiscal year.

REQUIRED TRANSFERS FROM GENERAL FUND TO RGF AND BRF

Beginning in FY 17, the bill diverts, to the newly created RGF, projected surpluses in combined revenue based on January and April consensus revenue estimates. The bill requires the state treasurer to transfer the surpluses from the RGF to the BRF after the close of General Fund accounts each fiscal year. As with the BRF under existing law, the bill authorizes the treasurer to invest all or part of the RGF in certain statutorily prescribed investments and directs her to credit all investment interest to the General Fund.

January

The bill requires the state treasurer to transfer funds from the General Fund to the RGF if the January 15 consensus revenue estimate projects combined revenue for the current fiscal year that exceeds the threshold level. The treasurer must transfer the amount projected to exceed this level annually by January 31.

Under the bill, there is no transfer if (1) combined revenue is projected to be less than or equal to the threshold level or (2) the consensus revenue estimate for the current fiscal year projects a year-end General Fund deficit.

April

The bill requires the treasurer to adjust the amount diverted to the RGF in January based on the April 30 revised consensus estimate for combined revenue. It does so by requiring the state treasurer to transfer (1) additional funds from the General Fund to the RGF or (2) funds out of the RGF and back into the General Fund. In certain cases, it requires a transfer to the RGF after the April 30 estimate even if no transfer was made in January.

As Table 1 shows, the transfer depends on whether the (1) January estimate was more or less than the threshold level and (2) April estimate (a) increases or decreases the January estimate or (b) is more or less than the threshold level. The treasurer must transfer the required amounts to or from the RGF annually by May 15. As with the January estimate, there is no transfer if the April 30 estimate for the current fiscal year projects a year-end General Fund deficit.

Table 1: Transfers Required Following April 30 Consensus Revenue Estimate

January 15 Combined Revenue Projection

April 30 Combined Revenue Projection

Transfer Required Under the Bill

Exceeded the threshold level

Revised upward

Difference between January and April combined revenue projection must be transferred to RGF

Revised downward but still more than the threshold level for deposits

Difference between January and April combined revenue projection must be transferred from RGF to the General Fund

Revised downward to a level less than the threshold level for deposits

Difference between January combined revenue projection and the threshold level must be transferred from RGF to the General Fund

Less than or equal to the threshold level

Revised upward to a level exceeding the threshold level

Difference between April combined revenue projection and threshold level must be transferred to the RGF

Revised upward, but remaining less than the threshold level

No transfer to RGF

Deficit Mitigation Plans

The bill authorizes the governor to direct the treasurer to transfer money in the RGF to the General Fund as part of a required deficit mitigation plan. By law, the governor must submit a deficit mitigation plan whenever the comptroller projects a current year deficit of more than 1% of General Fund appropriations.

Reducing or Eliminating Transfers to RGF or BRF

The bill requires at least three-fifths of the members of the Appropriations and Finance, Revenue and Bonding committees to approve any bill that, if passed, would reduce or eliminate the amount of any deposit to the BRF or RGF. It is unclear whether this provision is enforceable against future legislatures (see BACKGROUND).

BRF

Purpose

The bill expressly provides that the BRF is to be maintained and invested to reduce revenue volatility in the General Fund and reduce the need for tax increases and state aid cuts due to economic changes.

Maximum Balance

The bill increases the BRF's maximum balance from 10% to 15% of net General Fund appropriations for the current fiscal year but appears to allow the balance to exceed 15% under certain circumstances. Specifically, if a required transfer to the BRF would cause the balance to exceed 15%, the bill appears to allow such a transfer to be made in whole, thus causing the balance to exceed 15%. As under existing law, once the BRF reaches the maximum, the treasurer may not transfer additional funds to it. Any remaining funds must go towards (1) the State Employee Retirement Fund's unfunded liability and (2) paying off outstanding state debt.

Authorized Use of Funds in the BRF

Beginning in FY 17, the bill provides statutory authority for the legislature to transfer funds from the BRF to the General Fund in the three fiscal years following a fiscal year in which the April 30 consensus revenue estimate projects a 2% drop in General Fund tax revenue from the current fiscal year to the next fiscal year.

Directing BRF Transfers to Pay Unfunded Pension Liability

By law, any unappropriated surplus that remains after the BRF reaches its maximum balance must be used for paying the State Employee Retirement Fund's unfunded liability. Beginning in FY 17, the bill additionally earmarks for that purpose a percentage of any amount transferred to the BRF. The percentage depends on the BRF's balance, as shown in Table 2.

Table 2: BRF Transfer Directed to Unfunded Pension Liabilities

BRF's Balance as a % of Net General Fund Appropriations

Percentage of BRF Transfer Directed to State Employee Retirement Fund

Less than 5%

5%

5% ≤ balance < 10%

10%

10% ≤ balance < 15%

15%

REPORTS TO THE LEGISLATURE

Beginning by December 15, 2020, and every five years thereafter, the bill requires the OPM secretary, OFA director, and state comptroller to each report to the Finance, Revenue and Bonding Committee and the governor on the bill's BRF deposit formula and include any recommended changes to the formula or BRF cap that are consistent with the BRF's purpose, as described above.

The reports must analyze the:

1. formula's impact on General Fund tax revenue volatility,

2. adequacy of the formula's required deposits to replace potential future revenue declines resulting from economic downturns,

3. amount of additional payments toward unfunded liability made as a result of the formula, and

4. adequacy of the BRF's cap.

BACKGROUND

Consensus Revenue Estimates

By law, the OPM secretary and OFA director must annually issue consensus revenue estimates by November 10 and any necessary consensus revisions of those estimates by January 15 and April 30. The estimates must (1) cover the current biennium and the three following years and (2) be the basis for the governor's proposed budget and the revenue statement included in the budget act the legislature passes.

Legislative Entrenchment

Legislative entrenchment refers to one legislature restricting a future legislature's ability to enact legislation. For example, CGS 2-35 previously prohibited appropriations bills from containing general legislation. (This provision has since been repealed.) In Patterson v. Dempsey, 152 Conn. 431 (1965), the Connecticut Supreme Court held that this provision of CGS 2-35 was unenforceable, writing that, “to hold otherwise would be to hold that one General Assembly could effectively control the enactment of legislation by a subsequent General Assembly. This obviously is not true, except where vested rights, protected by the constitution, have accrued under the earlier act. ”

Related Bill

sSB 946, reported favorably by the Finance, Revenue and Bonding Committee, includes identical provisions.

COMMITTEE ACTION

Finance, Revenue and Bonding Committee

Joint Favorable Substitute

Yea

48

Nay

0

(04/30/2015)