Dan Haar: Worried about a recession? Here’s what it might do to the Connecticut’s finances

CT Insider – Friday, March 21, 2025
By Dan Haar

Connecticut’s state government has spent six years building up a buffer of $7 billion against an economic downturn that has not come, other than the job cuts from COVID-19. And the federal government more than made up for that shock by sending billions of dollars our way.

Suddenly a real, old-fashioned recession seems a good bet — this time perhaps without a federal backstop.
Connecticut is clearly more prepared than we were just a few years ago. We have billions of dollars in a rainy-day fund, and strict rules that prevent us from spending as much as we take in, at least in good years.

How well prepared? To measure how the state’s coffers would fare in a recession, the General Assembly’s nonpartisan budget office recently issued a “stress test” predicting what would happen in the event of an economic decline or calamity.

The short answer: It could get ugly depending on the recession. Another downturn like the Great Recession of 2008 could knock Connecticut’s $7 billion cushion down to a hole of $852 million. That’s according to the legislature’s Office of Fiscal Analysis, known in policy circles as OFA.

A moderate one, worse than the “dot.com” recession of 2002 but not as bad as the Great Recession, could knock Connecticut’s buffer down to a thin, $148 million in two years, OFA said in its report, issued Feb. 25.

On the bright side, a recession like the one we saw immediately after the 9/11 attacks, triggered by security fears and a decline in the technology sector, could leave us with a buffer of $1.15 billion after two years — still a big blow but large enough to avert a tax increase, new debt, and a deep cut in state services, all of which se saw after the 2008-09 calamity.

Good news and bad news

The OFA stress test offers something for everyone. Advocates for human services will look at the report and say, “See, we’re still in the black even if we’re slapped with a recession. We’ve got billions. Why are we leaving so many dire needs unmet?”
Spending hawks and moderates such as Gov. Ned Lamont look at the OFA recession numbers and say it’s a warning to batten down the hatches, or at least resist rolling out the gilded carpets.

That’s all the more true with Acting U.S. President Elon Musk’s erratic and irrational slashing of federal spending. We might see zero help from the federal government if a recession happens.

“Recently, we’ve seen the potential for greater economic uncertainty at the national level, which combined with unsustainable levels of new state spending, will cause us to repeat the mistakes of the past when the next recession occurs,” Chris Collibee, spokesman for the governor’s budget office, said in a written response to my questions about the stress test.

Collibee said the Office of Policy and Management agrees with the OFA’s findings that “the fiscal guardrails and budget reserve fund would be sufficient to protect the General Fund in the event of a moderate or median recession scenario over a two-year period,” and that a severe recession would require additional measures to balance the budget.

A middle path on spending makes the most sense. That battle is the main event of this spring’s legislative session, which closes in early June.

As for those recession predictions, we’re hearing more economists sound alarms. Economist Donald L. Klepper-Smith, formerly of Connecticut, now in South Carolina, pegs the likelihood of a recession in the next 12 months at 70 percent.

“The dominoes seem to be falling in that direction,” Klepper-Smith told me Wednesday as we went over numerous signs such as consumer confidence and interest rates. And it’s happening fast, he pointed out, with a dangerous risk of a slowdown combined with inflation — the reason the Federal Reserve didn’t lower borrowing rates Wednesday.

“We’re seeing a situation where this is happening in a rather chaotic fashion in a matter of weeks. I think the key word here is uncertainty,” Klepper-Smith said.

Connecticut’s buffer

Among the mysteries: What effect will President Donald Trump’s tariffs (a tax paid by American consumers) have on inflation and growth? And, how much will Trump’s cuts worsen a downturn?

The folks at the legislature’s OFA created scenarios, not predictions. Here’s how the numbers worked out. The scenarios are based on money that will be on-hand this summer, at the start of the 2025-26 fiscal year, and current forecasts without a recession.

They describe the effects of a recession for the two fiscal years that start this coming July 1.

We will have $4.2 billion in the budget reserve fund, aka the rainy day fund. Separately, we have a rule known as the revenue cap that requires the state to budget about $300 million more than it intends to spend, or $600 million over two years.

And we have a rule that stops us from spending money beyond a threshold of about $4 billion from certain sources earned by wealthy families — capital gains, dividends and the income from partnerships such as law firms. We call that the volatility cap because that revenue swings up and down.

The predicted overage in the volatility fund over the next two years, the part we will receive as tax revenue but can’t spend, totals $2.6 billion.

Add all that together and we have our buffer, or cushion: $4.2 billion plus $600 million plus $2.6 billion, a total of $7.4 billion.

One twist: Lamont wants to raise the allowable spending from the volatility cap by $300 million a year, giving the state some breathing room to launch a trust fund for early childhood education and day care. That leaves us with a likely buffer of $6.8 billion if we use that money.

What a recession would do

Now let’s look at the scenarios for the downturn and what it will do for tax collections and spending. OFA assumes an added $500 million in extra spending from the rainy day fund each year, or $500 million in the first year and $1 billion in the second year.

Based on history, OFA said a mild recession would lead to a decline of about 10 percent of tax revenues. Combined with the $1.5 billion from the rainy day fund, that totals a loss of $5.7 billion from that $7.4 billion cushion. That would leave us with a cushion of $1.7 billion, or $1.1 billion if Lamont’s plan passes, as is likely.

A midlevel recession would sap $6.7 billion in tax revenues and rainy day savings over two years, leaving the state with $742 million, or $148 million under Lamont’s plan. Still in the black but just barely.

A Great Recession-type downturn? That would sap about 15 percent of revenues plus the extra spending from the rainy day fund, or $7.7 billion over two years.

That would leave state coffers in the red by $258 million, or $852 million with the higher spending threshold.

Some caveats from OFA: First, recessions cause a lot more damage than just two-year shortfalls. The create long-term financial woes. The stress test doesn’t cover that.

Then there’s the wild card: “The analysis does not include any federal response to the recession.”

And finally, with a recession wracking families and killing jobs, we will see pressure for the state to spend even more.

My advice, having covered five recessions: Buckle up.

Dan Haar is columnist and senior editor at Hearst Connecticut Media Group, writing about the intersection of business, public policy and politics and how the issues affect the people of Connecticut.

Access this article at its original source.