Home To Hedge Funds, Insurers, This State Is Cash Poor

After raising taxes in previous years, Malloy sought to balance next year’s budget solely with spending reductions. He’s even scaling back plans to ramp up transportation investments, one of the Democrat’s top priorities in his second term.

While the state won’t yet use the rainy-day fund to close next year’s shortfall, it likely will for the year ending June 30, Barnes said.

“The purpose of the rainy-day fund is exactly this -- when tax revenues come in unexpectedly short late in the year, you have very few choices and you need to have reserves available,” Barnes said in a telephone interview. “Depending on how revenue develops over the next year, we may have a similar problem next year that we have to address as well.”

Investors in the $3.7 trillion municipal market, particularly those in Connecticut, are more willing to look past the state’s deficits because of the tax-free yields and the lack of alternatives, said Craig Brandon at Eaton Vance Management. States and cities across the U.S. have been loathe to borrow more for new projects, instead opting to refinance, which is limiting the supply of debt.

“Everyone in the market is aware of the budget problems when they trade,” said Brandon, who oversees $32.5 billion as co-director of municipal investments in Boston. When it comes to borrowing costs, Connecticut officials “are lucky that they’re a high wealth state and there aren’t a lot of bonds around.”

High-paying jobs haven’t returned to Connecticut as quickly as expected since the end of the recession in June 2009, said Anne Cosgrove at Moody’s. Average wage growth from 2011 to 2015 was 5.6 percent, about one-third of the pace in the years before the financial crisis, she said in a telephone interview.

The number of jobs in finance, insurance, real estate and related fields has slumped to 130,800, or about 10 percent lower than the pre-recession peak. In January, General Electric Co., which had been headquartered in suburban Fairfield since 1974, delivered a blow to the state by deciding to relocate to Boston.

Connecticut home prices are down about 5 percent since the end of the recession, the biggest drop nationwide. It’s just one of six states with a decline over the period, according to data from the Federal Housing Finance Agency.

The state is also seeing an exodus. Its population fell by about 6,000 people as of July 2015 compared with a year earlier, to 3.59 million, Census Bureau estimates show.

Connecticut “is a leaky boat, but the question is how fast is the boat taking on water?” said Adam Stern, director of muni research in Boston at Breckinridge Capital Advisors, which oversees $22.5 billion in munis. “The payroll growth trend, the home price trend, the outmigration trend, what we see there is the same slow weakening pattern.”