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That the state confronts a $200 million budget deficit is disappointing but not alarming. The public needs to view the figure in context. It is equal to about 1 percent of state spending and relatively loose change when compared with the $3.6 billion deficit hole the administration of Gov. Dannel P. Malloy confronted at the beginning of 2011.
It's the long-term outlook that could prove alarming.
First, the immediate challenge: The Office of Fiscal Analysis (which advises the legislature) and the Office of Policy and Management (part of the executive branch) have reached a consensus on a projected $200 million deficit by the end of the fiscal year June 30. The shortfall results largely from income tax receipts running $147 million below projections. To close the gap, the administration wants to delay plans to expedite paying off the loan used to address the prior, far more serious fiscal problem.
We still cringe to recall it, but back in 2009 the Democratic-controlled legislature and Republican Gov. M. Jodi Rell conspired to borrow money to pay for ongoing expenses, incurring a debt of $1.1 billion in principal and interest to be paid off by 2016. The current budget includes paying $208 million toward that debt.
But the 2009 borrowing plan also required the legislature to use all future budget surpluses to pay off the debt sooner. That is what the state planned to do with the $222 million surplus left from the 2010-2011 fiscal year. Now the governor wants the legislature to redirect that money to close the $200 million projected budget gap.
And Gov. Malloy would still have to find another $50 million or so if he wants to pursue his campaign promise, codified in his first executive order, to convert state finances to Generally Accepted Accounting Principles (GAAP). That approach requires assigning expenses to the year the state incurs them and counting most revenues in the year they are received. This would end years of budgetary shell games, during which legislatures shifted expenses and revenues from one year to another to provide the illusion of balanced budgets, while in reality creating structural deficits. According to the most recent figures, if the state immediately reverted to GAAP it would find itself $1.7 billion in the red. Instead the administration plans to gradually convert to GAAP. To begin the process, the state needs to divert at least $75 million toward conversion this year - otherwise the GAAP gap will grow.
To maintain credibility, the administration cannot delay on GAAP conversion. And while we would prefer to see the legislature use the $222 million surplus to help retire the 2009 loan, and not spend it closing the projected deficit, we recognize options are limited.
In return for labor force concessions, including a two-year wage freeze, the administration agreed last year not to layoff any state workers for four years, through fiscal year 2014-2015. That certainly limits options when it comes to cutting expenses. The other choices, including reducing municipal aid or cutting expenditures to various non-profit agencies providing human services, are not attractive and potentially counterproductive.
Using the surplus for the deficit may be the best among poor options.
The legislature and administration may not be able to solve future budget problems so easily. In 2013-2014 and for the following two years state employees will receive 3 percent raises, in many cases on top of regular step increases. That was part of the concession deal. Combined with the promise of no layoffs, it could be a budget buster. Current trends don't suggest the state will have the money to pay for it, not without more tax increases.
As Connecticut Mirror reporter Keith M. Phaneuf has pointed out, a $424 million shortfall appears in 2013-2014, according to the administration's own numbers. And given how the state missed tax projections this year, that's probably optimistic.
While continuing to credit the governor for pushing the legislature to address the fiscal crisis, our concern persists that the solution was too focused on tax increases and too little on reducing government. That approach invites future budget crises to come.