Days of surplus may be shortlived

As workers returned from their Labor Day weekend earlier this month there was good news dispatched from the office of state Comptroller Kevin Lembo, the state's elected bean counter. Mr. Lembo now projects that when all the counting is done the state will have more beans left over from the fiscal year that ended June 30 than previously estimated. He expects the state will end up with a surplus of about $400 million, give or take a couple of million beans.

Among the most interesting facets of Mr. Lembo's assessment was this. "General Fund spending for Fiscal Year 2013 was up $224.1million - or 1.3 percent - over the prior fiscal year."

Some will argue that spending needs to decrease and so too the size of the tax footprint the state plants on the rear side of its taxpayers. That footprint did get larger after Gov. Malloy pushed through a $1.5 billion tax increase during the first two years of his term to address a massive fiscal deficit.

The Lembo assessment refutes, however, the argument that Gov. Malloy has overseen a massive growth in state government funded by the tax increase. In reality, there are fewer state jobs than when he arrived in office. Payroll expenditures last fiscal year were at their lowest level since fiscal year 2006. There has been success in finding savings through consolidating agencies and improving efficiency.

The biggest drivers of spending growth are the toughest to deal with - contractually agreed to pension and retirement health benefits for state workers; debt service; Medicaid growth; and prisons (many people support tough-on-crime initiatives but not the taxes to support them).

However, the Titanic has slowed during Gov. Malloy's time in office (though the iceberg remains ahead in the form of those big fixed drivers of state spending). As Mr. Lembo notes, in the four fiscal years leading up to the 2008 recession the average annual budget growth was a full-speed-ahead 7.3 percent. That was with a Republican governor and Democratic legislature, by the way.

The problem for Gov. Malloy as he charts a course further into the second half of his term, and as a re-election looms on the not-too-distant 2014 horizon, is that some of the measures that slowed state growth are no longer in play. This fiscal year promised pay raises for state workers replace a wage freeze and a no-layoff assurance limits any further efforts to slim down government. As a result of these and other factors, state spending is projected to increase 5 percent over FY 13 expenditures, according to the comptroller's office.

In addition, some of the good news that helped produce the surplus may not recur. Income tax revenues grew nearly 5 percent during the last fiscal year, $165 million in excess of budget estimates. That increase largely came from volatile, one-time capital gains revenues, which will likely not repeat.

About $221 million of last year's savings has already been set aside to pay for expenses in this fiscal year's budget, leaving $178 million for deposit in the Budget Reserve (Rainy Day) Fund, bringing the fund's total to $271.5 million. This sounds good until Mr. Lembo explains a healthy reserve fund would be about $3 billion.

The budget for the current fiscal year uses about $365 million in one-time revenues and rerouted funds to stay in balance without a tax increase. The budget estimates also anticipate Medicaid savings that are unlikely to be realized, according to Mr. Lembo.

So while the budget surplus is a positive development, and reflective of both good policies and happenstance, the longer-term trends remain a concern. Come next September, when a gubernatorial election is two months away, Mr. Lembo may not be issuing such a sunny press release.

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