Gov. Dannel P. Malloy may be enjoying more economic good fortune during his last year in office than he did in the first seven years combined.

State income tax receipts tied to Wall Street continue to surge, potentially leaving Connecticut with $2 billion in reserves 12 months from now. But unless the next governor and legislature can set partisan politics aside, one-third of those funds can’t be used to solve an even larger deficit looming after the November elections.

“The state is in far better shape today than when I came into office,” Malloy told Capitol reporters Thursday following the State Bond Commission meeting. “ ... We’re also seeing a level of economic activity and employment that I think will back that (deficit) number down significantly.”

Malloy, who inherited a massive shortfall, cash-starved pension funds and more than $1 billion in operating debt when he took over in 2011, struggled with red ink through much of his two terms in office.

But Malloy’s budget office reported Thursday that this fiscal year’s $19 billion General Fund — which covers the bulk of operating costs within the $20.9 billion overall budget — is on pace to finish $169 million in the black, up modestly from $138 million last month.

Officials can use that projected surplus, and the $1.2 billion already in the emergency reserve, next spring when they must adopt a new two-year state budget.

They almost certainly will need to.

Analysts say state finances, unless adjusted, will run $2 billion in deficit in the first year and $2.6 billion in the second, potential gaps of 10 percent and 13 percent, respectively.

There is one more pot of money legislators might be able to tap. This year's modest $169 million surplus, which is less than 1 percent of the General Fund, would be much larger if Connecticut hadn’t changed its budgeting rules last fall.

The deficit projection doesn’t even include another $648 million in unanticipated income tax receipts tied chiefly to capital gains, dividends and other investment income, which, over the last 21 months, has been at its most robust since before the last recession.

If officials could tap those dollars next spring, they’d have a pool of nearly $2 billion to use to whittle down the $4.6 billion two-year budget hole.

But they can’t do so — at least not easily.

To force the state to save better, lawmakers enacted a “volatility cap” that siphons off surplus income tax receipts from quarterly filings. These funds remain in fiscal limbo until the end of September 2019 — three months after the fiscal year has ended — when the comptroller officially closes the books.

The next legislature and governor cannot repeal this provision. To ensure that wouldn’t happen, the outgoing legislature found a way to contractually protect it. Specifically, it wrote a pledge not to tamper with the volatility cap for 10 years into bond covenants — contracts between the state and its investors — when it issued bonds this past May to borrow funds for various capital projects.

There is just one loophole.

The volatility cap system does allow the legislature to tap those funds early if:

[naviga:ul]

[naviga:li]The governor signs a “declaration of fiscal exigency,” essentially declaring a budget emergency.[/naviga:li]

[naviga:li]And 60 percent of both the House and Senate vote to break the cap. That would mean 22 votes in the 36-member Senate and 91 votes in House, which has 151 seats. Currently, neither party holds enough seats to achieve a 60 percent majority by itself.[/naviga:li]

[/naviga:ul]

Keith M. Phaneuf is a reporter for The Connecticut Mirror (www.ctmirror.org). Copyright 2018 © The Connecticut Mirror.

kphaneuf@ctmirror.org