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Governor, Legislators Grappling With $200M Budget Deficit

By CHRISTOPHER KEATING

May 02, 2012

One year after enacting the largest tax increase in Connecticut history, state officials learned this week that the state budget is still $200 million short.

Because state tax receipts were lower than expected by the traditional tax deadline of April 15, Gov.Dannel P. Malloyand legislators are making moves to close the deficit.

Top Republican legislators are calling upon Malloy to enact spending cuts immediately to balance the $20 billion state budget, but Malloy wants to plug the hole by using money that was originally slated to help pay off debt. Republicans are questioning whether that move could harm the state's bond rating following a downgrade byMoody's earlier this year.

The projected deficit increased when the official calculations were made, partly because the state collected $147 million less from the state income tax than expected. The collections are lower despite tax increases totaling $1.5 billion, including those on income, retail sales, corporations, estates, electric power plants, alcohol, cigars and cigarettes.

Malloy's budget increased taxes on more than 50 items in different categories, including charging sales tax for the first time on previously tax-free items such as nonprescription drugs, clothing and shoes under $50, pet grooming, automotive towing, manicures and pedicures. The tax on retail sales increased to 6.35 percent, while the maximum rate on the state income tax increased to 6.7 percent for those with the highest incomes.

The annual tax deadline, which was extended by two days this year, generally helps fill the state's coffers during economic boom times. But when the economy is still sluggish, as it is now, the collections are often lower than expected.

Income tax revenue was lower than expected for various reasons, including the high unemployment rate during the 2011 calendar year and lower-than-expected Christmas bonuses for many Wall Street traders. With the state's unemployment rate dropping recently, the state's budget situation should improve in the future as more workers are paying more income taxes.

Although Republicans were sounding alarm bells, Malloy and his budget director, Ben Barnes, said the projected deficit represented only 1 percent of the $20 billion annual state budget.

"I expect that there will be those who play politics with this news, claiming that it represents broader budgetary problems,'' Barnes said before the Republican criticism. "This couldn't be further from the truth. We aren't borrowing to cover operating expenses and we continue the move" toward changing the state's financial system to generally accepted accounting principles.

With the regular legislative session set to end at midnight Wednesday and the fiscal year ending on June 30, Republicans are calling for quick action.

To cover the deficit, Malloy intends to transfer $222 million from the 2011 surplus that had been intended to pay off bonds that financed the previous deficit from the 2009 fiscal year under then-Gov.M. Jodi Rell. Those payments are required by law, and the legislature would need to change the law to change the payments.

"In effect, it would be like needing an $80,000 mortgage, borrowing $90,000, and using $10,000 to pay your first couple of mortgage payments,'' said Senate Republican leader John McKinney of Fairfield.

If the transfer is approved by the Democratic-controlled legislature, lawmakers could avoid painful spending cuts that would cause protests from various constituencies.

Both McKinney and House Republican leader Larry Cafero oppose that transfer of funds, telling Malloy in a letter that they fear another bond-rating downgrade by rating agencies.

"Back in January,Moody'sdowngraded our bond rating. There was a lot of talk by the administration that they got it all wrong,'' Cafero told reporters. "This is a governor that nary 5 1/2 months ago said that the budget that he adopted, that he signed, with his Democratic colleagues, put us on solid fiscal ground not only then, but in the near future. It's obviously no longer the case 5 1/2 months later. ... It is of crucial importance that the governor, at the very least, be honest with the bonding agencies, tell them what he plans to do, and listen to what they respond back.''

"It's in a long litany of, unfortunately, broken promises by this governor,'' Cafero said. "Not only as a candidate, but certainly even as governor, he stated that GAAP — generally accepted accounting principles — was a priority. That has now been scrapped. He's even conceded that. He said we were on solid fiscal ground. He has to concede that is not the case. That he would not borrow money to pay operating expenses — he's broken that promise as well.''

But Barnes and Malloy think differently, saying that the money transfer is a smart move.

"This strategy will allow state government to use money saved to pay down debt early to cover the unexpected revenue shortfall, so that we won't be forced to cut essential services for Connecticut's most vulnerable residents,'' Barnes said. He added, "Connecticut has finally addressed its budget problems, but it's not something that will be solved overnight.''

Malloy also rejected the notion by Republicans that he was resorting to a budget gimmick.

"I don't think so,'' Malloy told reporters. "For Republicans to lecture me on what is or is not an appropriate way to balance the budget, I didn't run up a structural deficit of $3.6 billion. I didn't spend every dollar that was in the cookie jar.''

Malloy described the issue as "basically a revenue problem'' that could be solved by an upswing in the state's economic fortunes.

"I wish the economy was growing a little bit more rapidly,'' he said. "One percent is what we're talking about on the revenue side.''