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State Budget Deficit Projected At $192 Million

By CHRISTOPHER KEATING

July 05, 2012

HARTFORD — Despite the largest tax increase in Connecticut history, the state is projected to finish the fiscal year with an operating deficit of $192 million, officials said.

State Comptroller Kevin Lembo, who certifies the official calculations, said the state income tax that is collected from capital gains and Wall Street bonuses increased by only 5.9 percent for the year, which is below the recovery level from past recessions. The traditional Wall Street rebound has helped vault the state into budget surpluses in the past, but that has not happened yet this time.

"The economy is the largest single influence on the state budget – dwarfing any other budget drivers," Lembo said. "Wall Street's erratic equity markets and challenges in the financial sector – which had the largest private-sector job loss in the state – is the driving force behind this deficit."

Based on a recent law passed by the Democratic-controlled legislature and signed by Democratic Gov.Dannel P. Malloy, the deficit will be covered by money saved from various general fund reserves from the past.

Despite protests from Republicans, lawmakers agreed to transfer $222 million from the 2011 surplus — money that had been intended to pay off bonds that financed the previous deficit from fiscal 2009 under Gov.M. Jodi Rell. Those bond payments are required by state law, and will still be made, but not as soon as planned. The legislature changed the law in order to use the money for a different purpose.

With the transfer, lawmakers averted potentially painful spending cuts that could have caused protests from various constituencies.

While Connecticut has short-term budget problems, it also has billions of dollars in long-term liabilities to pay for pension and health-care benefits for retired state employees.

A recent national report showed that Connecticut is one of the least-prepared states in funding the retiree benefits. A second report, by the legislature's nonpartisan fiscal office, said that some of the money set aside for retirement benefits is currently being kept in a common cash pool that earns only 0.10 percent per year. Republicans argue that the state needs a higher interest rate to generate more money for the retirement benefits, and one actuarial analysis said the state needs to earn 5.7 percent – far beyond the current interest rate.

In a letter to the highest-ranking members of the budget and finance committees, Treasurer Denise Nappier acknowledged that the balance in the common cash pool "has fallen substantially during the year.'' Both Rell and Malloy have reached concessions deals with the state employee unions, but the state's long-term liabilities remain high.

In the short term, officials are still analyzing the fiscal issues. The legislature's nonpartisan fiscal office, which is separate from the comptroller's office, estimated late last month that the deficit would be $218 million. That estimate shows that the two workhorses of state financing – the state income tax and the sales tax – have generated the most money, by far, among the state's many taxes. The state income tax generated an estimated $8.3 billion for the fiscal year, and the sales tax generated $3.86 billion. The corporate profits tax accounted for $722 million, while the cigarette tax generated $426.5 million.

While the capital gains collections have been erratic, the state income tax that is withheld from paychecks is "performing as expected,'' with an increase of 18 percent from the past fiscal year, Lembo said.

Overall, tax collections for the just completed fiscal year are expected to be $250 million below the state's original projections. At the same time, spending is projected to be up by more than $22 million.

The budget for the new fiscal year, which started Sunday, is about $20.7 billion. The final calculations are still being done for the fiscal year that ended Saturday night, and the official totals will not be available until Labor Day – in the same way that the calendar year closes on Dec. 31 and a person's taxes are not due until April 15.

Gian-Carl Casa, a spokesman for Malloy's budget office, said Tuesday that the recent moves by Malloy and the legislature ensure that there will not be a deficit when the books are finally closed.

The latest numbers, he said, shows "that the governor's approach is working.''

But House Republican leader Larry Cafero of Norwalk burst out laughing when he heard that Malloy's plan is working.

"I gotta laugh and take my hat off to them,'' Cafero said. "Completely ignore the issue and claim victory. … It's like having $2,500 worth of bills at the end of month, going to the bank and borrowing $3,000, and then saying you have $500 in surplus.''

Casa agreed with Lembo that the national and state economies have not kicked in high gear, which would have sent millions of tax dollars pouring into the state's coffers.

"It's been a slow recovery. No question about it,'' Casa said. "Nationwide, the recovery has come in fits and starts. We're obviously cautiously optimistic. Growth isn't at the levels that anyone would like them to be.''

The state currently has no "rainy day'' fund for fiscal emergencies because it was completely drained by the Democratic-controlled legislature and former Gov. Rell, a Republican, to cover the budget deficits following the deepest recession since the Great Depression.