Dealing with the deficit: Governor and legislators take aim at a moving target

Trying to follow state government’s budget surpluses and deficits is confusing enough in normal times.

Spending and revenue trends are tracked for the current year and as far off as five years down the road and three different agencies study some or all of them.

Given that the past 18 months have produced more red ink than a bankruptcy audit, it’s easy to miss the small bits of good fiscal news that lowered the current deficit by about 30 percent over the past month.

But state government also is facing two rapidly-approaching benchmarks that could determine whether the governor and legislature will have a manageable 2010 deficit to debate or whether Connecticut will put hundreds of millions of dollars in operating costs on its credit card for the second year in a row.

deficit graphic 3-31-10

Nearly $157 million was lopped off this year’s $518.4 million deficit in recent weeks thanks to an emergency clause in the last year’s union concession deal, some good news regarding federal aid, and about $12 million in new and other savings ordered by Gov. M. Jodi Rell.

“These cuts will help trim the current shortfall, but certainly do not close it,” Rell said in a statement this week.

The concession deal negotiated by Rell and ratified by the legislature and the State Employees Bargaining Agent Coalition allows the governor to reduce this year’s contribution to the employees’ pension fund by another $100 million in the face of deficits, and the governor announced last week she would exercise that clause.

More good news came recently when the Obama administration announced it would reduce the amount states must pay the federal government to help fund prescription drug benefits for low-income seniors eligible for both Medicare and Medicaid. Connecticut’s so-called “clawback” payment was reduced by nearly $45 million this year.

State Comptroller Nancy Wyman, who certifies state government’s official budget assessment for the current year, is expected to adjust her next forecast, due Thursday, to reflect these changes.

Majority Democrats in the Senate tried to eliminate the rest of this year’s deficit, adopting a plan Saturday that includes a mix of spending cuts, tax hikes, and additional federal revenue. But after Rell pledged to veto the plan, demanding more spending cuts and objecting to a proposed increase in the tax on multi-million dollar estates, the Democrat-controlled House suspended their plans to vote on the deal.

House Speaker Christopher G. Donovan, D-Meriden, had said he hoped to meet face-to-face Tuesday with Rell, but the governor’s press office said Rell, who has been vacationing since last week in Colorado, did not arrive back until Tuesday night. A spokesman for Donovan said the speaker would attempt again to meet with the governor later this week, and that members of their respective staffs already have begun discussions.

Senate President Pro Tem Donald E. Williams Jr., D-Brooklyn, said this week that he remains hopeful that a deal can be struck, but warned that Connecticut has just three months left to avoid more borrowing.

“Time is running out to balance this year’s budget and the plan approved by the Senate over the weekend is the best solution on the table,” Williams said. “It is time for the House to pass this bill. I am also calling for a bipartisan budget meeting with all leaders as soon as the governor returns to Connecticut.”

And there are still some signs that this year’s deficit could grow larger.

The legislature’s nonpartisan Office of Fiscal Analysis testified before the Appropriations Committee earlier this month that it believes the Rell administration has underestimated potential cost-overruns throughout state government by $135.5 million. More than half of that disputed amount, nearly $78 million, involves Medicaid-funded programs in the Department of Social Services, where caseloads for welfare, home care and various medical services are on the rise.

Rell’s budget director, Office of Policy and Management Secretary Robert L. Genuario, said “we’re pretty confident” about the administration’s estimate, adding that the disputed amount between the two budget agencies isn’t too significant given the enormous deficits that have plagued state government for the past 18 months.

Still, if even a portion of that $135.5 million in projected over-spending comes to pass before the fiscal year ends, the deficit increases.

And before state government gets to that point, it has to clear another key hurdle, namely the state income tax filing deadline of April 15.

That deadline, and more specifically the week after, traditionally has been a crucial indicator of revenue trends, both for the rest of the fiscal year and for the remainder of the calendar year.

Fiscal analysts for the legislature, governor and comptroller all have projected income tax receipts of $6.4 billion this fiscal year, down about 6.3 percent from collections in 2008-09 despite a new top rate of 6.5 percent for individuals earning more than $500,000 and couples topping $1 million.

None of the fiscal agencies has dared to project yet whether that trend will worsen, hold constant, or improve after thousands of state income tax returns pour into the Department of Revenue Services in the middle of next month.

But history shows the income tax has the potentially to be extremely volatile in the spring.

In May 2009, as Connecticut filers were still reeling from a 2008 tax year during which the Dow Jones Industrial Average plunged nearly 4,500 points, Wyman reported Connecticut’s budget deficit had grown by $289 million in just one month.

During rosier times in 2007, the budget surplus leapt $252 million in the first month-and-a-half after the April 15 deadline, again due largely to income tax trends.

“This legislature has gotten used to watching the ship take on water this year,” Rep. Craig A. Miner of Litchfield, ranking House Republican on the Appropriations Committee, said, adding it would be a mistake for lawmakers to count on a mid-April windfall to bail them out this year. “Unfortunately there is a pattern of indecision.”