Modest good news, despite the deficit

The state got some welcome economic news Tuesday–an estimate that the surplus for the fiscal year that ended June 30 has jumped to $393.3 million, up nearly $150 million over the past month–but hardly enough to offset the massive deficit bearing down on the state 12 months from now.

The increased surplus reported by Gov. M. Jodi Rell’s office will enable state officials to reduce by nearly 25 percent about $956 million in controversial borrowing authorized to cover current expenses without further spending cuts or tax hikes.

That still leaves the state facing is a $3.37 billion shortfall projected for the 2011-12 fiscal year, a deficit equal to 18 percent of current spending and 8½ times the size of this new surplus.

“After a long and difficult slog, our economy is showing some positive signs,” Rell said Tuesday, adding that modest job growth over the past six months has helped reduce the state’s unemployment rate to 8.8 percent. It stood at 9.2 percent back in March according to the state Labor Department.

The “positive signs” that contributed to the recent surge in the 2009-10 surplus center on a $108 million increase in revenue forecasts, including a $39 million from the sales tax , $20 million from licenses, permits and fees, $13 million from the insurance industry tax and $10 million from federal grants.

Though the 2009-10 fiscal year ended on June 30, various taxes continue to accrue over the summer and state Comptroller Nancy Wyman will not officially close the books on the fiscal year until October.

Rell and the legislature used a portion of the 2009-10 surplus, $139.3 million, to help support spending in this fiscal year’s $19.01 billion budget.

But the Republican governor also insisted that the Democrat-controlled legislature dedicate any further surplus to scale back a controversial plan to balance 2010-11 by borrowing $955.9 million. Added to that borrowing would be $34 million in issuance costs and $141.6 million in interest charge for a total of $1.3 billion, according to the legislature’s nonpartisan Office of Fiscal Analysis.

That debt would be paid off over the next eight years with a surcharge on monthly electric bills and by raiding an energy conservation fund.

The new surplus number means state government would need to borrow just under $702 million in principal, or 23.4 percent less. It was unclear late Tuesday how much bond issuance and interest charges might be reduced.

Both Rell, who is not seeking re-election, and the legislature, have been criticized by many of this year’s gubernatorial candidates – including Lt. Gov. Michael C. Fedele – for using financing rather than further spending cuts or tax increases to balance the budget.

“All too many Connecticut families are struggling and the pain is not yet over because the recovery is just beginning,” Rell said, adding that the prospect of reduced borrowing “is good news for every Connecticut family.”

But economists warned that this “good news” is tempered by a surplus created, in part, through artificial means, and by an economy that is rebounding very slowly.

“I don’t think we can say, in any way, shape or form, that we are out of the woods,” said Peter Gioia, chief economist for the Connecticut Business and Industry Association, who added he believes it will take at least four years to recover all of the roughly 100,000 jobs the state lost since the last recession began in March 2008.

But in the meantime, Rell’s successor and the next legislature must solve a fiscal crisis much larger than the new surplus.

The same budget that yielded a $393 million surplus was propped up with more than $1.9 billion in emergency state reserves and federal stimulus grants.

Another $914 million from those emergency sources will be used, along with the planned borrowing, to take the place of tax hikes or spending cuts this year.

Those emergency sources, which will be exhausted before the next governor’s first budget takes effect, are the primary factors behind the nearly $3.4 billion hole in 2011-12.

Further complicating matters, legislative analysts already have assumed state revenues will first jump by nearly 6 percent over the coming year. In other words, it will take healthy revenue growth just for state government to be $3.4 billion in debt.

“These new surplus numbers don’t tell me we’re going to exceed what are already aggressive estimates” for revenue growth, Gioia said. “What we have right now is a continuation of slow growth and it’s slow enough growth that it’s going to raise continuing challenges.”

The governor’s own chief economic adviser also urged caution Tuesday when assessing the state’s economy.

“All of the indicators we’re looking at say we’re looking at a state economy that’s coming back inch by inch as opposed to yard by yard,” said Don Klepper-Smith, chief economist and director of research for DataCore Partners in New Haven and chairman of Rell’s Council of Economic Advisers. “We’ve yet to see signs of robust job growth.”

Klepper-Smith added that consumer confidence numbers remain “on the soft side.”

The U.S. Consumer Confidence Index, which measures consumer optimism monthly by analyzing trends in savings and spending, entered July at 52.9 percent, well below a healthier level in the mid-70s.