With givebacks in doubt, Malloy and legislators face new fiscal gap

The apparent rejection of a concessions deal by state employees leaves Gov. Dannel P. Malloy and the General Assembly with a sizable hole in the budget for the year that begins in just over a week. The question is, how much do they have to make up?

It’s not the $700 million that the labor deal was supposed to save in fiscal 2011-2012; some recent good economic news, including a bump in revenues announced this week, has seen to that. But the size of the gap depends partly on how Malloy decides to use the surplus now anticipated in the current year budget and partly on whether favorable economic trends continue.

“There has been strong growth, but it has been very recent,” Malloy’s budget director, Office of Policy and Management Secretary Benjamin Barnes, cautioned Tuesday. “I appreciate what we see now but I don’t have any ability to be certain it will continue.”

OPM reported Tuesday that this fiscal year’s General Fund now is on pace to finish $85.5 million in the black. And that’s despite Malloy and lawmakers dedicating $646 million from the fund to cover current expenses, thereby scrapping a plan to finance a portion of the budget with eight years of utility bill surcharges.

The administration also reported that General Fund revenues for this fiscal year alone are up $53.4 million from the past month, with $40 million of that growth tied to the income tax.

The $20.14 billion budget adopted for the fiscal year that starts July 1 was designed with an $89 million surplus cushion – assuming the concession deal was ratified. With rejection of the tentative agreement by a major AFSCME unit Tuesday, that appears unlikely.

But if the past month’s revenue growth can be counted on again in 2011-12, he will start with more than $142 million to plug into the $700 million gap. Combined with the $85.5 million left over from this year, Malloy could have nearly $230 million extra at his disposal in 2011-12.

The governor has said that if the labor deal is rejected, he would order as many as 7,500 layoffs over the next two fiscal years to keep the budget in balance. He’s also warned that $2.9 billion in aid to cities and towns, left largely untouched in this year’s budget deliberations, could also be cut. Malloy has ruled out adding to the $1.5 billion in tax increases passed by the legislature.

Barnes cautioned Tuesday before the AFSCME vote was tallied that while the current surplus forecast is new, it is unlikely the governor would use that one-time bonus to help fund ongoing programs in the next budget if concessions are rejected, as now appears likely. “I think that would be at odds with many of the statements he has made,” he said.

The administration reacted cautiously today to the AFSCME vote, which was first reported late Tuesday night by The Mirror.

“We are aware of what’s being reported, but want to let the state employee unions finish their voting process in its entirety,” said Roy Occhiogrosso, the governor’s senior adviser. “As the governor has said all along, he hopes the agreement is ratified; if it’s not, then an alternative budget will be put in place – one that does not increase taxes beyond what has already been agreed to.”

The governor and his fellow Democrats in the legislature have taken heat from minority Republicans who charge the next state budget has a much larger fiscal cushion than the administration has acknowledged.

Deputy House Minority Leader Vincent J. Candelora, R-North Branford, said Malloy and his allies built excessively conservative revenue assumptions into the new budget and the administration’s latest numbers reinforce that argument.

With the latest growth factored in, this year’s General Fund tax revenues are projected at $11.96 billion, $1.04 billion over the level originally budgeted for 2010-11.

But Malloy and the legislature assumed this growth will slow considerably next year when they adopted the next state budget on May 4. The two branches used a joint revenue forecast projecting a further increase of $411 million, or 3.5 percent, based on economic growth alone – before new tax rates are applied.

And now based on the administration’s latest revenue numbers, next year’s growth would be just $286 million, or 2.4 percent.

“What’s sort of disconcerting is that nobody seems to want to talk about this,” Candelora said. “The Republicans have always felt that we’ve underestimated revenues and we created these surpluses while raising taxes.”

The new budget raises more than $1.5 billion next fiscal year from tax increases, including higher levies on income, sales, corporate earnings, estates, insurance companies, real estate conveyances, electricity generation and cigarettes.

Despite the recent growth, Barnes said the revenue forecast built into the new budget last month was and is the responsible move.

“I sincerely hope that personal income, employment and economic activity rebound more quickly than we projected,” he said. “But it’s not prudent to bank on a robust recovery when that is still at odds with many other economic indices.”

The University of Connecticut’s quarterly economic journal issued a similar warning last week.

While personal income rose nearly 5 percent between January and March, unemployment remained “stubbornly high” at 9.1 percent, gas prices rose and both home prices and new housing permits plunged compared with the first quarter of 2010.