Malloy administration watching danger signs in state budget

Gov. Dannel P. Malloy’s budget office warned this week it is watching some negative fiscal trends that could threaten the modest surplus currently projected for this year.

And the $75.6 million fiscal cushion reported Thursday by the Office of Policy and Management – in one respect – is already gone. That’s because Malloy and the legislature committed to use the first $75 million of any year-end surplus to an important early step in the conversion of state finances to Generally Accepted Accounting Principles.

“Several areas of the budget have the potential to significantly impact the estimates provided,” OPM Secretary Benjamin Barnes wrote in his agency’s monthly budget assessment for the state comptroller’s office.

A “significant shortfall” is possible in the health service programs both for retired and current workers, due in part to “higher than anticipated enrollment” in the new Health Enhancement Plan established in the union concession deal, he wrote.

The administration anticipated roughly half of Connecticut’s 50,000 employees would elect to pay a monthly premium hike of $100 and face a new deductible rather than participate in wellness program, which requires workers to receive regular physicals and other types of health care screenings. But Lembo’s office reported in mid-September that only 4 percent of workers opted not to participate.

OPM assumes no additional state resources will be needed to meet the benefits ordered by the state legislature for Connecticut’s winter heating assistance program, which relies primarily on federal aid. But Congress hasn’t resolved funding for the Low Income Home Energy Assistance Program to date, and Connecticut could face problems if federal lawmakers allocate less than the U.S. House and Senate appropriations committees have recommended.

The state also may need to adjust this year’s contribution to the state employee pension fund up or down, in the next few months. The administration and legislature built savings in this area into the budget based upon new pension restrictions in the concession deal and the amount of money they are expected to save over the next 30 years. But the state’s actual required pension contribution for this year won’t be known until a private actuarial analysis is completed later this year.

Barnes also warned that there is a big question mark hanging over the single-largest source of revenue for the budget, the state income tax.

Both OPM and the legislature’s nonpartisan Office of Fiscal Analysis opted not to issue a projection on income tax revenues in a joint report last week.

That’s because the administration granted a one-month delay to households that file quarterly earning information to report their income for July, August and September. This was done to accommodate households disrupted by Tropical Storm Irene.

Quarterly filings are the chief method used to report capital gains, dividends and other major investment earnings. These represent nearly 40 percent of the $8.5 billion in total income tax receipts projected for this fiscal year when the budget was adopted in June.

“There are some areas of real concern,” Barnes said in an interview Friday. “But the good news is across agencies they appear to be managing and living within their budgets.”

Sen. Robert Kane of Watertown, ranking GOP senator on the Appropriations Committee, said the governor and his fellow Democrats in the legislature’s majority left themselves little margin for error. Kane said they adopted a budget that increased overall spending by 5 percent over last year’s levels while relying on aggressive savings targets built into the union concession deal.

“This budget was built on a lot of assumptions and I think what we are seeing now are the warning signs, like cracks in the dam,” he said.

Though the Malloy administration is projecting a $75.6 million surplus for the General Fund, which represents about 93 percent of the spending in this fiscal year’s $20.14 billion budget, it was designed to run nearly $88 million in the black. Both revenues and spending projections have worsened marginally since the fiscal year began on July 1.

But the whittled down surplus has big implications for one of the biggest promises Malloy made on the campaign trail last fall.

Malloy pledged to convert state finances to Generally Accepted Accounting Principles, a series of common financial guidelines established by the Government Accounting Standards Board to emphasize transparency.

Unlike the modified cash basis currently used, under GAAP expenses must be promptly assigned to the year in which they were incurred. Similarly, revenues are counted in most situations in the year in which they were received.

In the context of the state budget, that ends an array of accounting gimmicks that have pushed current expenses into future years and similarly used revenues received in one year to balance the books of the prior year.

According to legislative analysts, state government would need an extra $1.5 billion on hand to fully follow GAAP principles. And that GAAP differential grows each year because of inflation.

The current budget does require $75 million from any projected surplus next fiscal year, and $50 million from 2012-13, be used to cover the inflationary growth and effectively freeze the GAAP differential at its current level. After that, the full GAAP shortfall would be paid off in annual increments over 15 years.