Malloy’s fiscal cushion continues to shrink

The fiscal cushion built into this year’s state budget continues to shrink, a trend that could hinder one of Gov. Dannel P. Malloy’s biggest campaign promises: to bring government finances under Generally Accepted Accounting Principles.

The Office of Policy and Management reported late Tuesday that this year’s $20.14 billion budget — originally designed to finish with an $88 million surplus in the general fund — now is on pace to wrap up $67 million in the black next June 30.

The administration’s chief budget and policy planning agency, OPM included the forecast in its Fiscal Accountability Report, an annual assessment on both long- and short-term budget trends.

The $67 million projection also marked the third downgrade in the surplus since the fiscal year began four months ago, and budget analysts still haven’t been able to gauge the single-largest revenue source: the personal income tax.

Massive storm-induced power outages in late August and October prompted the administration to extend deadlines for filing quarterly income tax receipts from Sept. 15 until this past Monday.

While quarterly filings are submitted by many self-employed individuals, they also are the chief source of income tax payments tied to 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.

Because those receipts are still pouring in, neither Malloy’s budget office nor the legislature’s nonpartisan Office of Fiscal Analysis have projected any major trends to date regarding the income tax.

The General Assembly enacted a measure six years ago requiring budget analysts from both offices to report each November to the Appropriations and Finance, Revenue and Bonding committees on the status of state finances as preparation for the coming legislative session.

But Sen. Andrew W. Roraback of Goshen, ranking GOP senator on the Finance panel, said he isn’t very confident about a budget that already relies on the administration finding hundreds of millions of dollars worth of as-yet-undefined savings built into the plan.

“There are not a lot of positive signs out there in the economy,” Roraback added, citing a sluggish recovery here and continued economic instability in Europe. “If anything we are more susceptible to these things due to our reliance on Wall Street. When Wall Street sneezes, Connecticut catches a cold.”

The whittled down budget surplus also 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, GAAP rules require that funds be on hand to cover expenses as they are 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 requires that the first $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.

Malloy’s budget chief, OPM Secretary Benjamin Barnes, said Wednesday he remains hopeful that the administration will be able to devote either $75 million — or an amount very close to it — toward the GAAP initiative.

“We will try to meet that number in any event,” he said. “We clearly want to be in balance on a GAAP basis.”

But he also conceded that some big fiscal questions still have the potential to impact the budget significantly.

Besides the income tax question, Barnes’ office also has warned that there are other danger signs to watch in the budget.

With a slumping economy and unemployment seemingly fixed above 9 percent, demand for state-funded health care services drove Medicaid spending about $250 million over budget in 2010-11, and $30 million in overspending already is projected for this year.