Fiscal analysts leave large question mark over small budget surplus

Three months after the largest state budget deficit in Connecticut history was resolved, the budget remains modestly in the black — for now.

But budget analysts both for Gov. Dannel P. Malloy and the General Assembly put a big asterisk next to surplus figures Tuesday, warning that could change quickly — for better or for worse — as delayed state income tax receipts pour in over the next few months.

And the legislature’s nonpartisan Office of Fiscal Analysis also told lawmakers that it remains unable to assess key components of the single-largest package of spending cuts used to balance the current budget, the $1.6 billion employee concessions deal negotiated by Malloy and state unions.

“I wouldn’t say we have a real positive outlook on revenue,” Alan Calandro, OFA director, told the Appropriations and Finance, Revenue & Bonding committees during a joint informational meeting, adding quickly that his office hasn’t formed any major negative assumptions about government’s finances either. “We’re doing a lot of waiting and seeing.”

Analysts for both branches are required under the state’s Fiscal Accountability Act to provide both short- and long-term financial projections to the legislature’s two key budget committees each November.

Legislative analysts projected that this fiscal year’s $20.14 billion budget stands $101 million in the black, a margin of just one-half of 1 percent. Malloy’s budget agency, the Office of Policy and Management, pegs the surplus at just $67.1 million. The budget, which was approved by legislators and Malloy in June — but not fully resolved until the Aug. 25 union ratification of concessions — was designed to finish with an $88 million bonus.

But all three of those relatively slim margins seem even smaller, though, when set against the state’s single-largest revenue source, an income tax expected to produce $8.5 billion this fiscal year.

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 to Nov. 15. It could take several more weeks to analyze revenue trends in this area, analysts said.

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 total income tax stream, with the majority coming from paycheck withholdings.

Further complicating matters, revenue from investment income is one of the most volatile components of the state budget. Receipts from capital gains and dividends tend to peak during boom times, drop during economic down-swings and then rebound faster than receipts from paycheck withholding, just as Wall Street typically recovers faster than the job market.

Taxes from quarterly payments shot up 18 percent in 2008, topping $3.1 billion. One year later they fell 27 percent, losing $900 million of their value. They would have fallen another 21 percent, or nearly $500 million more, in 2010, had then-Gov. M. Jodi Rell and the legislature not raised the top income tax rate on the wealthy that year.

“There is a large piece of volatility coming down the road,” Calandro said, “It’s early and the numbers have been fairly static so far. What they will look like in January, that’s another story.”

Malloy’s budget chief, OPM Secretary Benjamin Barnes, said that while he remains confident the administration will finish the fiscal year June 30, 2012, with a balanced budget, his office also needs more data to make a full assessment of the income tax.

The Dow Jones Industrial Average, one of the chief indicators of the health of blue-chip stocks, closed at 12,049 on June 8, 2011, the last day of the regular legislative session and the day the final budget implementation bills were adopted. The Dow closed Tuesday at 11,556, nearly 500 points below the June 8 mark.

In its written report to lawmakers, OPM warned that “income tax growth remains tenuous,” adding that, “While the equity markets provided a health recovery in 2009 and 2010, returns in 2011 do not bode well for accelerated and sustained (income tax) growth in the short run.”

But Barnes also said Connecticut legislators could take heart while those in other states are panicking. Unlike most other states, Connecticut relied on a combination of tax increases and spending cuts to close a shortfall once projected as high as $3.67 billion for the 2011-12 fiscal year.

“This group and the entire General Assembly should be enormously proud of having taken some difficult steps,” he said. “We did what we needed to do to restore structural balance to the budget.”

“Thanks for all of the good news,” quipped Rep. Patricia Widlitz, D-Guilford, co-chairwoman of the finance committee. “I’d hate to be one of the states that’s in worse shape than us.”

On a more serious note, Widlitz also expressed concern that sales tax revenues are running $23.5 million below projections. Lawmakers and Malloy both increased the base sales tax rate this year from 6 percent to 6.35 percent while also closing sales tax exemptions for several goods and services.

Sen. Eileen Daily, D-Westbrook, the finance committee’s other co-chairwoman, added, “we understood when we made tough choices last session that this year would be one of the most difficult in terms of budget predictability. The difficulties in income tax reporting are huge.”

Daily noted that legislators and Malloy not only adopted several new income tax rates in May, but made them retroactive to Jan. 1, which can be confusing for residents and businesses reporting income either through withholdings or quarterly reports.

Another key to balancing the budget involves a union concessions deal that the administration insists will provide $1.6 billion in savings over two years, including $700 million in 2011-12.

But since a few weeks after the administration first released savings projections in mid-May for what was then just a tentative deal, OFA has told — and continues to tell — legislators that it cannot fully assess several components of that package because of a lack of information.

And Calandro also told legislators Tuesday that while it appears the administration is on pace now to meet the $700 million savings target, it is unclear if all of that savings will come from the actual concessions deal, or other policy changes ordered by the administration.

For example, Republican legislators have criticized both Malloy and his fellow Democrats in the legislative majority over $170 million in savings that is supposed to be produced this fiscal year by ideas offered by three joint labor-management efficiency panels.

The Connecticut Mirror reported in late October that two of the panels responsible for a combined $130 million in savings hadn’t even met yet; one hadn’t even been formed. And Malloy’s budget office had moved on, drawing its own blueprint to determine which state agencies will be cut to cover nearly all of the concessions savings targets.

Also in late October, OFA issued a report that identified more than $80 million in projected savings ascribed by the administration to the union concessions deal that don’t actually depend on the contract changes ratified by the State Employees Bargaining Agent Coalition.

“There is a significant lack of detail on the information coming out of those accounts, and it is difficult to get into a heavy and complex analysis of each item without data,” Calandro said.

“I think I”m concerned that we’re just accepting these numbers in the absence of that data,” said Rep. Sean J. Williams of Watertown, the ranking GOP representative on the finance panel. The concessions agreement “is a huge change in policy, for better or for worse, for the state of Connecticut.”

Barnes responded that some components of the concessions deal have produced more savings than expected, and others less. Besides the efficiency panels, the concessions package also counts on savings from a two-year wage freeze, several thousand worker retirements, a new employee wellness program and other changes to retirement and health benefits.