Malloy reports microscopic surplus, emergency budget cuts likely next week

The state’s budget isn’t drowning, but its fiscal nose is above water by such a small fraction — 1/134th of 1 percent — it’s almost impossible to see.

The latest monthly report from Gov. Dannel P. Malloy’s administration, released late Friday afternoon, projects a $1.4 million surplus, with the $88 million cushion originally built into the budget all but vanished.

Also Friday, Malloy’s budget chief warned that the governor likely would exercise his unilateral authority to cut spending without legislative approval later this month.

The new General Fund surplus also falls well short of the $75 million surplus level Malloy needs to continue the ongoing conversion of state finances to Generally Accepted Accounting Principles — one of the governor’s largest campaign pledges. The General Fund, which stands this year at $18.7 billion, covers the bulk of the operating costs in this fiscal year’s overall $20.14 billion budget.

The latest budget forecast, which now heads to Comptroller Kevin P. Lembo’s office for review, is down from the $83.7 million surplus that the administration projected on Dec. 20, and that Lembo confirmed on Jan. 1.

The reduction was anticipated after fiscal analysts for the executive and legislative branches agreed on a consensus revenue report late Tuesday that showed revenues from the income tax and other sources coming in below budgeted levels.

Income tax projections alone are down more than $169 million from the revenue forecast in the adopted budget, but that loss was offset somewhat by gains in sales and wholesale fuel tax receipts.

Malloy pledged earlier this week that his administration would both keep the budget in balance and maintain his GAAP initiative by tightening spending rather than by seeking further tax hikes. The governor and the legislature approved more than $1.5 billion in new state taxes this year to help close a record-setting budget deficit.

“We’re going to make spending cuts,” Malloy said while talking with reporters Wednesday. “That’s what we do. We balance the budget.”

The legislature has long granted the governor limited authority to unilaterally rescind allocations in many line items by up to 5 percent, though municipal aid cannot be touched.

“By early next week I fully anticipate that the governor will exercise his rescissionary authority,” Office of Policy and Management Secretary Benjamin Barnes wrote in his letter to Lembo, warning that the administration also may delay or cancel planned hirings in state government.

More than 2,600 state workers elected to retire from state service between January and Oct. 1, 2011 — more than two-and-a-half times the number of retirements recorded over the same period in 2010. The 2011 total was driven largely by new restrictions in retirement benefits that took effect on Oct. 1, according to the concessions deal negotiated by Malloy with state employee unions.

The Democratic governor absorbed some criticism this week from Republican legislative leaders, who charged that last year’s tax increases dampened Connecticut’s economic recovery. And though keeping the budget out of the red may be a prime concern, House Minority Leader Lawrence F. Cafero said Malloy also needs to find the $75 million to keep his GAAP initiative on pace.

GAAP rules are a series of common financial guidelines established by the Government Accounting Standards Board to emphasize transparency.

Unlike the modified cash basis state government has long 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 are received.

The Malloy administration estimated in its Fiscal Accountability report in mid-November that state government would need another $1.7 billion in its coffers to cover all its obligations under GAAP rules. And that differential grows annually due to inflation.

When the budget was adopted in June, Malloy signed language that allowed him to delay the first of 15 annual payments to eliminate that $1.7 billion differential until 2014.

But the governor and legislature did agree to dedicate $75 million from the surplus originally projected for this year, and $50 million from a built-in surplus in 2012-13, to cover inflation-related costs and stop the GAAP differential from growing.