Is next state tax debate nearer than expected?

Gov. Dannel P. Malloy insists he won’t seek more taxes this session after raising more than $1.5 billion last spring.

But with a sluggish recovery and an expensive pension fix turning Malloy’s future budget surpluses into a potential deficit by July 2013, Republicans already are questioning whether more tax talk is dead — or simply being swept under the rug until after the November legislative elections?

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“It would be the height of fiscal irresponsibility to make changes to the pension plans now that it would create a budget hole in a little more than a year,” House Minority Leader Lawrence F. Cafero, R-Norwalk, said.

“The governor’s budget passed by the Democrats continues to fall apart … despite the largest tax increase in state history,” added Senate Minority Leader John P. McKinney, R-Fairfield.

Even Malloy’s fellow Democrats in the legislature are beginning to show concerns over the direction of state finances.

“The revenues don’t look as good as we had hoped, but hopefully the income tax will turn around by April,” Sen. Toni N. Harp, D-New Haven, co-chairwoman of the Appropriations Committee, said, adding that the pension fix shouldn’t come at the expense of crucial education and health care programs. “We want to make sure that we’re moving our (pension) contributions up in a responsible way, but not so it makes it difficult to run the rest of government. I’m not sure how that all comes together in 90 days.”

The 2012 legislative session, which starts Wednesday and runs through May 9, doesn’t pose anywhere near the fiscal challenges Malloy and the legislature faced in January 2011, when nonpartisan legislative analysts projected a nearly $3.7 billion budget hole for 2011-12.

Officials closed that gap not only with the tax increase but also with more than $1 billion in cuts to the current services budget, including a major union concessions package, and many hoped the worst was over for some time.

Malloy and lawmakers even built considerable fiscal cushions into the budgets for this fiscal year and next, margins of nearly $90 million and $555 million, respectively.

But problems with the budget began to spring up a few months after its adoption.

Controversial labor-management panels charged with finding $170 million in the annual cost-saving measures that are part of the concessions deal got off to a slow start.

Reports of underperforming state taxes began to trickle in in late in 2011, and income tax projections in particular took a serious hit in mid-January.

By month’s end the $90 million surplus built into the current year had all but evaporated. Nonpartisan legislative analysts were reporting a $145 million deficit, while the administration insisted finances were still a razor-thin $1.4 million in the black.

And Malloy’s big fiscal security net — the half-a-billion-dollar cushion built into his second budget — had been chopped in half.

Still, the governor urged everyone to maintain some perspective. “We’re in much better shape than we were a year ago,” he told his commissioners at their January meeting. And he also pledged to use just one tool to keep current finances out of deficit.

“We’re going to make spending cuts,” Malloy said on Jan. 20, shortly before announcing $34 million in emergency reductions. “That’s what we do. We balance the budget.”

But just three days later he rolled out an ambitious plan to undo more than two decades worth of damage done to the state employees’ pension fund. The plan would boost pension payments nearly $125 million next year and even faster after that.

Connecticut eventually would save billions, but the savings wouldn’t begin until 2025.

What drew less attention, though, was that these pension costs open a new budget hole just 17 months down the road.

Malloy’s budget office had reported in November that, based on spending and revenue trends, the state could expect a nearly $200 million fiscal cushion in the year that starts July 2013.

The governor’s budget director, Office of Policy and Management Secretary Benjamin Barnes, briefed lawmakers at that time about the need to begin rebuilding the state’s emergency reserve, commonly known as the Rainy Day Fund.

Two months later, though, Barnes’ office and legislative analysts sliced more than $40 million off their revenue expectations for the budget to be written in the third year of Malloy’s term.

Now subtract more than $300 million extra that Connecticut would spend on pensions in 2013-14 under the governor’s plan, and a potential gap of more than $150 million opens up.

Barnes was quick to counter last week that the administration has a strong track record when it comes to cutting spending, and it isn’t finished yet. Malloy consolidated more than two dozen state agencies and offices last spring, recently proposed seven more consolidations, and has frozen the bulk of nearly 2,700 positions left vacant across state government by retirements this year.

“When you get out that far (17 months from now), it’s very much dependent on economic growth rates and we have slowed down our long-term projections on revenues,” Barnes said.

“I would say that there’s no question there is always a challenge to find the savings, to find the resources, to address the priorities that we have, but that is what we’re doing. The administration isn’t done finding ways to make government more cost-effective.”

Still, Barnes conceded that the sluggish economy is making it more difficult to achieve all of the goals the governor has set.

“We could face limits to our ability to implement everything we want to implement, including addressing these long-term (pension) liabilities,” he said. “We’ll cross that bridge when we come to it.”

But Republicans said if Malloy’s pension plan gains legislative approval now — the governor needs lawmakers to endorse an exception to the spending cap rules to implement it — then the bridge they all ultimately cross will lead to more tax increases when the legislature convenes in 2013.

McKinney said that despite arguments from the administration, spending hasn’t been cut sufficiently. Even though the level needed to maintain current services was cut, the overall state budget is still 5 percent above last year’s level.

“Connecticut faces a current deficit and possible out-year deficit in 2014 instead of promised surpluses largely due to the failure of both the governor and majority Democrats in the legislature to make any spending cuts or achieve promised union concessions,” McKinney said.

Rep. Patricia Widlitz, a Guilford Democrat and co-chairwoman of the tax-writing Finance, Revenue and Bonding Committee, said Democrats aren’t ready just yet to give up on the budget they adopted last spring.

“I think realistically we need to have the experience of a whole year behind us before we can fully evaluate it,” she said. “That’s why we’re really not delving into any tax changes in the coming session.”

But Widlitz added that she believes no one at the Capitol is anxious to revisit taxes — this year, next year, or any time in the foreseeable future.

“We’re going to really scrutinize any new spending,” she said. “Certainly there is no appetite to look forward to future tax increases within either party.”

Editor’s Note: Parts I and II, running today, of a three-part series previewing fiscal issues in the 2012 legislative session focus on shrinking surpluses and rising fears of future tax increases, as well as a push from municipal leaders for more than simply another year of sparing town aid from the budget axe.

Part III, to be posted Tuesday, will look back at dramatic personnel reductions created by the 2011 union concessions deal, and the growing likelihood that agencies will be allowed to fill very few of those positions in 2012 as the state struggles to keep its finances out of the red.