Lembo says April revenue forecast could determine fate of growing budget deficit

The game of ever-shifting state budget forecasts took another new twist Monday as Comptroller Kevin P. Lembo announced a worsening deficit that largely matches the shortfall reported by nonpartisan legislative analysts.

Both offices now say Gov. Dannel P. Malloy -- who continues to project a small surplus -- will need to find roughly $115 million over the next three months both to finish in the black and to maintain his promised conversion of state finances to Generally Accepted Accounting Principles, commonly known as GAAP.

Lembo also said Monday that Malloy could be bailed out later this month if revenue forecasts improve.

"All eyes are on April," Lembo wrote in his latest monthly budget report, referring to the updated revenue forecast analysts will prepare shortly after the income tax filing deadline of Tuesday, April 17.

Faced with a record-setting budget deficit last spring, state officials approved a complicated income tax increase last spring worth about $875 million this fiscal year. Those changes included three new income tax rates, a reduced credit to offset local property tax payments and a new credit to help poor working families save money. In addition, though the tax wasn't approved until May, lawmakers and Malloy applied it retroactively to Jan. 1.

These complexities led many households to realign their withholding levels, Lembo noted, making it more difficult for analysts to project how much the income tax would raise. Those analysts will have much more data to reset their projections after most residents have filed their returns for the 2011 income year.

"As a result, final and estimated income tax payments received in April could differ significantly from those projections," Lembo wrote.

Lembo reported that the general fund, which covers the bulk of operating costs in this year's $20.14 billion budget, is on pace to finish with a $45.8 million deficit. Cost overruns in several agencies also are behind that estimate, according to the comptroller, who projected a $21 million deficit one month ago.

"We all agree that we're operating in a challenging fiscal climate," Malloy's budget director, Office of Policy and Management Secretary Benjamin Barnes, said Monday. "This is to be expected given that we have undertaken a number of measures to stabilize our state budget, specifically the implementation of GAAP. We remain confident that we'll end the year in the black."

The governor warned his department heads last week that he would ask lawmakers to consider emergency spending cuts in May if the administration cannot meet all of its targets before the fiscal year ends June 30.

But House Minority Leader Lawrence F. Cafero, R-Norwalk, said Lembo's latest forecast "once again points to the fact that while we hope for the best, we have to prepare for the worst. We should be doing something right now."

The legislature's nonpartisan Office of Fiscal Analysis technically is reporting a much larger shortfall of $124.4 million. But that forecast doesn't take into account $86 million in unused funds Malloy carried forward from an account for employee raises from the 2010-11 budget -- the last spending plan adopted by his predecessor, M. Jodi Rell. Most state employees won't receive raises this fiscal year or next under a concessions deal Malloy reached with unions last summer.

The governor has yet to disclose how he will use those funds, but legislative analysts said that if they are applied to the deficit, the shortfall effectively shrinks to $40.7 million.

But both Lembo's $45.8 million shortfall projection and OFA's gap of $40.7 million rise close to $120 million after another obligation of the governor's is considered.

The governor repeatedly has promised to maintain his planned conversion of state finances to GAAP rules, 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.

State government would need another $1.7 billion in its coffers to cover all its obligations under GAAP rules. And that differential grows annually with inflation.

Malloy and the legislature originally designed the current budget to finish with an $80 million surplus and promised to use $75 million of that to cover that inflationary cost and stop the GAAP differential from growing.

Even with his $12.4 million surplus projection, Malloy is $62.6 million short of the surplus mark he needs to keep his GAAP pledge.

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