Despite vowing during the campaign not to use the state's credit card to cover its operating costs, Gov. Dannel P. Malloy announced late Monday he would divert more than $220 million dedicated last year to pay off debt to close a growing deficit in the current budget.
And a new report showing plunging tax revenues opened a huge projected deficit in Malloy's budget plan for next fiscal year, jeopardizing new initiatives for school districts and nonprofit social services that the governor unveiled just three months ago.
That's because fiscal analysts for the executive and legislative branches agreed Monday to downgrade revenue expectations by nearly $150 million this fiscal year, $234 million in the year that begins July 1 and by more than $310 million in 2013-14.
The latter drop is huge, given that Malloy's own numbers back in February showed his new budget plan headed for a $424 million deficit in 2013-14. If the true gap in the Democratic governor's proposal tops $700 million 14 months from now, Republican legislative leaders warned Monday that another state tax debate is on tap for next spring.
"Entering last year, Connecticut faced a staggering $3.6 billion deficit," Office of Policy and Management Secretary Benjamin Barnes said Monday. "While today's drop in estimated revenue is disappointing, the fact remains that we've solved more than 94 percent of the budget shortfall. And let's be clear about one thing: We will end the current fiscal year in the black."
But it's how state government gets back into the black that was sparking controversy at the Capitol late Monday.
The administration, which had projected a $67 million hole in this year's $20.1 billion budget, watched that gap triple this week after analysts reassessed state tax projections following income tax filing deadlines.
Malloy recently directed his department heads to look for more spending cuts, but the budget calendar will work against the governor. That's because agencies already have expended most of their funds for the year and they received their allotment for the final quarter of the fiscal year earlier this month.
To close the deficit, Malloy now wants to take more than $200 million he and the legislature set aside last year to accelerate payments on controversial borrowing tied to the last recession.
In June 2009 -- a few weeks before the fiscal year ended -- the legislature and then-Gov. M. Jodi Rell approved $1.2 billion in borrowing and interest charges to fill a budget hole even though the state still had nearly $1.4 billion in its Rainy Day Fund. But Rell, a Republican, and the Democratic-controlled legislature, wanted to use that reserve to help prop up the upcoming state budget -- and to avoid tougher decisions about taxes and spending.
Malloy blasted that action when he was a gubernatorial candidate in 2010 while pledging repeatedly that he would stop the practice of using the state's credit card to cover operating costs.
"Increasing debt makes responsible budgeting less possible," he wrote in his campaign platform. "And, it is simply irresponsible to leave more and more debt for future generations."
Barnes said Monday that by using the debt payment funds to cover operating costs, "we won't be forced to cut essential services for Connecticut's most vulnerable residents. We will continue to pay down the (economic recovery notes) in accordance with the required repayment schedule."
House Minority Leader Lawrence F. Cafero, R-Norwalk, said Monday that Malloy's double-standard was clear. "It's using the money for the mortgage to buy the groceries," Cafero said. "Use whatever analogy you want, it's borrowing to pay for operating expenses."
"I expect that there will be those who play politics with this news, claiming that it represents broader budgetary problems. This couldn't be further from the truth; we aren't borrowing to cover operating expenses," Barnes wrote in a statement released late Monday.
But despite the controversy over using debt payments to prop up the latest budget, the bigger challenge may lie with the governor's plan for the coming fiscal year, especially given a new report showing income and sales tax revenues aren't matching the expectations Malloy and the legislature set last spring.
The Malloy administration said late Monday that despite the eroding revenue picture, it was unwilling to scrap the revised budget it proposed in February for the fiscal year that begins in July.
"The original FY 13 budget does not include critical policy initiatives, particularly education reform," the governor's budget office reported late Monday.
The single-largest initiative in that plan involves bolstering the cash-starved state employee pension fund. The governor may not have the flexibility to cut that plan, even were he interested in doing so. That's because contract language to implement the fix starting in July was negotiated last winter with the State Employees Bargaining Agent Coalition and approved by the state Retirement Committee.
But other proposals the governor dangled in February, more than $125 million in new education funding -- including $50 million in municipal grants -- and a modest increase for nonprofit social services, would be hard to keep in the new budget -- unless matching spending cuts are found or taxes are raised.
Just last week, Malloy delivered a sobering message to municipal leaders at the state Capitol: Don't count on the education cost-sharing funds. But Malloy attributed that threat to his frustration with a legislature reluctant to enact the teacher tenure reform that he seeks -- and not to any fiscal problems.
Another new initiative in the governor's February plan was a 1 percent increase for nonprofit social service agencies.
But Senate Minority Leader John P. McKinney, R-Fairfield, noted that based on the latest revenue projections, the governor's plan is unbalanced next year, and is on pace to run deep in the red in the fiscal year that begins in July 2013.
The legislature will tackle that fiscal year next January, after the state elections in November, and McKinney said the path Connecticut is headed toward is obvious.
"Given the unwillingess of the Democrats to show any fiscal discipline, and that the governor's completely unrealistic expectations for revenue, I think it's fair to say they are setting us up for a big tax increase again next year," McKinney said.
Malloy and the legislature approved more than $1.6 billion in new state and municipal tax hikes last spring to help close the record-setting budget deficit left behind by Rell and the last General Assembly.