The state budget is $365 million in the red, nearly double the level needed to compel Gov. Dannel P. Malloy to prepare a plan to lower the deficit, the governor's budget chief told legislators Wednesday.
Office of Policy and Management Secretary Benjamin Barnes also confirmed in his testimony to the Appropriations Committee that huge cost-overruns in the state's Medicaid program, coupled with declining revenues, are driving the shortfall.
"All told, these changes result in a projected deficit of $365 million" in the current fiscal year, wrote Barnes, whose next official budget estimates are due to Comptroller Kevin P. Lembo Tuesday. "Assuming they are certified by the comptroller on Dec. 1, (they) will require that the governor submit a deficit-mitigation plan to the General Assembly before the end of the calendar year."
Whenever the comptroller certifies a deficit larger than 1 percent of the general fund, state law requires the governor to submit a plan to lower the deficit to lawmakers. In this year's $20.54 billion total budget, the general fund -- which covers most operating expenses -- totals $19.14 billion, putting the 1 percent threshold at $191.4 million.
Barnes' testimony came as the legislature's budget-writing panel began a review of cost overruns in the state budget.
The first indications that state finances had worsened significantly came Friday when the administration and the legislature's nonpartisan Office of Fiscal Analysis issued a joint report that lowered revenue expectations $128 million below the level in this year's budget, which the legislature adopted in late June.
That report, which dealt only with revenues, would have expanded the deficit for the current year beyond $200 million.
But that revenue report also showed federal grants to help Connecticut pay for its Medicaid program were growing -- something that only happens when the state's costs for providing medical services to the poor were escalating even faster beyond budgeted levels.
That picture became much clearer Wednesday when legislative and executive analysts reported $220.5 million to $240 million in projected cost overruns throughout the entire general fund. This includes at least $190.9 million in the Medicaid program.
Medicaid costs surging
In his testimony, Barnes attributed the Medicaid shortfall largely to increased use of medical services, particularly hospitals, and increased enrollment in various programs. He singled out Medicaid for Low Income Adults, which covers poor adults without minor children, as having grown to 83,827 people, a level it hadn't been expected to reach until next August. Enrollment in the program -- commonly known as LIA -- has grown more than 12 percent since January.
Enrollment in LIA grew by 4,000 people since June, and according to OFA, those clients represent an increased cost of $30 million.
In addition, Barnes said, fewer people than anticipated had moved out of nursing homes as part of the state's Money Follows the Person program, leading to higher-than-expected spending on nursing home care.
The budget figures presented Wednesday still count on the state saving $50 million before next July by tightening eligibility for the LIA program. But the federal government hasn't granted the state the permission it needs to make the changes, narrowing the window the state has to make up the savings.
And federal approval might not come anytime soon, according to a court filing by attorneys for the Department of Social Services. DSS still has to answer questions posed by the federal government about its application to waive certain Medicaid rules so it can make eligibility changes, and doing so is expected to take "considerable time," they wrote last week. After that, it will take more time for the federal agency to review the application, they said. The filing was in response to a request by legal aid attorneys for an injunction to stop the state from pursuing the eligibility changes.
Regardless of whether eligibility changes are made or not, the costs of the Medicaid for Low Income Adults program will be a relatively short-term problem for Connecticut. Beginning in 2014, the federal government will pay the full cost of coverage as part of federal health reform. After three years, the percentage the federal government pays will drop, but not below 90 percent. Currently, the federal government reimburses the state 50 percent of the program's costs.
Social Services Commissioner Roderick L. Bremby also submitted written testimony to the committee, warning that his department might need up to $8 million extra because of additional staff and overtime being used to meet "record levels" of demand for programs, including Medicaid and the Supplemental Nutrition Assistance Program, formerly known as food stamps. The department is facing class action lawsuits over delays in processing applications for both programs, and has been under threat of federal sanctions because of delays and errors in processing food stamp applications. The department has been hiring workers to handle applications.
Legislative analysts also targeted smaller levels of additional spending needed elsewhere in the budget, including $20 million in the prison system and $9.5 million in the Department of Emergency Services and Public Protection.
Total cost overruns, according to legislative analysts, are on pace to reach $220.5 million.
Barnes' office projected a similar net total for cost overruns throughout state government's operating budget, estimating $240 million in total.
Malloy said this week that he is optimistic that state income tax receipts will climb next spring as many of Connecticut's wealthier residents sell their stocks and report capital gains now before federal income tax rates potentially rise.
Malloy added, "We should really have this (deficit) discussion in greater detail in January and February, but we're going to do whatever it takes to balance the budget."
But the top Republican in the state House of Representatives, Lawrence F. Cafero of Norwalk, said the governor should have publicly ackowledged the deficit long before this week.
"We went from everything's-rosy-and-the-governor-has-made-the-tough-decisions to we've-got-a-$365 million deficit-and-it's growing" Cafero said, adding he doesn't believe everything coincidentallty changed within a few days of the election.
"Who's playing fast-and-loose with the facts now?" Cafero added, taking a jab at Malloy's senior policy adviser Roy Occhiogrosso. The governor's aide had criticized the GOP leader on Oct. 18 when Cafero released a report from nonpartisan fiscal analysts that showed sales and other tax revenues had eroded well in excess of any level the administration had reported to date.
"The more heated the rhetoric, the more they play fast and loose with the facts," Occhiogrosso said at the time. All of the revenue losses outlined in that Oct. 18 report have since been included in the latest revenue assessment from both branches of government.
Occhiogrosso said Wednesday that Republicans tried unsuccessfully to blame the state's fiscal challenges on Malloy in this year's state election -- and gained no seats in either the state House or Senate. "Instead of saying they have the wrong strategy," Republicans continue to try to rewrite state budget history, Occhiogrosso argued.
The current $365 million deficit is 1/10th the size of the $3.67 billion deficit built into 2011-12 finances -- a problem Malloy inherited in January 2011 when he succeeded Republican Gov. M. Jodi Rell, Occhiogrosso noted. "Make no mistake about it," he added, "we will end the current fiscal year in balance, without a tax increase."
Sen. Robert Kane of Watertown, the ranking GOP senator on the Appropriations Committee, noted that Malloy's new deficit estimate is more than six times the $60 million shortfall the Democratic governor reported on Oct. 20 -- a gap that Lembo, also a Democrat, confirmed Nov. 1.
"That seems a little bit ironic, that it would take such a bad turn in such a short period of time," Kane said. "This information should have been brought forward months earlier."
Lembo responded Wednesday that "I think it's pretty clear to anyone who's read my monthly (budget) letters that I've been raising concerns" about both declining revenue and rising spending trends, at times differing both with the Malloy administration and the legislature.
The comptroller noted that he specifically tried to alert officials in his Nov. 1 letter that the potential for a deficit large enough to trigger a reduction plan was great.
"I am increasingly concerned with the deterioration in revenue receipts, especially in the sales tax category," Lembo wrote to Malloy on Nov. 1 "The potential for a deficit in excess of 1 percent of General Fund appropriations is growing."