Revenues shrinking faster than state is making cuts

Gov. Dannel P. Malloy’s bid to avoid raising taxes in the next state budget took another hit Tuesday as plunging revenue projections undid much of the long-range savings from program cuts he and legislators made late over the last two months.

The consensus report from the governor’s budget staff and from the legislature’s nonpartisan Office of Fiscal Analysis all but ensures the built-in gap in the next state budget still exceeds $1 billion, despite emergency cuts by Malloy in November and a special deficit-mitigation session by lawmakers in mid-December.

The report, which lowered revenue expectations for the fifth time in 16 months, also worsened the shortfall in current finances, pushing that deficit beyond $70 million.

“The decline in revenue projections is not surprising,” Malloy’s budget chief, Office of Policy and Management Secretary Benjamin Barnes wrote in a statement Tuesday evening. “The economy and state government finances are extremely difficult to project in these unusual times, particularly given the significant shifts in income tax revenue that occur surrounding the dates of major tax changes. We will continue to closely monitor state revenues in order to maintain balance in the state budget this year and through the coming biennium.”

The biggest problem in the new report involves balancing the budget that begins July 1.

Both the administration and legislative analysts projected back in November that, based on current trends, spending would exceed revenues by just under $1.2 billion next fiscal year — a gap of about 6 percent.

Both branches of government were hoping that when lawmakers and Malloy closed a $365 million shortfall in the current budget in December — primarily through spending cuts — that the bulk of those savings would repeat in 2013-14, and lower next year’s potential gap to something less than $900 million.

But while a report on the long-range savings from those December spending cuts isn’t expected until later this month, Tuesday’s report showed new problems that could undo much of that savings.

The new report lowered expectations for overall revenues for the 2013-14 fiscal year by another $68.3 million — a reduction that doesn’t appear too large at first glance. That figure is a blended number, though, that actually reflects $200 million in declining receipts from taxes, fees and the state’s share of casino revenues, and a $132 million increase in anticipated federal aid.

And most of those extra federal grant dollars represent reimbursement Connecticut would receive for having to spend a matching amount of state money — or more — to meet rising Medicaid costs tied to increasing demand for health care assistance.

That means Connecticut’s potential deficit in the coming fiscal year likely worsened Tuesday by at least $200 million, or possibly more.

House Minority Leader Lawrence F. Cafero, R-Norwalk, said the new report simply underscores the need for both parties to work together again to cut spending — but on a much larger scale.

“We all worked in earnest and I was proud to be part of that bipartisan effort,” he said. “But we’re losing ground.”

The state’s two largest sources of tax revenue, the levies on income and sales, were the biggest losers in the 2013-14 projection, with the former down $71 million from the last consensus projection in November and sales down $130 million.

Declining sales and corporation tax revenues were the chief culprits behind worsening numbers for the current state budget.

The new report reduced revenue expectations by $35 million from the November estimate by the legislative and executive branches.

Earlier this month, state Comptroller Kevin P. Lembo reported that — despite the deficit-mitigation steps taken late last year — he still was tracking a $40 million deficit in the current budget.

Coupled with the shrinking revenue projection in the latest consensus report, this year’s shortfall now exceeds $70 million.

Tuesday’s report continues a steady downward trend in expectations for state finances since Malloy and the legislature adopted their first budget together in June 2011. That plan relied on a combination of $1.5 billion in new state taxes and fees, a union concession plan, a departmental consolidation plan and various programmatic cuts to close a projected shortfall estimated as high as $3.7 billion.

Republican legislators have tried to argue that Malloy and his fellow Democrats in the legislative majority are largely to blame; specifically that the tax hike has stymied the state’s economy. Malloy and Democratic lawmakers counter that Connecticut’s budget problems largely mirror those in other states, and have been driven by negative national and international economic trends.