Nonpartisan analysts say state budget deficit approaches $140M

The state budget deficit is more than twice the size Gov. Dannel P. Malloy's administration reported this week, according to a new analysis released Friday by nonpartisan legislative analysts.

The $138.6 million shortfall projected by the Office of Fiscal Analysis still falls short of the threshold needed to force Malloy to draft another mitigation plan, but it does exceed funding in the state's emergency budget reserve.

The new forecast also comes just five weeks after the legislature and Malloy teamed up to wipe $365 million in red ink off the state's books.

Like the earlier deficit, the new shortfall is largely a product of declining state revenue projections and surging demand for Medicaid-funded health care services.

But while Malloy's budget office reported a $64.4 million deficit Tuesday to Comptroller Kevin P. Lembo, legislative analysts expect greater cost-overruns this year in social services, mental health and addiction programs and in the prison system.

OFA also is less optimistic than the administration that it will achieve some of the savings targets built into the annual budget.

The new report also warns legislators that costs for Medicaid programs in particular remain volatile. Projected spending for Medicaid-funded health care services for the poor have risen by $88 million since the fiscal year began last July 1.

Many of the budget cuts ordered late last year when Malloy and the legislature whittled down an earlier deficit focused on social services and health care, but also targeted higher education and tourism initiatives.

The governor and legislature also covered the earlier deficit by raising more than $46 million in new revenue for operating programs by imposing new limits on business tax credits, launching a new crackdown on insurance tax fraud, and by tapping a few one-time sources of funding to support other ongoing programs.

Even while that process was going on in December, Lembo warned that it wouldn't be sufficient to balance the state's books, citing Medicaid expenses in particular. And two weeks after the special session, the comptroller projected a $40 million deficit.

The state budget took another hit on Jan. 15 when Malloy's budget staff and OFA downgraded their consensus revenue projections for the current fiscal year. Sales tax receipts alone now are expected to finish the fiscal year on June 30 about $116 million below the level originally built into the budget.

Still, Malloy's budget chief, OPM Secretary Benjamin Barnes, expressed some optimism during a budget forum earlier this week that Connecticut could be in for some good fiscal news in the coming months regarding state income tax receipts.

Both Barnes and Malloy also have said that new changes in federal income tax law, specifically increasing the top rate on capital gains from 15 to 20 percent starting in 2013, could help state finances this spring. If wealthier households sold stock and took extra capital gains in late 2012 -- presumably so those gains could be taxed at the lower federal rate -- they still would also have to pay state income taxes on those earnings.

Both the $64.4 million deficit forecast from the administration and OFA's $138.6 million projection aren't sufficient to trigger another deficit reduction plan.

The governor is required by law to submit a deficit-mitigation plan to the legislature whenever the comptroller certifies a deficit larger than 1 percent of the general fund. In the context of this year's $20.5 billion state budget, the general fund -- which covers the bulk of operating costs, -- is $19.1 billion and 1 percent is $191.4 million.

The OFA deficit projection does exceed available dollars in the state's emergency budget reserve. Commonly known as the Rainy Day Fund, it holds $93.5 million.

Follow Keith M. Phaneuf on Twitter.

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