Current state budget outlook improves, though big challenges remain

The red ink in Connecticut’s current spending plan may be drying up, though significant challenges remain.

State Comptroller Kevin P. Lembo reported a $91.3 million deficit Monday in the state’s chief operating fund, a $40 million improvement from the shortfall the comptroller projected one month ago. That change is due largely to an unanticipated surge in estate tax receipts.

But the legislature’s nonpartisan Office of Fiscal Analysis (OFA) also is tracking improvement in the state’s fiscal outlook, both in terms of rising revenues and shrinking expenditures.

OFA analysts are projecting a $50.7 million deficit in the general fund, a reduction of more than one-half from the $128 million shortfall the office projected one month ago.

And both Lembo and legislative analysts noted that more fiscal improvement could be seen in the coming months if income tax filings around the April 15 deadline show more economic growth statewide.

“Connecticut’s economy is showing signs of a moderate, but steady, recovery,” Lembo said.

Most of the $40 million improvement in Lembo’s budget assessment is attributable to extraordinarily high collections last month from the inheritance tax. Because Connecticut only levies a tax on the estates of wealthy residents, it is not unusual to see a significant surge in revenue if particularly valuable property or other assets change hands.

But Lembo also noted that spending growth has been minimal for most of the current fiscal year, and that effort is helping to diminish the red ink. Gov. Dannel P. Malloy’s administration has imposed a hiring freeze on most vacant Executive Branch positions this year, limiting growth in personnel costs.

And legislative analysts projected that the cost of providing health insurance to retired state employees this fiscal year has been downgraded significantly, about $21.6 million, due to a reduced number of claims and cheaper-than-expected insurance premiums.

Most of the deficit projections earlier this year were driven by two factors: Medicaid costs that exceeded budgeted spending; and income, sales and other tax receipts projected to finish below anticipated levels.

The fiscal year doesn’t end until June 30, though, and analysts have said that income tax numbers could improve before then. Their hope is that wealthy Connecticut residents sold investments late last year and took an unusually large amount of capital gains so they could report the income under 2012 federal tax rules — which included a 15 percent income tax rate on capital gains.

President Obama and Congress have since allowed that rate, part of the federal tax cut package enacted under former President George W. Bush in 2001 and 2003, to expire. Starting this calendar year, the federal government taxes most income from capital gains at 20 percent.

State Office of Policy and Management Secretary Benjamin Barnes, Malloy’s budget chief, said “it certainly is within the realm of possibility” that an April revenue surge could close the deficit.

But Barnes also said he believes the administration has been more successful than either the comptroller’s office or legislative analysts realize at cutting costs, and will be ready to close the deficit that way, if necessary.

A much larger projected deficit, about $1.2 billion, is forecast for the next fiscal year, based on current spending and revenue trends. Malloy has proposed closing that gap with a mix of spending cuts –primarily to social services — new tax revenues from businesses and power plants, and borrowing.