Will Malloy spend Connecticut’s shaky surplus on election-year tax cut?

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Gov. Dannel P. Malloy finally has a chance to trumpet a large budget surplus, even though much of it stands on shaky underpinnings.

And Republicans suspect the Democratic governor will use it next month to pay for an election-year tax cut — even though a larger deficit has been forecast for just a year from now.

“Beware of governors bearing gifts in election years,” said House Minority Leader Lawrence F. Cafero, R-Norwalk.

“This is not an indication that our budget problems have been solved,” said Fairfield Republican John P. McKinney, the top Republican in the Senate and a candidate for governor. “Even the governor’s own numbers, as fudged as they are, show budget deficits” on the horizon.

But the administration and his allies note that Malloy has confronted several expensive problems that his GOP predecessors ignored, including a cash-starved employees’ pension fund and a municipal education grant program reeling from the loss of federal support. If Malloy had ignored these, he could have saved more.

“While Republicans root for failure, Governor Malloy is focused on progress,” Malloy spokesman Andrew Doba said. “Unlike his predecessors, Governor Malloy has fully funded our pension obligations, and he’s done that while continuing to invest in job creation and public education.”

“Over the past three years, Connecticut has reduced its overall long-term debt by more than $11.6 billion, created more than 40,000 private sector jobs and built a state budget that has a nearly $500 million surplus this year,” Doba added. “That’s progress by any standard.”

A one-time solution 

But that progress is open to interpretation.

On the plus side, the state’s emergency reserve — commonly called the Rainy Day Fund — contains $271 million.

And based upon improving revenue forecasts released last week, the projected surpluses for the current fiscal year, and for the one that begins July 1, jump up to $493 million and $161 million respectively.

Add it all up, and Malloy and the legislature have $925 million extra to work with.

But if the legislature’s nonpartisan analysts are right, Connecticut will need it.

More deficits in the forecast

The Office of Fiscal Analysis estimated in November that starting in July 2015, the state will have a $1.1 billion deficit. That’s about 6 percent of the Connecticut state budget.

While inflation and some expiring tax rates contribute to that gap, it also exists because Malloy and the legislature have been using borrowing and other gimmicks to delay paying hundreds of millions of dollars of expenses until after the gubernatorial election in November.

Even considering the latest, improved revenue forecast, the shortfall in the first new budget after the election still approaches $940 million. In the second and third years after the election, the potential deficits approach $1.1 billion and $1.3 billion, respectively. And those deficit projections already assume Connecticut’s economy will improve a lot.

Malloy’s potential fiscal cushion of $925 million would barely plug that first post-election budget hole. But after that, long-term solutions are needed.

Is a tax cut on the way?

The governor’s Republican rivals fear that he and the legislature won’t save the entire surplus, spending some to pay for an election year tax cut -– a move that could make the post-election deficit larger.

For example, if Democrats want to ensure many households get a tax break before the election, they could simply increase the property tax credit within the state income tax and apply it to returns filed this spring.

That would cost $71 million in the current budget — paid for out of the surplus.

But unless Democrats set the tax break to expire after one year — politically unlikely — the $71 million cost would pop up in the first budget after the election, expanding the $940 million deficit to more than $1 billion.

When asked how he weighs the current-year surplus against the long-term shortfalls, Malloy declined to discuss tax cuts specifically. “We can’t be all things to all people,” he said. “So that means we have to pick and choose where we invest. I’ll invest in working families every day I get the chance. I’ll invest in educational achievement when I have the opportunity to do that.”

Two other GOP gubernatorial contenders, Danbury Mayor Mark Boughton and Greenwich businessman Tom Foley, are both wary of such a move, or something similar.

“You can’t propose responsibly cutting taxes without reducing spending,” said Foley, his party’s gubernatorial nominee in 2010.

“If you have tax cuts that are accompanied by a true reorganization of government, then it’s perfectly appropriate,” Boughton said, adding that GOP legislators “have to be unrelenting” in insisting on spending cuts to match any tax breaks.

Malloy tackled costly problems in education, worker benefits

But the administration insists that reorganization already has taken place.

The state workforce is down about 5,000 employees since Malloy took office.

A 2011 union concessions agreement is expected to save billions in worker retirement and other benefit costs in future years.

And if Malloy had wanted to stockpile the largest surplus possible, administration allies insist, he would have ignored problems in the pension system and municipal aid as his Republican predecessors did.

When Malloy took office, the state was funding public schools through a $1.9 billion Education Cost Sharing (ECS) grant program. But $271 million in federal stimulus money — that was expiring — was helping to pay that.

In three years, Malloy and the legislature have not only filled that $271 annual gap without cutting the largest grant program for municipal schools, but they’ve grown the program.

Total ECS aid is up $177 million this year; starting July 1, it will stand $233 million over 2010-11 levels.

Malloy and the legislature also repealed a controversial system established in the mid-1990s that allowed the state to scale back payments into an already grossly underfunded worker pension system.

That change and another reform added about $100 million per year to pension contributions.

“The surplus number is a real number, and it is a reflection of the choices that the governor and the legislature made,” said Comptroller Kevin P. Lembo, a Democrat.

The governor and lawmakers have enacted real reforms that have improved state finances dramatically from the $3.7 billion deficit projection Malloy inherited three years ago, Lembo said.

Putting operating costs on the credit card

But the comptroller also acknowledged that despite improving revenue numbers, the projected shortfall after the election is a concern. And while he didn’t recommend any specific amounts, Lembo said officials should keep a lot of the projected surplus.

“The primary action has to be a significant contribution to the budget reserve fund,” he said.

That’s because a big part of Malloy’s fiscal cushion comes from borrowing and related moves, not from a booming economy.

Since the governor took office three years ago, close to $1 billion in operating costs have either been deferred or shifted onto the state’s credit card. Malloy criticized these very gimmicks when he was a candidate in 2010.

“Too often over the past 16 years, and especially over the past two years, Hartford’s played a budget shell game; piles of money get moved around, erasers get used, and voila, there’s a ‘balanced budget,'” Malloy wrote in a 2010 campaign policy paper. “It fools only those who want to be fooled.”

Among the steps taken by Malloy and the legislature’s Democratic majority were:

  • Canceling an early $222 million debt payment in June 2012. Instead they used $138 million to close a year-end operating deficit and put $94 million into the Rainy Day Fund.
  • Refinancing debt to push $392 million in payments owed now until after the election.
  • Bonding $173 million in new municipal aid over this fiscal year and next.
  • Bonding $57 million for pollution abatement and stem cell research grants that previously were paid for out of the operating budget.
  • Borrowing an extra $39 million so that debt payments tied to converting state finances to Generally Accepted Accounting Principles could be deferred until after the election.

The last area centers on “bond premiums.” These involve bonds sold for an extra sum above their base value, typically in exchange for the state’s paying a higher interest rate.

In the 2012 and 2013 fiscal years, the state took $118 million in premiums that had not been anticipated in the budget or planned for use to pay off some other debt.

These excess premiums effectively bolstered the operating budget and contributed toward the growing Rainy Day Fund.

Malloy, who must present his next budget to the legislature Feb. 5, was coy Monday about his plans.

“There are a lot things I want to accomplish in the coming year,” he said. “And so I think we’ll be talking about a number of those things before the address on the 5th.”

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