Despite Malloy’s assurances, last CT budget closes in deficit

State Comptroller Kevin Lembo

Arielle Levin Becker / CTMirror.org File Photo

State Comptroller Kevin Lembo.

It’s official. Connecticut state government finished the last fiscal year in deficit, despite assurances from Gov. Dannel P. Malloy that this would not happen.

Comptroller Kevin P. Lembo officially closed the books Wednesday on the 2014-15 fiscal year – which ended June 30 – determining it finished $113.2 million in the red.

Though the deficit represents a small portion of last year’s general fund, it also means Connecticut must use a significant share of its modest reserves to plug the gap.

This news comes two weeks after the Malloy administration warned that eroding revenues could threaten state finances both this year and next.

“The general fund ended Fiscal year [2014-]2015 with a deficit of $113,168,010, which represents six-tenths of 1 percent of … budgeted spending,” Lembo wrote Wednesday to Malloy. (Though the last fiscal year ended three months ago, the comptroller doesn’t close the books until late September, since certain tax receipts received over the summer are applied to the prior budget.)

Regardless of the deficit’s size, Malloy insisted frequently last year during his successful re-election campaign that “there isn’t going to be a deficit.”

On most occasions, the governor actually was referring to nonpartisan analysts’ warnings that state finances, unless adjusted, were on pace to run more than $1.3 billion in the red in this fiscal year, 2015-16, the first new fiscal year after the election.

Malloy pledged that shortfall would be resolved without tax increases. But in July he signed a new two-year budget that increased taxes by more than $1.3 billion over the biennium, while also canceling or postponing another $480 million in previously approved tax cuts.

But Malloy also had defended the last budget of his first term, despite Republican legislative leaders arguments that the 2014-15 spending plan was flawed.

Aggressive savings targets and insufficient funding to cover contractually required health care benefits for retirees – the latter problem first exposed by Lembo, a Democrat – were among the chief problems cited by the GOP.

The governor insisted his administration would manage any problems that cropped up and finish 2014-15 in balance.

But his administration didn’t report any problems with 2014-15 finances until after winning re-election in early November, more than four months after the fiscal year had begun.

Malloy was careful never to let the deficit, which swelled on several occasions, get above $175 million, or 1 percent of last fiscal year’s general fund.

And while that might seem small, state law requires the governor to submit a deficit-mitigation plan within one month whenever the comptroller certifies a shortfall exceeding 1 percent of the general fund. That’s because large portions of the annual budget cannot be cut quickly in any given year because of contractual obligations.

The top Republicans in the House and Senate, Themis Klarides of Derby and Len Fasano of North Haven, both accused Malloy of disclosing a larger deficit in piecemeal fashion to avoid the political setback of being mandated to prepare a formal deficit-mitigation plan.

They also have said repeatedly in recent months, as it became clear 2014-15 would end in deficit, that it could have been avoided with more aggressive steps been undertaken last fall.

But Republicans, who insisted they had plans to cut the budget, also refused to disclose them publicly, insisting they only would reveal them if invited into bipartisan talks with Malloy and Democratic legislative leaders.

“This represents less than 1 percent of the overall budget,” Malloy spokesman Devon Puglia said, “and it’s exactly why we built up our reserves when there were none previously.”

“The governor said we would not have a deficit at the end of the year,” Fasano said Wednesday. “People can make mistakes. However, there’s very little excuse to be wrong when you close your eyes to the warning signs. The governor owns this deficit.”

The official shortfall also means Connecticut’s modest emergency reserve – commonly known as the Rainy Day Fund – will drop from $519.2 million to $406 million to plug the gap in 2014-15 finances.

The $406 million reserve leaves Connecticut with a fiscal cushion equal to just 2.2 percent of annual operating costs. Lembo insists the state needs to build its reserves to 15 percent to have a sufficient buffer against economic downturns.

Connecticut’s income tax, which is expected to bring in $9.7 billion this fiscal year, is more volatile than those in most other states. That’s because about 40 percent of income tax receipts are tied to capital gains, dividends and other investment-related earnings, which traditionally fluctuate year-to-year by double-digit percentages.

Office of Policy and Management Secretary Benjamin Barnes, Malloy’s budget chief, warned two weeks ago that income tax receipts were lagging by about $100 million this year due to weak stock market earnings – a trend that could continue next year and into 2017-18.

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