Connecticut’s finances were dealt a major blow Thursday when nonpartisan analysts downgraded projected income tax receipts by hundreds of millions of dollars for this fiscal year and next.
The new report from the Office of Fiscal Analysis, coupled with earlier projections, now means:
— The current fiscal year's budget could be as much as $266 million in deficit.
— The original budget for 2016-17, adopted last June, now is almost $900 million out of balance.
— Gov. Dannel P. Malloy’s proposal to adjust 2016-17 is as much as $410 million in the red — and that’s assuming legislators agree to cut $570 million from the previously approved 2016-17 plan, as the governor has proposed.
— And the new biennial budget after the November elections, which covers the 2017-18 and 2018-19 fiscal years, has built-in shortfalls topping $2 billion in each year. These represent more than 10 percent of annual operating expenses.
Nonpartisan analysts issued a new revenue forecast Thursday – nine weeks before the next projection they must issue jointly with Malloy’s budget office, and just six weeks after their last consensus estimate. This report updates a mid-January projection.
Leaders of the legislature's Republican minorities, who have called since April for Malloy to seek concessions from state employees to mitigate deficit projections, called again Thursday for immediate spending cuts.
"We are scared to death" by these numbers, said House Minority Leader Themis Klarides, R-Derby.
"It is a very, very sad day, an upsetting day here in Connecticut," Senate Minority Leader Len Fasano, R-North Haven said. "These are just incredible numbers."
“Projections are going to vary from one set of numbers to another," Gian-Carl Casa, spokesman for the governor's budget office, said Thursday. "But what we should all agree on is that this is a new economic reality that requires a different solution. We hope that solution will happen in a bipartisan manner."
"This reflects the reality of an economy where families are working harder for less, and further emphasizes the need for structural changes as to how our budget is built,” House Speaker J. Brendan Sharkey, D-Hamden said. “Savings and efficiency must be the priority, where accountability of state agencies for every taxpayer dollar is the new watchword. This is how the budget challenge we face will be met."
“We are prepared to do what is necessary to balance Connecticut’s budget,” Senate President Pro Tem Martin M. Looney, D-New Haven, said. “Today’s projections reinforce the need to find additional efficiencies and savings across government. That’s why we have already made structural changes to save half a billion dollars over the next two years.”
“While we continue to increase jobs and see growth in the state’s economy, we are impacted by a slower international and national economy,” said Senate Majority Leader Bob Duff. “One only needs to look at the stock market averages to see the challenges we face. We have always worked to make the right decisions for the long-term, and we will stay focused on meeting the needs of our citizens in the most efficient and effective way possible.”
Deficits widen this fiscal year and next
The culprit in this new analysis is the same one that has plagued state revenue projections most frequently since the last recession: that portion of the state income tax that covers capital gains, dividends and other investment-related earnings.
Nonpartisan analysts downgraded expectations for income tax receipts this fiscal year by almost $200 million. OFA, which already had projected a $72.2 million deficit for this fiscal year back on Jan. 25, now pegs the shortfall at $266 million.
Though that represents a relatively modest 1.4 percent of this year’s general fund, it is still greater than the 1 percent threshold that would require Malloy to prepare a deficit-mitigation plan.
More importantly, OFA also dramatically expanded the projected deficit for the upcoming fiscal year — a budget that Malloy and legislators are working to prepare right now.
Nonpartisan analysts had projected a built-in hole of $552 million in the original budget for 2016-17. Lawmakers and Malloy mitigated that problem somewhat in December in a budget-cutting special session. But more revenue erosion in January effectively countered those efforts.
And with the new report estimating $340 million in further revenue erosion, it all adds up to a gap that approaches $900 million.
The report also comes as legislators are trying to decide whether to accept or reject a contract between the University of Connecticut and its non-teaching professionals union. That deal, which raises compensation by 3 percent in 2016-17 and by 4,5 percent in each of the four years after that, would cost the state an additional $94 million in total over the next five years.
Governor's new budget no longer in balance
The new report also means Malloy's Feb. 3 plan to rebalance 2016-17 spending no longer does the job.
Malloy offered a plan in February that relied on spending cuts. But that was when the deficit still was presumed to be in the range of $550 million.
Since then, Treasurer Denise L. Nappier has reported that the governor’s budget underfunds the general fund debt service account by $71 million.
That estimate, coupled with the new OFA projection that revenues in 2016-17 are down by another $340 million, means the Malloy plan could be as much as $410 million out of balance.
This potential hole is just larger than the state's modest fiscal cushion. According to Comptroller Kevin P. Lembo's office, the emergency reserve, commonly known as the Rainy Day Fund, holds $406 million.
But the biggest problem lies in the first biennial budget after the election. Nonpartisan analysts already were projecting deficits topping $1.72 billion in 2017-18 and $1.9 billion in 2018-19.
Post-election deficits swell beyond $2B per year
Since revenue trends traditionally extend for several years, the $340 million loss foreseen for 2016-17 probably would carry into the next biennial budget as well.
That would push the deficit in each of the first two new fiscal years after the November state elections to more than $2 billion.
GOP leaders said they fear the legislature's Democratic majority will try to downplay these projected deficits until after the November state elections.
Fasano said he fears the majority might tap the emergency reserve and off-budget funds or use borrowing to cover this fiscal year's deficit and adopt a plan for 2016-17 without raising taxes. But that only will put increasing pressure on the legislature to make hard choices after the election, he added.
"The Democratic majority is incompetent to run the fiscal ship of this state," Fasano said.
Klarides added she also fears the Democrats' real solution is another major tax hike – to be delivered after the 2016 state elections. "Our concern is that they are going to do whatever they have to do to get through the election, and then 'Katy, bar the door' after that."