Eroding revenues widen gap in next two-year state budget by $500M

The projected deficit in the next two-year state budget has swelled by more than $500 million because of declining revenue projections, state fiscal analysts reported Thursday.

Coupled with recent cost hikes projected for Connecticut’s pension fund for teachers, red ink in the next two-year budget has grown by nearly $600 million in two weeks.

The Consensus Revenue Report, signed by the governor’s budget agency and by the legislature’s nonpartisan Office of Fiscal Analysis, also lowered revenue expectations for the current budget by $46 million from the adopted budget, probably worsening deficit forecasts issued in the last few weeks.

Red ink is growing

Analysts said state government can expect about $208 million less General Fund revenue in the 2017-18 fiscal year than nonpartisan analysts projected this summer, and about $297 million less in 2018-19.

Benjamin Barnes, secretary of the Office of Policy and Management, speaks at the Benjamin Barnes, secretary of the Office of Policy and Management, speaks at the annual budget forum of Connecticut Voices for Children Tuesday.

Keith M. Phaneuf / Ctmirror.org

Malloy administration budget director Benjamin Barnes

Connecticut also learned last week in the new actuarial analysis of its teachers’ pension fund that state contributions to this program must grow by $47 million more than anticipated in 2017-18 and by $42 million the year after that.

Nonpartisan analysts warned when the latest budget was published in September that state finances — unless adjusted — were on pace to run about $1.25 billion in deficit next year and $1.4 billion in the red in 2018-19.

The new revenue erosion and higher pension costs together would swell the projected deficits to $1.5 billion next fiscal year, and $1.74 billion in 2018-19, shortfalls approaching 8 and 9 percent of the General Fund, respectively.

This means the combined two-year deficit probably exceeds $3.2 billion. Legislators are expected to ask nonpartisan analysts to issue new budget forecasts later this fall.

“Our excessive borrowing is going to cause huge problems because the debt we are loading on the state’s credit card gives us little room to budget for critical services that we desperately need,” House Minority Leader Themis Klarides, R-Derby, said.

Klarides and Senate GOP Leader Len Fasano of North Haven, whose respective caucuses both gained seats in Tuesday’s election, have argued since the summer that state finances were in worse shape than Gov. Dannel P. Malloy and the legislature’s Democratic majority claimed.

“The next legislative session is going to be extremely challenging, and we will keep the governor and the Democrats at their words that Republicans will finally have a hand at shaping the state’s finances,” Klarides said.

“Republicans have been asking for months for lawmakers to start looking at the budget and talking about how we can fix the issues that we know exist today,” Fasano said. “Every day that goes by without action only makes the problems worse. Now that elections are over, I hope that all lawmakers will finally be willing to begin that conversation with us. In the past few weeks not only have we seen this year’s deficit grow, we have also seen budget shortfalls in future years grow by over $500 million. These are problems that we cannot wait to address. We have to come together and start talking about solutions now.”

Malloy and his budget director, Ben Barnes, have challenged the value of these deficit forecasts, which rely on “current-services” estimates.

House Minority Leader Themis Klarides.

mark pazniokas / ctmirror.org

House Minority Leader Themis Klarides

In other words, nonpartisan analysts attempt to calculate how much it will cost to maintain current services in future years, considering such factors as inflation, contractual requirements and caseload changes in social service programs.

Still, the administration has said that some of Connecticut’s fixed debt costs — payments on bonded debt and expenses tied to retirement benefit programs — will surge considerably in future years because of decades of inadequate savings.

The consensus revenue forecast also must — as its name implies — reflect a projection negotiated by the governor’s and legislature’s budget staffs. And Malloy spokesman Chris McClure said Thursday the administration still remains confident about its last individual revenue projection — a more optimistic forecast issued Oct. 20 — but “consensus required compromise.”

“We are very much in agreement that state revenues are growing, albeit slowly. This slow growth presents manageable challenges in the current year and more difficulty in developing a balanced budget for the coming biennium. We look forward to presenting more details on these challenges next week with our annual Fiscal Accountability Report to the legislature.”

Lowering expectations for income tax receipts

The chief culprits behind the latest declining forecast were the state income tax — Connecticut’s largest revenue engine — and federal grants.

Analysts for the executive and legislative branches, as well as Comptroller Kevin P. Lembo, have been warning since last summer that income tax receipts were running off pace.

Comptroller Kevin P. Lembo

ctmirror.org

Comptroller Kevin P. Lembo

The new report shows income tax receipts in the current budget are coming in $67.5 million below original expectations.

That problem largely was offset in the current budget by one-time proceeds from a legal settlement Attorney General George Jepsen reached last month with RBS Securities, a Stamford-based mortgage underwriter.

But since revenue projections for the next two fiscal years also were based, in large part, on the original assumptions for the current budget, officials had been expecting revenues for future fiscal years — in which no major legal settlement is assumed — to take a hit.

According to the consensus report, projected income tax receipts for 2017-18 have been scaled back by $144.3 million, and those for 2018-19 by $211.5 million.

Current budget gap also worsens

The new report also potentially widens several deficit forecasts for the current budget — which were issued in the final weeks before Tuesday’s election.

Nonpartisan analysts projected a $77.9 million deficit on Oct. 13, recognizing much of the revenue erosion included in this new report. Still, their forecast would swell to just under $100 million.

The Malloy administration, which said on Oct. 20 that finances were just $5.7 million in deficit — a minuscule shortfall equal to 1/31st of 1 percent of the General Fund — would see its deficit swell to $55 million based on the new revenue report.

Lembo, who pegged the deficit at $42 million on Nov. 1, would see his estimate grow to about $91 million based on the new revenue projections.

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