Lembo sees progress, but concerns linger over state budget

State government continues to make steady progress resolving the fiscal crises amassed over years, or even decades, Connecticut’s chief fiscal watchdog reported Wednesday.

But Comptroller Kevin P. Lembo also used his annual fiscal review to highlight several concerns — lingering debt, hefty health care costs and modest job and revenue growth — that still threaten Connecticut’s progress.

“There is a certain level of impatience when you are trying to dig out of a big, difficult situation,” Lembo told reporters during a briefing in his office. “Connecticut is in a big, difficult situation. … There is much work that needs to be done.”

State government finished the 2012-13 fiscal year on June 30 with a nearly $400 million surplus, equal to about 2 percent of its annual operating budget.

It holds a modest $271 million in its emergency reserve. And state employee payroll in the general fund, which covers the bulk of operating expenses in the annual budget, is at its lowest point since 2006. 

But Lembo said the need for “belt-tightening” is far from past.

Not only does the budget reserve, commonly known as the Rainy Day Fund, hold only about 1/11th of the maximum allowed by law, but revenues aren’t flowing into Connecticut’s coffers at a record-setting pace.

Revenues grew by 4.5 percent last fiscal year compared with 2011-12, Lembo said, adding this is welcome news. But it doesn’t match the average growth of 6.4 percent Connecticut enjoyed during the five years leading up to the 2008 recession.

One glaring sign of weakness remains within the state’s single-largest source of funds, its income tax.

Payroll withholding, which provides roughly two-thirds of state income tax receipts, actually fell by just under 1 percent in the last budget.

And were it not for a rebounding state market — and double-digit growth in state income tax revenue tied to capital gains, dividends and other investment earnings — last year’s budget surplus might not exist.

That growth was driven in part by rising federal capital gains tax rates. This spurred many investors to take capital gains in 2012, and pay state income taxes on those gains into the 2012-13 budget — a development that won't repeat this year, Lembo said.

And besides slow growth in employment and personal income in Connecticut, trends in consumer credit and household spending also don’t point to an economic boom anytime soon, Lembo said. 

State officials should focus on fast-growing “cost-drivers” in the budget, including Medicaid-funded health care, debt service and retirement benefits, the comptroller said.

But Lembo quickly added that progress already has been made in several of these areas.

Spending in the Department of Social Services, which oversees the bulk of the Medicaid program, grew by just 2 percent last fiscal year, after jumping by 7 percent ion the previous two.

Connecticut owes $17.9 billion in bonded debt, most of it tied to capital projects including municipal school construction, building programs at public colleges and universities, and road and bridge repair.

The state also has large unfunded liabilities in its pension and retiree health care programs for state workers and for public school teachers.

This so-called “soft debt,” coupled with the bonded debt, totals $46.5 billion, and represents nearly $18,000 for every person in the state, the comptroller said.

Still, Gov. Dannel P. Malloy’s administration and the legislature used the last budget to end nearly two decades of under-funding the state employees’ pension program.

And a new wellness program and other health plan changes negotiated with state unions in 2011 have produced significant savings, Lembo said.

State spending on employee health care rose 4 percent last year, compared with 7.5 percent in 2011-12.

The cost of retiree health care actually dropped 7 percent in the last budget, one year after it had risen by 8.3 percent.

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