A controversial system for exposing state budget deficits that the Democrat-controlled legislature forced on Gov. M. Jodi Rell last year could come back to bite Democrats this fall – less than three weeks before Election Day.

Commonly known as the “consensus revenue” law, the statute requires the legislature’s nonpartisan Office of Fiscal Analysis and the governor’s budget staff to issue new revenue projections for the current and next four fiscal years on Oct. 15.

Now,  with hundreds of millions of dollars in anticipated federal aid stalled on Capitol Hill, and with the stock market having plunged more than 1,000 points below the level state analysts used to forecast a modest recovery back in early May, Republicans hope the mid-October report could be a major political embarrassment for Democrats at the worst possible time.

“Eventually someone tells the truth. Eventually the lies catch up with you,” Republican State Chairman Christopher Healy said. “Eventually the taxpayers are going to have to face this historic dereliction of duty by the Democrats.”

“It’s sort of ironic now that this legislation, which was purely a political creature, may come back to bite the Democrats,” said Rep. Vincent J. Candelora of Branford, the ranking House Republican on the Finance, Revenue and Bonding Committee. “It’s going to be political Russian roulette.”

At issue are state finances for both 2010-11 and for 2011-12, the latter being the first budget the next governor and legislature must craft.

Minutes before the regular 2010 legislative session adjourned on May 5, Gov. M. Jodi Rell – a Republican who is not seeking re-election – and the legislature resolved a $19.01 billion spending plan for the fiscal year that begins July 1.

On paper, that budget was balanced with no tax increases, and top Democratic leaders were quick to point that out, as well as the fact that it was resolved through compromise with a Republican governor.

But GOP lawmakers, who are trying to chip away at large Democratic majorities in both chambers, argue the budget is more fiscal fiction than fact.

The plan is balanced on paper, but it includes nearly $1 billion in borrowing in the form of revenue bonds. That borrowing was one of the primary weaknesses cited by Fitch Ratings Service, a major Wall Street credit assessment agency, which lowered Connecticut’s bond rating last week – a move that can lead to future increases in borrowing rates.

The budget technically contains no new “taxes,” but there is a new surcharge, ranging from $2 to $3, on most consumers’ monthly electric bills, to pay off the revenue bonds.

It also hinges on $365.6 million in proposed-but-not-yet-approved increases in the emergency federal stimulus grant program. But since the state budget’s adoption, proposals to increase the health care and education funding that comprise Connecticut’s potential $365.6 million have bogged down in the U.S. House of Representatives. Majority Democrats in Congress have objected to endorsing additional stimulus funding until federal lawmakers identify new spending cuts or tax hikes to offset the proposed increases.

And possibly of prime importance, the Dow Jones Industrial Average has fallen more than 1,100 points since April 30, when fiscal analysts for the legislature and the Rell administration last bolstered revenue expectations for Connecticut, particularly from the state income tax. The indicator of blue chip stocks traditionally is one of the best tools for assessing state income tax growth tied to capital gains, dividends and other investment income. But over the past month it has dropped sharply driven largely by economic instability in the European markets.

“When we passed the budget it was balanced according to the revenue estimates,” Senate President Pro Tem Donald E. Williams Jr., D-Brooklyn, said Monday. “If changes in the European economy affect us, that would have affected us under any budget we passed. There’s no news there.”

Williams was a force behind the consensus revenue legislation passed one year ago amidst Democratic frustrations that Rell had not delivered a balanced budget proposal.

The governor unveiled a $37.29 billion biennial budget in February 2009 to cover the 2009-10 and 2010-11 fiscal years, but the plan’s revenue assumptions were too optimistic by more than $2.6 billion, according to a report from nonpartisan legislative analysts.

Williams offered legislation that would force executive and legislative branch fiscal analysts to meet three to four times annually and negotiate a consensus report on revenues. If they cannot reach consensus, the state comptroller must mediate and issue a final report.

The legislature adopted the bill twice, the second time in July 2009 by the two-thirds’ margin needed to overcome Rell’s veto. Shortly afterward the administration confirmed nearly all of legislative analysts’ revenue assumptions.

“Republicans have absolutely no credibility to talk about honest budgets or budgets that balance,” Williams said, noting that Republicans in both chambers overwhelmingly opposed the consensus revenue legislation and accused him of waging a partisan witch hunt to embarrass Rell. “The Republicans fought this tooth and nail. Without it, we would have been stuck with their phony numbers.”

Sen. Andrew W. Roraback of Goshen, ranking Republican senator on the finance committee, said that while the GOP was “leery of the consensus revenue bill in the context of which it was raised, … it is the beginning, not the end of an honest, transparent budget process.”

Roraback said Democrats still are trying to present the current budget as an honest document that was balanced from the beginning, which they know to be incorrect.

The Oct. 15 report, according to the consensus revenue statute, not only must assess the current fiscal year, but the next three as well. OFA had been projecting a nearly $3.9 billion built-in shortfall for the 2011-12 budget, the first one that the next governor and legislature must craft. That deficit was downgraded to $3.4 billion in May based on new projections of modest revenue growth. But both shortfalls represent close to 20 percent of the entire current budget, and more than half of all revenue expected to be produced by the income tax this year.

Mansfield political consultant Jonathan Pelto, a former state representative and former strategist for the state Democratic Party, said the timing of the Oct. 15 report “potentially is a huge problem for the Democrats.

“They are banking on pushing any news of the budget off until after the election. There is not a political observer who doesn’t know the budget is out of balance. The difference is that in October, both the media and the voters are more likely to be interested in any news of a potential budget deficit.”

Pelto added Democrats cannot count on one of their own, Comptroller Nancy Wyman of Tolland – who is running for lieutenant governor – to quell any bad fiscal news. “Nancy Wyman has made it clear that the comptroller’s role is to tell the truth and that both the governor and the legislature should expect her to continue to use her role to force them to confront the magnitude of their bad budget decisions,” he said.

Wyman’s campaign issued a statement Saturday that called the bond rating downgrade “the direct result of a refusal to address the structural hole in the state budget, and instead, borrowing to pay for ongoing expenses. I have repeatedly warned that the state cannot afford to balance the budget with a credit card… Connecticut has simply not met its obligations.”

Keith has spent most of his 31 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut’s transportation and social services networks. He has been the state finances reporter at CT Mirror since it launched in 2010. Prior to joining CT Mirror Keith was State Capitol bureau chief for The Journal Inquirer of Manchester, a reporter for the Day of New London, and a former contributing writer to The New York Times. Keith is a graduate of and a former journalism instructor at the University of Connecticut.

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