She’s been criticized for leaving more than $3 billion worth of fiscal problems for her successor to resolve, but Gov. M. Jodi Rell will have to take one crack herself later this fall at filling what effectively represents the largest budget deficit in state history.

The administration began work earlier this month to meet its obligation to the next governor as defined under the state law.

According to a provision last exercised nearly 16 years ago, Rell must craft a plan to balance the fiscal year that begins next July 1. And according to the most recent projections from the legislature’s nonpartisan Office of Fiscal Analysis, that budget has a built-in hole of $3.26 billion.

what's in the 2011-12 deficit

The governor’s office declined to comment Monday when asked whether this plan would propose tax increases or additional borrowing. But sources close to the process said the administration has asked departments and agencies to develop options for reducing their expenses by as much as 15 percent.

Both major party candidates for governor, Democrat Dan Malloy and Republican Tom Foley, have said the massive deficit stems largely from tough decisions Rell avoided over the past two years – though Foley also has laid the blame for that shortfall at the feet of the Democrat-controlled General Assembly.

“For an incoming governor, who has to propose a budget shortly after the first of the year, for the proceeding governor to undertake this exercise can be a good thing,” Foley said, adding he hopes Rell avoids the steep borrowing used to prop up the last two annual budgets. “The whole idea of having an annual budget is not incurring additional debt.”

Rell and the legislature agreed to borrow $1 billion in June 2009. Technically those funds were used to close a budget deficit from two fiscal years ago. Yet state government borrowed those funds despite having nearly $1.4 billion in its budget reserve — commonly known as the Rainy Day Fund–at the time. This enabled Rell and lawmakers to use the entire reserve to mitigate spending cuts or tax hikes in 2009-10.

They also authorized additional borrowing, up to $956 million, to balance this fiscal year’s budget, though the administration estimates less than $700 million will be needed, thanks to a modest surplus last fiscal year.

Malloy was cautiously optimistic Monday that the administration’s efforts would prove helpful, particularly any agency reduction plans. “I want to review those,” he said. “I hope they have great ideas. We all know the state is in terrible shape and needs to change direction.”

Chester First Selectman Tom Marsh, who is running for governor under the Independent Party of Connecticut banner, was skeptical about whether Rell would produce a balanced plan to cover the entire shortfall.

The governor took considerable heat from the legislators in February 2009 when her proposal for the 2009-11 biennium closed only about two-thirds of the $8.7 billion, two-year deficit projected by legislative analysts.

“As long as there is an honest dialogue between the outgoing and the incoming administration, as long as the governor puts forward every effort to give the best budget information she has, it would be useful,” Marsh said.

Rell did not receive a tentative budget from her predecessor, John G. Rowland, who resigned mid-term in July 2004 amid an impeachment inquiry. Rowland, who eventually pleaded guilty to accepting $100,000 in gifts from state contractors and subordinates, served 10 months in federal prison while Rell, his running mate, assumed the governor’s post.

The last time an outgoing governor prepared a tentative budget for a governor-elect was in November 1994, when Lowell P. Weicker prepared one for Rowland.

But this time around, Rell is on pace to hand off a shortfall that effectively represents the largest budget deficit in state history.

Technically the $4 billion shortfall Rell and the legislature closed in 2009-10 was larger. But nearly half of that deficit, about $1.9 billion, was closed either with funds from the budget reserve or with emergency federal stimulus grants. Neither of those options is expected to be available for the next governor.

The $3.26 billion shortfall forecast for 2011-12 is down slightly from the $3.37 billion deficit OFA first released the projection in early May. The latest figure, released earlier this month when analysts published the $19.01 billion budget for the current year, was adjusted largely for two reasons.

Rell and the legislature replaced a plan to balance this year’s budget with “securitization,” or the sale of future revenues at a discount, with more traditional borrowing.

Under the securitization plan, state government would have begun forfeiting “sold” revenues, starting with $216.5 million, in 2011-12 under the next administration. In its place, state officials not only opted to issue revenue bonds, but adopted a plan to cover the annual debt service with a new surcharge on monthly electricity bills.

But while the overall shortfall improved once that $216.5 million obligation was removed, an additional $106.5 million was put back on to reflect additional federal stimulus funding for health care approved in July for the current budget – but set to expire next fiscal year.

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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