State’s revenue forecast improves, but deficit still looms large

It looks like a huge gift for the next governor, but the latest state revenue projection turns out to be less than meets the eye.

Fiscal analysts for the legislative and executive branches released a new forecast on Friday projecting $601.2 million extra for the budget’s General Fund next fiscal year–when a built-in shortfall of $3.26 billion looms large.

But that growth from the last revenue forecast on April 30 doesn’t automatically translate into a deficit reduction in the same amount.

More than a third of that revenue growth, $216.5 million, is tied to a change in borrowing strategies already factored into the last deficit projection, which was released last month.

Another $95 million involves federal funding – primarily for Medicaid-regulated programs – which could only be obtained by first boosting state health care spending by roughly twice that amount.

And while the new revenue forecast doesn’t address all spending trends, the same agencies that prepared it are tracking over $170 million in cost-overruns in the current fiscal year that have the potential to spill over into 2011-12.

“Everyone acknowledges that Connecticut is facing a $3 billion deficit in each of the next two fiscal years,” House Minority Leader Lawrence F. Cafero, R-Norwalk, said Friday, shortly after the legislature’s nonpartisan Office of Fiscal Analysis and the governor’s budget agency, the Office of Policy and Management, released new quarterly consensus revenues required by law.

Republicans, who hold minorities in both chambers, have criticized both the Democratic majority and Republican Gov. M. Jodi Rell for propping up billions of dollars in state spending over this fiscal year and last with borrowing and revenues from limited sources that won’t be available starting in July.

“While the latest projections from OPM and OFA reflect a modest increase in revenue, the bottom line is Connecticut is still in deficit this year and more than $7 billion in deficit over the next three years,” Senate Minority Leader John McKinney, R-Fairfield, said.

But while the new revenue forecast doesn’t resolve the state’s budget crisis, there are some important positive signs, said Rep. Cameron C. Staples, D-New Haven, co-chairman of the Finance, Revenue and Bonding Committee.

The forecast does project an extra $342.3 million in General Fund tax revenues in 2011-12, with most of that growth coming from the budget’s two chief revenue sources: the income and sales taxes.

“It’s a continuation of a trend that we saw begin a few months back,” Staples said. “I think it’s a hopeful sign that we’re seeing not an enormous amount of growth, but steady growth. We’re moving in the right direction.”

The new revenue forecast also has the potential to push the $19.01 billion budget for the current year from a $45.3 million deficit into a small surplus.

Fiscal analysts say tax revenues now are up $19.6 million and other revenues are up nearly $50 million.

Both legislative and executive branch analysts are required to submit more detailed assessments of state budget spending and revenues next month to the Appropriations Committee.

Whether a surplus or deficit is reported at that time could depend on the spending side of the budget, specifically whether the $171.2 million in projected cost overruns for state agencies reported in September have grown.

The consensus revenue statute sprang from a dispute between Rell and Democratic legislative leaders in spring 2009 when fiscal analysts for the two branches of government differed by more than $2.7 billion over the severity of a two-year deficit forecast.

The legislature overrode a Rell veto and required the two branches to review and negotiate a common revenue forecast each January, April and October.