Legislative analysts say Rell’s office understates budget crisis

State government’s budget crisis is nearly $500 million worse than projected this fall, and about $390 million worse than Gov. M. Jodi Rell warned her successor just this week, according to a new report from nonpartisan legislative analysts.

Gov.-elect Dan Malloy will face nearly $3.8 billion in deficits when he is sworn in on Jan 5 based on the projections issued late Monday by the Office of Fiscal Analysis.

And while shrinking revenues caused most of state government’s red ink during the past two years, surging costs–particularly for employee benefits, health care and social services–are behind the latest bad fiscal news.

“We continue to project significant deficits in the out-years,” fiscal analysts wrote, adding that the annual, structural deficit remains larger than $3 billion through 2014. “The deficits increase significantly in the out-years as the one-time infusions of federal stimulus, (emergency reserve) funds, economic recovery revenue bonds, surplus funds, and the elimination of a corporation tax surcharge are no longer available.”

The nonpartisan fiscal office traditionally does not comment beyond its written reports.

Rell’s budget agency, the Office of Policy and Management, declined to comment Tuesday.

In its mandated annual assessment of both current and future state budgets, commonly known as the Fiscal Accountability Report, OFA said the General Fund deficit for the fiscal year that begins July 1 now stands at $3.67 billion. That’s $410 million worse than the $3.26 billion shortfall it reported in September, and $304 million worse than the deficit the Rell administration built into the transition budget delivered Monday.

Further complicating matters, legislative analysts also say the current General Fund, which it estimated to be a razor-thin $200,000 in the black, actually is $83 million in deficit.

The Rell administration had projected a $300,000 surplus in its last monthly budget report to the comptroller, issued on Oct. 20.

The combined shortfall that Malloy stands to inherit totals $3.76 billion. That’s more than half of the all revenue the state income tax is expected to produce this year, and greater than the receipts from any other state tax or fee on the books.

“As I said yesterday when I received Governor Rell’s transition budget, there are no surprises here,” Malloy said in a written statement Tuesday. “And when we transition to Generally Accepted Accounting Principles – a standard in the industry that will ensure there are no games or gimmicks contained within our state’s books – the budget deficit will likely be even higher. This is a reality we must all begin to face, and do so knowing the shared sacrifices we must all make.”

The Executive and Legislative branch budget agencies agreed in mid-October on revised revenue projections that showed modest growth in the income and sales taxes, though most other revenue sources largely remained flat.

The latest report from OFA reflected those trends, increasing revenue expectations by $267 million this year and $617.3 million next year.

But at the same time, OFA raised its projections for the cost of maintaining existing programs and staffing levels by $350.6 million this year and by $1.03 billion in 2011-12.

More than a third of that growth in the coming fiscal year, $367 million, is tied to increased pension costs, according to legislative analysts.

Pension costs were expected to rise sharply this year because of two measures employed by Rell and the legislature–through a concession deal approved by state employee unions– to control budget costs during the past two years.

State government deferred $314 million in required pension contributions, a move that also deprived a badly under-funded pension account of additional investment earnings.

It also offered financial incentives in 2009 to encourage senior state workers to retire. Critics have argued that the savings from these programs are an illusion, and that any short-term reduction in salary costs is eventually offset by larger, long-term losses suffered in investment earnings.

Legislative analysts also significantly expanded their estimate for social services and health care costs from earlier deficit forecasts. The new report estimates expenses tied to social service and health care caseload growth and rate increases for nursing homes and other medical providers will jump by $680 million by next year. Earlier forecasts had projected an increase of less than half that amount.

Though the administration projects major increases in both of these areas, it doesn’t agree with OFA on the severity of the problem.

The news isn’t much better in the chief, secondary component in the budget, the Special Transportation Fund.

Legislative analysts now predict that the $1.2 billion fund, which covers debt service and other costs tied to road, highway and bridge repairs and rail and airport maintenance, will run $71.4 million in deficit next fiscal year.

And though the fund has a $105 million reserve, that should be exhausted and the fund left in debt by 2012-13, according to the report.

Rep. John Geragosian, D-New Britain, co-chairman of the Appropriations Committee, said that while there are some positive economic signs in Connecticut, it’s no big surprise that the deficit has worsened with unemployment still above 9 percent.

“The lagging indicator in all recessions is employment,” he said. Recovery “is really incumbent on people having jobs and spending money in the markets out there.”

And with many still out of work, demand for state-funded health care and other social services is understandably high, Geragosian. “We’re seeing that in health care, mental health and other of the other services people need,” he said. “This is the great conundrum that we face as legislators: That folks need the services and the revenues are still down.”

The New Britain lawmaker added that majority Democrats, bolstered by Malloy’s campaign pledge that “I won’t shred the safety net” to balance the budget, will look to control costs with bulk purchasing and other efficiencies, but won’t seek major cutbacks in services.

But Rep. Vincent J. Candelora of Branford, ranking House Republican on the Finance, Revenue and Bonding Committee, predicted that once the pressure builds on his panel to craft a major tax hike, the public will demand not just modest savings from efficiencies, but reductions in social service spending.

“I know there’s going to be pressure on the Finance Committee to approve new revenue, but we need to stop and take a more comprehensive look at our tax structure,” he said.

While fiscal analysts are projecting modest growth in income, sales and gasoline taxes next year, expectations for the corporation, estate and cigarette taxes are for further decline and growth of less than 3 percent is forecast for taxes on public service and insurance companies.

“A lot of businesses, a lot of taxpayer groups are still struggling,” Candelora added.