After tackling a $3 billion-plus state budget deficit and negotiating a tentative deal for unprecedented labor concessions, Gov. Dannel P. Malloy now faces a new fiscal challenge: the constitutional spending cap.

The Democratic governor, whose original budget plan for next fiscal year fell a comfortable $406 million under the limit, now is expected to enter his first full budget year with a cushion of less than $9 million. That razor-thin margin represents less than 1/20th of 1 percent of the revised, $20.13 billion spending total Malloy proposed last Friday for the coming fiscal year.

And while the $291 million in “deficiencies,” or projected agency cost overruns, this fiscal year is much higher than normal, even the $80 million to $100 million deficiency range that has occurred during better fiscal times far surpasses the $8.9 million buffer currently projected.

Malloy could go down the same route as his two Republican predecessors and seek legislative permission to exceed the cap legally. But that option also could open Malloy to charges that he is following one of the fiscal practices that helped create the mammoth-sized deficit he inherited upon taking office in January.

“This is going to be an extra challenging year for us,” said Office of Policy and Management Secretary Benjamin Barnes, noting the administration must oversee about two dozen agency mergers and consolidations and implement a host of health care and pension benefit changes if a new labor concession deal is ratified. “But we are especially mindful of our budget controls. I think we’re going to make it work.”

But Senate Minority Leader John McKinney, R-Fairfield, said if Malloy can’t live within the cap, it would be a sign that the new governor isn’t interested in breaking with fiscal mistakes of the past.

“On the campaign trail he said tax increases would be his last resort,” McKinney said, adding that the $1.5 billion in new state taxes Malloy signed into law in May could have been avoided with deeper spending cuts. “He’s governed differently than he campaigned. If he exceeds the spending cap, that would be the last straw.”

Malloy has defended his tax hikes, arguing they are part of a balanced approach to closing the budget gap that also includes close to $500 million in programmatic spending cuts. And the administration also insists it can reduce costs another $700 million next fiscal year if the labor concession package is ratified by unions and the legislature.

Still, that balanced approach leaned a little more toward the spending cuts side until a couple of recent developments.

First Malloy and lawmakers approved a compromise budget in early May that would spend $19.83 billion next fiscal year, about $87 million more than the governor initially proposed in February.

Then Malloy agreed last week to use $259 million in projected tax revenue growth to plug a hole in the new budget when the tentative labor deal’s savings fell short of the projected target. The legislature hasn’t voted on that budget adjustment proposal yet, but it has been endorsed by Democratic leaders in the House and Senate.

Those were the two largest factors in trimming Malloy’s spending cap cushion from $406 million to $8.9 million.

The General Assembly tried to temper outrage over enactment of the state income tax in 1991 by drafting a statutory spending cap. Voters would add the cap requirement to the state Constitution one year later by adopting the 28th Amendment.

But the cap, which is supposed to keep spending increases for most purposes in line with the annual growth in personal income, exempts debt payments and grants to poor cities and towns. And it also can be circumvented if the legislature and governor see eye-to-eye.

If the governor signs a declaration of fiscal “exigency,” effectively declaring a budgetary emergency, the legislature can expend dollars in excess of the cap with a 60 percent vote in both chambers. That means 91 votes in the 151-member House and at least 22 out of 36 in the Senate.

Rell and Rowland both teamed with Democrat-controlled legislatures to legally exceed the cap most years between 1995 and 2010. In most cases, it involved spending tens of millions of dollars in excess of the cap just a few weeks before the fiscal year’s end on June 30 to cover cost overruns in various agencies.

Rell became the first governor to propose legally exceeding the spending cap before a fiscal year had begun, though, when she offered a plan in February 2005 that went about $200 million over the cap. The governor defended her proposal, saying that it enabled the state to qualify for more than $100 million in added federal aid for nursing homes and other community based care providers.

The legislature eventually adopted a variation of that plan, and two years later combined with Rell to approve a new budget for 2007-08 that exceeded the cap by $690 million.

Democrats currently hold 99 House seats and 22 in the Senate, meaning Malloy could legally exceed the cap without Republican support if he can unite his own party.

Malloy also has tools at his disposal to try to avoid going over the cap in the first place.

The administration has limited authority to hold back a portion of the quarterly allotment it gives each agency to try to force them to run in the black. Those “held” funds can be released in the final months of the year to offset major, unanticipated cost increases.

Though the spending cap margin is small, Rep. Toni Walker, D-New Haven, co-chairwoman of the Appropriations Committee and an 11-year veteran of the House, said Wednesday she doesn’t believe it is a foregone conclusion that the cap will be lifted next year.

Democrat-controlled legislatures struggled to get accurate budget information from state agencies under the prior two administrations, Walker charged, adding the dynamic changed dramatically under Malloy before the latest budget was crafted this spring.

“We finally have honesty and transparency,” she said. “We actually have conversations” with agency heads. “That has never happened before.

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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