As they scramble to deal with rejection of the union concessions deal, Gov. Dannel P. Malloy and legislative leaders are in the position to having money to fill at least part of the $700 million hole it leaves, but a big constitutional obstacle to using it.

The state is looking at more than $150 million in projected surpluses across this year and next, as well as new signs that tax revenues are running tens of millions of dollars ahead of expectations. But Malloy and legislators can’t spend more than $1 million of that bonus next fiscal year without running into the constitutiomal spending cap.

“The big promise I made is that we would have a balanced budget,” Malloy told reporters Friday morning outside his Capitol office, moments after the State Employees Bargaining Agent Coalition announced unions had rejected the tentative concession plan. “And we are going to have a balanced budget.”

That means the governor and legislature must plug holes of $700 million in the $20.14 billion budget adopted for the fiscal year that begins July 1 and $901 million in the $20.4 billion package for 2012-13. Those are the savings that were supposed to come from a two-year wage freeze, new restrictions on health care and pension benefits, an employee wellness program and various management-labor cost-saving committees.

Unfortunately for Malloy, those annual spending plans are $1 million below the cap in the first year and $278 million below in the second. Any new spending approved above these amounts triggers both procedural and political challenges.

The legislature adopted a statutory spending cap in 1991 to temper voter frustration over the new state income tax. 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, 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.

Malloy’s two Republican predecessors, M. Jodi Rell and John G. Rowland, routinely teamed with Democrat-controlled legislatures to legally exceed the cap. Under those administrations nearly $3.8 billion in excess of the cap was appropriated between 1998 and 2009, according to state budget records.

But would the Malloy administration attempt to do so?

The new governor’s budget director, Office of Policy and Management Secretary Benjamin Barnes, said “it’s not the kind of alternative budget the governor would support. I have no reason to believe we would look to exceed the spending cap.”

Malloy decried many of the fiscal practices of Rell and Rowland during last fall’s campaigns, saying they contributed to the problems he inherited. Those include the $3.67 billion deficit originally built into the 2011-12 budget and huge unfunded obligations in the state employee pension fund and retiree health care program.

Senate Minority Leader John P. McKinney, R-Fairfield, said Thursday that Malloy should be able to manage with fewer than 7,500 layoffs and no municipal aid cuts to re-balance the budget.

But McKinney said there’s no need to exceed the spending cap, arguing Malloy and the Democrat-controlled legislature need to consider other programmatic cuts throughout state government.

The GOP leader said that if Malloy does ask lawmakers to exceed the cap, “it would be a continuation of many fiscal contradictions by the governor.”

McKinney also predicted that if Malloy were to risk the political criticism he would face for trying to break the cap, he would fail in the attempt. “He wouldn’t get the votes in the Senate,” McKinney said.

Though Democrats control 22 out of 36 seats in the Senate–enough to override the cap–three Democrats already have voted against the biennial budget at its current level: Edward Meyer of Guilford, Gayle Slossberg of Milford and Joan Hartley of Waterbury.

Slossberg said that while she would weigh any specific budget adjustment proposal before deciding, “I think it’s an accomplishment to have stayed below the cap.”

And though Meyer said “the spending cap is not what I live my public life by,” he added that he also believes the answer to balancing Connecticut’s budget lies with spending reductions. “We need to focus on downsizing those agencies that are bloated.”

Hartley could not be reached for comment.

Malloy again emphasized Friday that state employee layoffs, to be announced as early as next week, would be his primary means of cutting costs and plugging those budget gaps.

But the governor also wants legislators to temporarily expand his emergency authority to reduce spending levels unilaterally across the budget, including normally-exempt municipal aid. The governor’s fellow Democrats in the legislative majority declined to grant him that power during the regular session.

Still, Malloy could mitigate this problem somewhat by tapping into some pots of money already at his disposal – were it not for the cap.

The budgets for the next two fiscal years are designed to run $89 million and $555 million in the black, respectively.

Malloy and lawmakers did stipulate that $75 million of that first surplus, and $50 million of the second, be reserved to help with the gradual conversion of state finances to Generally Accepted Accounting Principles, a series of financial guidelines that emphasize transparency and accountability.

But state government would need an extra $1.5 billion in its coffers to be GAAP-compliant, and doesn’t plan to start amortizing that differential until 2013-14. The $125 million assigned from the next two projected surpluses to the GAAP conversion only is designed to effectively freeze that $1.5 billion margin in place, covering inflationary increases.

Still, the governor and legislators could redirect some or all of both of those projected surpluses to compensate for the failed concession deal. The administration also projected earlier this week that the budget for the current fiscal year, which ends on June 30, is on pace to finish $86 million in surplus.

Lastly, the administration also reported that General Fund revenues jumped $53 million over the past month alone, including $40 million from the state income tax. Republican lawmakers have argued that tax revenue forecasts built into the next two state budgets were underestimated and don’t reflect this growth.

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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