Lembo warns officials not to get excited over ‘mirage’ surplus

As state government launched a new fiscal year Friday, its chief budget watchdog cautioned against viewing the $85 million surplus left from 2010-11 as anything more than a “mirage” produced by an array of fiscal gimmicks.

And Comptroller Kevin P. Lembo also warned that Connecticut still needs “significant budgetary reform to permanently repair” its finances.

“This is an example of when a surplus is not a surplus,” said Lembo, who began his first term in January. “Last year our state was forced to do the financial equivalent of gluing petals back onto a flower in order to address a budget crisis.”

Though the new fiscal year is underway, the comptroller won’t officially close the books on the last fiscal year for another two months because since certain tax revenues continue to accrue over the summer to the prior year.

In his monthly budget report, Lembo reported an $85.5 million surplus, matching the estimate offered on June 20 by Gov. Dannel P. Malloy’s administration.

Despite that finish, though, the $19.01 billion budget the legislature and former Gov. M. Jodi Rell approved for the last fiscal year back in May 2010, was built on a number of one-time fixes including: $700 million in non-recurring emergency federal stimulus; $552 million from prior budget reserves; $115 million in transfers from other one-time sources; and $40 million in electric ratepayer charges levied between January and June.

Without these, Lembo noted, the 2010-11 budget would have been $1 billion in deficit.

That budget also originally relied on $956 million in borrowing, to be repaid largely with $113 million in additional annual electric bill surcharges for the next eight years. But both Rell and Malloy, working with legislators, whittled that borrowing target down until it was eliminated entirely, due largely to surging income and other tax revenues.

That also is a positive sign, Lembo said, noting that income, sales, estate and corporation tax revenues are on pace to finish the year a combined $963 above originally budgeted levels.

The $85.5 million surplus already is accounted for. Current law calls for $14.5 million of that fiscal cushion to be deposited into the state’s meager savings program for retiree health care benefits and the remaining $71 million will be applied to pay down more than $915 million in borrowing Rell and legislators ordered in 2009–also to cover government operating costs.

But Lembo said state government needs to further improve its saving habits while streamlining its spending.

The legislature did not act on Lembo’s proposal this past spring to increase the maximum allowable level in the state’s emergency budget reserve, commonly known as the Rainy Day Fund, from 10 to 15 percent of annual operating costs.

Lembo also wants new controls requiring monthly deposits into the reserve–rather than one at fiscal year’s end–whenever projected savings exceed a threshold level.

The comptroller also favors reducing the debts tied to bonding and pension programs, and the legislature should ensure state Treasurer Denise L. Nappier remains empowered to dedicate surplus funds toward those purposes when necessary.

And while tax revenues surged in the just completed fiscal year, Lembo said, the last budget also was marked by more than $283 million in cost overruns in the General Fund.

As for the state’s economic outlook, the signs are mixed, Lembo added.

“Unemployment remains historically high” at 9.1 percent in May after Connecticut lost 2,900 payroll jobs “and thousands of homes are in foreclosure,” he said. But not only are personal income, retail sales and corporate profits enjoying “positive, though slow growth,” but Federal Reserve Bank statistics also show household debt has declined steadily over the last nine quarters.