Gov. Dannel P. Malloy and the legislature may be struggling to balance the budget in the face of uncertain union concessions, but they’ve made considerable headway in attacking $1.8 billion in debts their predecessors authorized to keep operations afloat in their last year in office.

According to the Office of Policy and Management, the projected General Fund surplus for last fiscal year — which ended June 30, but the books won’t close officially for another month — has jumped another $73 million and now approaches $159 million.

And though $14.5 million of that must be deposited in the trust fund for retiree health care, $144 million is available to get a head start on paying off a $1.2 billion debt the 2009 legislature and then-Gov. M. Jodi Rell created, despite having nearly $1.4 billion still in the bank at the same time.

The Malloy administration and the legislature already managed to avoid another $647 million in borrowing that their predecessors had built into the last state budget. That borrowing target — originally $956 million, but whittled down to $647 million before Rell left office — would have been paid off with eight years of surcharges on monthly electricity bills and raids on an energy conservation fund. But it became unnecessary largely due to increases this past spring in income, sales and other tax revenues.

“I think we were all pretty clear on the need to avoid or retire debt,” Rep. Patricia Widlitz, D-Guilford, co-chairwoman of the legislature’s Finance, Revenue and Bonding Committee. Though some lawmakers talked informally about using the added revenues to increase spending, a consensus clearly recognized that the economy still hasn’t recovered fully from the last recession with unemployment still above 9 percent.

“Every day you hear something about jobs being lost somewhere,” she said, calling the “First Five” and other job creation programs launched under Malloy this year “a bright light. But we’re still not out of the woods.”

The latest surge in the surplus projection for the past fiscal year also stems in part from rising revenues from taxes and fees, Secretary Benjamin Barnes of the Office of Policy and Management wrote in his agency’s monthly budget report to Comptroller Kevin P. Lembo.

Revenue projections for corporation and real estate taxes, as well as from licenses, permits and fees, are up a combined $20 million from last month, Barnes wrote, while expectations for federal aid were increased another $13.4 million. Projected cost-saving efforts in various agencies also were increased by another $26.4 million.

The nearly $1.2 billion debt was ordered in June 2009 when Rell and the last legislature wanted to close a $950 million hole in the 2008-09 finances without breaking into the state’s $1.38 billion emergency reserve, commonly known as the Rainy Day Fund.

With tax revenues shrinking rapidly and budget deficits expanding amid the recession, Rell, a Republican, and the Democrat-controlled legislature couldn’t reach agreement on a long-term solution, opting against both hefty tax hikes and deep spending cuts. And by borrowing to close the 2008-09 budget, they were able to keep the entire Rainy Day Fund to artificially prop up declining tax revenues in the last two annual budgets of their term.

Not only did Rell and the last legislature borrow $950 million to close the 2008-09 deficit, but they borrowed another $78 million to cover the first two years’ worth of payments on that loan – effectively pushing the entire job of repaying the debt onto Malloy and the new legislature, most of whose members were in office when those decisions were made.

Bond issuance and interest costs associated with that exercise pushed the total debt to just under $1.2 billion.

Connecticut is scheduled to make the first of five annual payments of $238 million each this fiscal year. The additional funds from the 2010-11 surplus will allow state government to pay more than $380 million of that $1.2 billion debt off this year.

The legislation authorizing the borrowing also stipulated that future surpluses had to be used to help reduce that debt. But similar mandates have been swept aside through legislation in the past.

Lembo warned earlier this month that despite the 2010-11 surplus and successful efforts to mitigate debt to date, Connecticut still needs “significant budgetary reform to permanently repair” its finances.

Besides continuing to dedicate any future surpluses to reduce debts, legislators also should reconsider a proposal to increase the maximum balance in the Rainy Day Fund, from 10 to 15 percent of annual operating costs, Lembo said. The comptroller offered that proposal last legislative session but it wasn’t taken up by either the House or Senate.

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.

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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