Though just a fraction of the state budget, the $80 million winter heating assistance funding shortfall might not be the last small-ticket item to toss a big wrench in Connecticut’s fiscal machine.

With virtually no cushion below the constitutional spending cap, more than $830 million in savings targets that must be hit, the potential for cost overruns in key health care programs, and a volatile revenue outlook, the budget effectively has no margin for error with nine-plus months still to go this fiscal year.

“We know this is going to be enormously challenging,” Gov. Dannel P. Malloy’s budget director, Office of Policy and Management Secretary Benjamin Barnes, said Wednesday, adding that allocating $80 million in extra state funds to compensate for a potential loss of federal aid for the Low-Income Home Energy Assistance Program is easier said than done. “We’ve been over the lists many, many times.”

In terms of state finances, little has been easy for Malloy since he was sworn in on Jan. 3 – and inherited a built-in budget deficit for 2011-12 projected as high as $3.67 billion, or nearly one-fifth of all annual spending.

The governor and his fellow Democrats in the legislative majority settled on a $20.14 billion budget that falls a paper-thin $1 million below the constitutional spending cap. That margin represents 1/200th of 1 percent of projected annual spending.

Contrast that $1 million with the $329.2 million in General Fund cost overruns agencies reported last year. Even after additional savings of $130 million were factored in, state government spent nearly $200 million more than the legislature had appropriated in 2010-11.

And though the new fiscal year is less than three months old, with no major deficit reported to date, Barnes’ office did warn Comptroller Kevin Lembo this week that demand for Medicaid and other state-funded health care for the poor – one of the big causes of last year’s cost overruns – remains a concern.

The spending cap is not an absolute limit on state finances.

Initially employed in the 1991-92 fiscal year, the cap was crafted to counter voter outrage over the new state income tax and is designed to tie most state budget growth to the annual increase in personal household income. But it can be exceeded, legally, provided the governor signs a declaration of fiscal exigency and both chambers of the legislature endorse the additional spending by a 60 percent affirmative vote.

Malloy’s two Republican predecessors, John G. Rowland and M. Jodi Rell, routinely worked in concert with Democrat-controlled legislatures to approve spending in excess of the cap – usually several hundred million dollars worth of agency overruns at the fiscal year’s end. The two GOP governors exceeded the cap eight out of 11 years between 1998 and 2008.

Malloy, though, campaigned on the need to end the fiscal gimmicks that helped create the deficit he inherited from Rell.

“The fact that something was done in the past is not a sufficient argument for doing it in the future,” Barnes said. “In our view they did a poor job of developing budget policy.”

Even in good fiscal times, state agencies typically run up $80 million to $100 million in cost overruns, commonly called deficiencies. And if the governor doesn’t want to exceed the cap to deal with them, that means his administration has to press agencies to find matching savings to offset these costs.

The problem with that, though, is that agencies already have to come up with huge savings to keep the budget in balance.

This year’s also hinges on $700 million in concessions this year from state employees – with another $900 million in 2012-13. Some components of that savings plan are relatively well defined: a wage freeze, changes to health and pension benefits, increased worker retirements.

Other components are not so certain.

The deal directs the administration and unions with jointly finding more than $170 million in cost efficiencies in health care, technology and across state government in general. Another $102.5 million has to be saved this year through an employee wellness program.

That means any opportunity to reduce spending might be needed just to meet those targets – or expose Malloy to charges that the concession deal’s value was exaggerated from the beginning.

Further complicating matters, the governor and legislature also built another $130 million in undefined savings to be found – exclusive of those required by the concession deal — into the budget’s bottom line.

“I think looking at all of this we are operating under a very tight margin,” Senate Majority Leader Martin M. Looney, D-New Haven, said Tuesday, adding that in past years the winter heating funds issue wouldn’t have posed as difficult a problem as it does now. “It’s too soon to speculate on what we might do, but I think everything will be on the table.”

House Majority Leader J. Brendan Sharkey, D-Hamden, conceded that while Democratic lawmakers also played a role in bursting past spending caps – and in crafting an extremely tight-fitting budget to solve the deficit, they aren’t ready to stop trying to make it work.

“Exceeding the cap should be the last resort,” Sharkey said, adding that while he doesn’t believe Connecticut should ignore needy families who lack winter heat, there still is time to pursue other solutions. And if the rosiest options – increased aid from the federal government or from private utilities – doesn’t materialize, Sharkey said he believes the legislature should try to find $80 million in cuts elsewhere in the budget to allow the heating program to be increased without jeopardizing the cap.

Sen. Robert J. Kane of Watertown, ranking Republican senator on the Appropriations Committee, said Malloy and the Democratic majority boxed themselves into a fiscal corner by relying too heavily on tax and fee hikes – more than $1.5 billion – and by increasing overall spending amidst a poor economy by 5 percent.

“They do not want to increase spending. They just can’t see the light,” Kane said, adding that more fiscal restraint would have left state government the flexibility to safeguard the winter heating program and still comply with the cap.

And even if Democrats ultimately decide to exceed the spending cap again, Kane added, they shouldn’t assume given the volatile nature of Wall Street and the new state burdens placed on Connecticut households and businesses, that revenues will be sufficient to support them.

“Any time you raise taxes, you’re doing more harm to the economy than good.”

Neither the administration nor the legislature’s nonpartisan Office of Fiscal Analysis has projected any revenue trends so far this fiscal year, which hasn’t concluded its first quarter yet.

But Barnes said that to date there have been no signs that tax revenues will surpass the projected levels built into the new budget, a pleasant surprise that helped the administration close last fiscal year with a surplus.

“It’s not like anyone’s being wowed by the results coming out of” the Department of Revenue Services, he said. “We’ll just have to watch that, too.”

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Keith M. PhaneufState Budget Reporter

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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