Though Gov. Dannel P. Malloy’s administration has insisted to date it intends to live within the constitutional spending cap, its budget office recently gave warning — less than three months into the new fiscal year — that this goal would be difficult to reach.

In its monthly budget report to Comptroller Kevin P. Lembo, the Office of Policy and Management formally projected $17 million in projected cost overruns, or deficiencies, for the $20.14 billion budget that took effect on July 1. That plan was designed to fit under the cap by a paper-thin margin of $1 million, or 1/200th of 1 percent of annual spending.

Early indications show Medicaid costs, which drove spending well over budget last fiscal year, challenges tied to the union concession plan, and legislative support for a winter heating assistance program, could worsen both the cap situation, and the budget-balancing effort in general.

And even if tax revenues remain strong enough to cover most cost overruns, the cap poses an array of political problems for Malloy, whose new budget already increases spending by 5 percent while raising taxes and fees by more than $1.5 million.  Bursting the cap also would leave the Democratic governor, who campaigned on pledge to restore fiscal accountability, in the same company as his GOP predecessors, whose budget gimmicks Malloy contends helped create the state’s last fiscal crisis.

“We do have a cap issue,” OPM Secretary Benjamin Barnes said Tuesday. “We were $1 million under the cap to start and we have developing deficiencies.”

But Barnes was quick to add that the administration doesn’t have to resolve the cap situation now, just monitor it along with other budget issues.

With a slumping economy and unemployment seemingly fixed above 9 percent, demand for state-funded health care services drove Medicaid spending about $250 million over budget in 2010-11, the single-largest component of nearly $330 million in cost overruns across all state government. 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.

OPM, which is required to report monthly on the budget’s status, projected two deficiencies in its Sept. 20 letter to the comptroller: $15 million in the Department of Social Services and $2 million in public defender services.

“If not addressed, this over-expenditure could result in exceeding the cap,” Barnes wrote, noting that demand for the state welfare program providing health care benefits to low-income adults — one of the chief culprits behind last year’s Medicaid overrun–has continued to grow.

Though the OPM report doesn’t mention the union concession deal, Lembo reported recently that just 4 percent of Connecticut’s nearly 50,000 state employees declined to sign up for new state employee Health Enhancement Program established under that deal.

Employees who decline face a $100 per month health insurance premium hike and a $350 annual deductible. The administration estimated about half of state workers would pay these higher costs, with the higher deductible bringing in about $18 million per year. If half of all workers paid the higher premium for the last nine months of this fiscal year, that would yield roughly another $22 million.

Barnes said Tuesday that it’s too soon to adjust projections for the wellness program, which starts Oct. 1, but added that he expects some enrollees either will leave or be removed before the fiscal year ends. The program requires all enrollees to participate in a series of regular physicals and other health care screenings.

“The program is a compulsory one with significant obligations,” he said.

Malloy’s efforts to stay under the spending cap also could be challenged by Tuesday’s decision by three legislative committees to add $15 million to his proposed budget for the Low Income Energy Assistance Program. The administration projects the state will get get $46.4 million in federal funding for the program this year, down from $115 million last year.

Rep. Vickie Nardello, D-Prospect and co-chair of the Energy and Technology Committee, said the decision to increase the program budget was based on the anticipation that Congress would appropriate additional funds. If not, she said, she expects that compensating reductions in the state budget would be found to avoid exceeding the cap. Tuesday’s action did not identify any areas to cut, however.

Sen. Toni Harp, D-New Haven, said that while she hopes lawmakers would work with the governor to identify some spending cuts to offset a state appropriation for LIHEAP, she doubts many would give spending cap compliance higher priority than winter heat.

“Even when we weren’t in a recession, people have declared emergencies” and approved spending in excess of the  cap, she said.

During an 11-year stretch from 1998 through 2008, Malloy’s two Republican predecessors, John G. Rowland and M. Jodi Rell, worked in concert with Democrat-controlled legislatures to approve spending in excess of the cap in eight fiscal years. Exceeding the cap requires the governor to declare a fiscal “exigency” and the legislature to approve the added spending by a 60 percent vote in each chamber.

“We can’t responsibly spend a lot more money than the governor has put in his package, but I still think we can find some middle ground,” Harp added.

But the top Republicans on the Appropriations Committee said Tuesday that administration appeared to be paving the way politically to modify its stance on the spending cap.

“I won’t say they are massaging the numbers but they are working them to their benefit,” Sen. Robert Kane of Watertown said.

Kane questioned why the budget report, after outlining $17 million in projected cost overruns in the context of the spending cap, mentions they are “mostly offset” by $15 million  in projected savings in debt service accounts. That savings helps keep the budget nearly in balance for now, but debt service spending isn’t counted under spending cap rules.

More importantly, Kane said, the administration was comfortable projecting a $15 million cost overrun in the massive 4.6 billion Medicaid program, but wasn’t ready to report on hundreds of millions of dollars in budget savings it must find — involving not only employee health care, but a wide-array of government efficiency programs also built into the concession deal.

“All of their scenarios are best-case scenarios,” Kane added. “If the fiscal year ended today, I think we’d be in a heap of trouble.”

Malloy will be hard pressed to declare a fiscal emergency after a record-setting tax hike and a budget that already boost spending 5 percent, said Rep. Craig A. Miner of Litchfield who predicted taxpayers won’t accept past governors’ actions as a valid excuse for breaking the cap yet again.

Utilizing rules designed for fiscal emergencies to spend for routine matters became “accepted practice,” in the past, Miner said. “The more that happened, the more I think we have violated the trust of the public.”

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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