Red ink, spending cap threaten new budget next year

One year after building the largest fiscal security blanket in more than two decades of state budgets, Gov. Dannel P. Malloy moved onto the fiscal high wire Wednesday without a net.

While the governor talked decisively about finding more spending cuts to keep his new $20.7 billion plan for 2012-13 in balance, lawmakers from both parties and the state’s chief business lobby balked at the plan’s barely visible margin for error.

And Republican legislative leaders again questioned whether the Democratic governor’s budget, which stands to shatter the constitutional spending cap in 17 months, also will leave them staring at another deficit by the time they return to the Capitol in 2013. One set of numbers from the administration identifies a potential shortfall topping $423 million one year after that covered in the proposed budget.

“We need to maintain the fiscal discipline we imposed a year ago,” Malloy said. “That business has made Connecticut a more predictable, reliable, stable place in which to do business.”

But the governor’s critics, and some of his allies, were uncertain just how stable the new budget will be. While Malloy and lawmakers adopted a preliminary $20.4 billion plan for 2012-13 that featured an unprecedented, built-in fiscal cushion of $555 million. By comparison, the revised $20.73 billion package the governor offered Wednesday is designed to finish $8.5 million in the black.

That’s a margin of error equal to less than 1/24th of 1 percent of all spending.

Further complicating matters, since a mid-November administration projection that state revenues were on pace to run $200 million above expenses in the third year of Malloy’s term — the 2013-14 fiscal year — the developments since then have largely been negative.

Revised revenue projections in mid-January shaved away about one-quarter of that projected cushion.

And the spending level Malloy proposed Wednesday stands $225 million higher than what the administration’s November forecast estimated Connecticut would be spending in 2012-13.

Carry that spending forward one more year, and even without inflationary cost increases, the numbers slip into a deficit of about $70 million.

Malloy’s budget agency, the Office of Policy and Management, offered numbers that show a much larger potential shortfal. The office reported that the spending and revenue trends in the budget proposed for 2012-13 would produce a negative gap of $257 million by 2013-14.

If Malloy keeps his pledge to convert state finances to Generally Accepted Accounting Principles, the potential shortfall swells beyond $423 million. That’s because the conversion process requires state government to set aside more than $1.7 billion over 15 years, including $166.8 million in 2013-14. Unlike the modified cash basis state government has long used, GAAP rules require that funds be on hand to cover expenses as they are incurred. Similarly, revenues are counted in most situations in the year in which they are received.

OPM also projected that while the proposed budget would fall about $6 million under the constitutional spending cap next fiscal year, but would shatter the cap by $650 million in 2013-14 and by about $1 billion three years from now.

“I’m very concerned about the long-term implications,” Senate Minority Leader John P. McKinney, R-Fairfield, said.

Many economists have warned Connecticut’s sluggish recovery from the recovery from the recession could take several more years, and House Minority Leader Lawrence F. Cafero, R-Norwalk, said legislators can’t ignore where Malloy’s proposal appears to be headed.

“I hope that those (economic) experts are wrong and the governor is right, but we as a legislature have to be prepared,” Cafero said.

The governor’s budget primarily increases spending for two purposes: bolstering contributions to the cash-starved pension fund, and adding $50 million to an Education Cost Sharing grant program that last enjoyed an increase in 2008-09.

Malloy’s budget chief, OPM Secretary Benjamin Barnes, acknowledged that there are some concerns about projected finances after 2012-13, but he insisted that the administration isn’t finished searching for new means to curb spending, and won’t let a deficit develop.

“We remain committed to reducing expenditures below current services level to remain below the cap,” Barnes said.

But that would mean the administration would have to find hundreds of millions of dollars worth of spending cuts one year from now.

And current efforts to control state spending have hit a few bumps in the road. Controversial labor-management panels charged with finding $170 million in the annual cost-saving measures that are part of the concessions deal got off to a slow start.

John Rathgeber, president and chief executive officer of the Connecticut Business and Industry Association, praised Malloy for recognizing the need to search for new ways to make government lean.

“Now we encourage them to be more forthcoming about how they are doing that,” he said, adding that if the administration begins sharing some cost-cutting measures publicly, it would greatly bolster confidence in the business community.

“If the economy even burps right now, we could end up in a deterioration” of the fiscal picture, he said.

In addition, the governor is restricted, both legally and politically, from touching some of the largest segments of the budget.

State employee salaries and benefits, which represent close to 30 percent of all spending, are locked in for the most part by a provision in last summer’s union concessions deal. In exchange for a two-year wage freeze, new restrictions on health care and retirement benefits, and savings from other changes, the administration agreed to exempt most bargaining units from layoffs for four fiscal years, through 2014-15.

Malloy also has pledged not to reduce municipal aid, which approaches $2.9 billion, or 14 percent of his entire budget.

And debt service, which is nearly $2.4 billion or more than 11 percent of the budget, is another contractual obligation and therefore a relatively fixed cost.

Even one of Malloy’s fellow Democrats in the House, Majority Leader J. Brendan Sharkey of Hamden, acknowledged “we have to keep on eye on the second and third years out” from the governor’s budget. “Some of our plans and expectations may have to be toned down.”

But Sharkey quickly added Malloy deserves to be praised for decisively moving forward with key reforms in education and health care. “We’re setting the stage for economic growth with this budget,” Sharkey said. “We’re not just treading water.”