Red v. Black: Comptroller Lembo’s bottom line a different color than the governor’s

For the first time since they took office 14 months ago, Comptroller Kevin P. Lembo and Gov. Dannel P. Malloy don’t see eye-to-eye when it comes to state finances.

Lembo, whose office certifies the official monthly budget assessment, reported his first deficit of the fiscal year Wednesday, projecting a $20.7 million shortfall in the general fund.

Kevin Lembo

The governor’s budget office says the state is on pace to finish with a $35.9 million surplus.

Both agencies had agreed on a $1.4 million surplus projection one month ago.

Why does Lembo see the fiscal outlook getting worse when his fellow Democrat, Malloy, still reports Connecticut’s finances in the black?

State tax data show the new earned income tax credit is generating refunds that are about 20 percent above the level built into the state budget. “If this refund experience continues through the remainder of the fiscal year,” Lembo wrote, “refunds will exceed budget expectations by $22 million.”

Lembo also declined to accept a new administration estimate that cost-cutting efforts would save another $34.5 million before the fiscal year ends June 30. Over the past four fiscal years, nearly 60 percent of the general fund has been expended through January, the comptroller wrote. “If this trend continues into Fiscal Year 2012, the additional (savings) will be difficult to realize,” Lembo wrote.

The comptroller also warned that “spending pressures to support state services are growing.” Between December and January, spending from the “other expenses” accounts — a line item covering a multitude of contractual, equipment and other miscellaneous costs in most agencies — grew by more than 20 percent. “Based on these trends, caution prohibits the inclusion of the additional (savings) into my estimate,” he added.

Malloy’s budget chief, Office of Policy and Management Secretary Benjamin Barnes, said Wednesday that “I think our projections are remarkably close. Both agency forecasts represent less than one-quarter of 1 percent of the general fund. At $18.7 billion, the general fund covers the bulk of the operating costs in this fiscal year’s overall $20.14 billion budget.

Barnes also noted that the $34.5 million in cost-cutting efforts in his projection stem from emergency budget cuts Malloy ordered more than one month ago. “I don’t have any reason to believe we won’t fully achieve that,” Barnes said.

The OPM Secretary added that while the earned income tax credit has proven popular to date, claims for that credit “tend to be concentrated at the beginning of tax season” and may slow somewhat before the fiscal year ends in June.

Lembo was not the first to declare state finances to be in the red.

The legislature’s nonpartisan Office of Fiscal Analysis first reported a $145 million general fund deficit on Jan. 25 and a $161 million shortfall on Feb. 24.

Those projections don’t factor in about $86 million in unused funds Malloy carried forward from an account for employee raises from the 2010-11 budget — the last spending plan adopted by his predecessor, M. Jodi Rell. Most state employees won’t receive raises this fiscal year or next under a concessions deal Malloy reached with unions last summer.

Still, even with those funds for raises — which Malloy hasn’t assigned a purpose for yet — the general fund remains in deficit based on legislative analysts’ projections.

Further complicating matters for the governor, he needs state finances to finish $75 million in the black to keep one of his biggest pledges: to maintain the conversion of state finances to Generally Accepted Accounting Principles.

GAAP rules are a series of common financial guidelines established by the Government Accounting Standards Board to emphasize transparency. 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.

The Malloy administration estimated in its fiscal accountability report in mid-November that state government would need another $1.7 billion in its coffers to cover all its obligations under GAAP rules. And that differential grows annually with inflation.

The governor pledged to use the first $75 million of any surplus this fiscal year to cover that inflationary cost and stop the GAAP differential from growing. When the budget was adopted in June, Malloy signed language that allowed him to delay the first of 15 annual payments to eliminate that $1.7 billion differential until 2014.

Set against the $75 million surplus target, Malloy’s latest budget projection falls $39.1 million short. The shortfall grows to $95.7 million based on Lembo’s numbers, and reaches $236 million according to legislative analysts’ projections.