Gov. Dannel P. Malloy’s administration recognized shrinking tax revenues in its latest budget forecast Wednesday, yet remained the only entity still projecting that state government will wrap up the fiscal year in just over three months in the black.
In a report filed Wednesday with the comptroller’s office, the governor’s budget agency did note that the new $12.4 million surplus projection in the general fund falls $62.6 million short of the level needed to continue the ongoing conversion of state finances to Generally Accepted Accounting Principles.
“The performance of income tax collections during the April filing period … will be the most significant factor affecting year-end results,” Office of Policy and Management Secretary Benjamin Barnes wrote in his monthly report to Comptroller Kevin P. Lembo.
Barnes’ office, which projected a $35.9 million surplus one month ago, downgraded its forecast by $23.5 million in the latest report, attributing the entire drop to shrinking revenues.
Though income tax collections are up by about $50 million, they are offset by a matching increase in refunds, Barnes wrote. Estate tax collections are down by $25 million.
One tax that has been performing better than anticipated is Connecticut’s wholesale fuel tax. Buoyed by rising prices on the international market, the tax is on pace to collect $20 million more than anticipated.
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 March 1. His next forecast is due in 11 days.
At $18.7 billion, the general fund covers the bulk of the operating costs in this fiscal year’s overall $20.14 billion budget.
The comptroller, whose monthly assessments had mirrored those of the Malloy administration until February, warned last month that “spending pressures to support state services are growing,” and that this could hinder administration efforts to achieve cost-savings targets.
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.
A GAAP gap
The other big fiscal challenge Malloy still faces is tied to his pledge to convert state finances to the GAAP system.
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 mid-November that state government would need another $1.7 billion in its coffers to cover all of its obligations under GAAP rules. 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. Malloy has continued to insist that state government will close the fiscal year in the black, and that funding to continue the GAAP conversion will be found.