Gov. Dannel P. Malloy warned his department heads Tuesday he will ask lawmakers to consider emergency spending cuts in May if the administration cannot erase a small deficit in the current state budget — which closes on June 30 — over the next month.
“I just ask you to take every step you can,” the governor told commissioners at their monthly meeting. “I know everyone is struggling. I understand that. But we have a goal.”
Malloy has pledged repeatedly that the $20.14 billion budget he and legislators enacted last spring would finish in the black, under the constitutional spending cap, and with a surplus large enough to continue the ongoing conversion of state finances to Generally Accepted Accounting Principles.
In its monthly budget report to Comptroller Kevin P. Lembo’s office, Malloy’s budget staff, the Office of Policy and Management, projected on March 20 that the General Fund was on pace to finish with a $12.4 million surplus.
But the lawmakers designed the budget to finish $80 million in the black and the administration has said it needs at least a $75 million surplus to continue the GAAP conversion. At the current pace, Malloy would fall $62.6 million short.
Most of that shortfall is due to tax revenue projections, which have not matched the targets set in the adopted budget.
The governor noted that one of the most crucial testing periods for revenue trends is approaching: the annual April 15 deadline for filing state income tax returns.
If the deficit cannot be erased by new savings found by commissioners, or by an improved April revenue forecast, the final step will involve asking lawmakers to approve reductions.
“I intend to direct OPM to prepare a deficit-mitigation plan for presentation to the legislature in May,” Malloy wrote in a letter sent to agency heads Tuesday.
Whether the governor can avoid that step remains unclear, for several reasons.
Other fiscal agencies are reporting state finances to be in slightly worse condition than the governor has.
Lembo projected a $20.7 million deficit on March 1. That shortfall, coupled with the GAAP requirement, would leave Malloy with a $95.7 million problem to solve by June 30.
The legislature’s nonpartisan Office of Fiscal Analysis reported this week that the governor likely needs $115.7 million to balance finances and keep his GAAP pledge.
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.
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.
One final challenge Malloy faces is the calendar itself. Agency budget allotments for the first three quarters of the fiscal year, which began last July 1, already have been released and — for the most part — spent. That leaves only one final quarterly allotment in which to find the remaining savings.
Malloy called the problem a management challenge, not a crisis.
“I believe we’re going to be able to close any gap,” he said.