Revenues plunge, deficit widens, forcing Malloy to close gap

A dramatic plunge Friday in the state’s anticipated revenue this year will force Gov. Dannel P. Malloy to craft an emergency plan to cover a deficit potentially approaching $300 million. It is a financial chasm that threatens his pledge to avoid a tax increase in the next state budget.

The latest consensus revenue report from fiscal analysts for the executive and legislative branches reset revenue expectations $128 million lower than the level built into the current budget — and $145 million below the level assumed when Comptroller Kevin P. Lembo reported a $60 million deficit on Nov. 1.

Those revenue changes alone would push the budget shortfall to $205 million.

But the actual deficit likely has grown well beyond that figure.

That’s because revenues from most sources — taxes, fees, the state’s share of Indian casino receipts — are down $258 million this year. The reason the net change is somewhere between $128 million and $145 million is because those revenue losses are offset by $130 million to $150 million in extra federal aid.

But Connecticut is getting most of that extra aid money only because it will have to spend an even larger amount of its own funds to meet the surging demand from its poor for Medicaid services.

Put it all together, and the budget deficit likely approaches or exceeds $300 million.

The shrinking revenue estimates are “not surprising given the continued sluggishness of the national economic recovery,” Malloy’s budget director, Office of Policy and Management Secretary Benjamin Barnes, said Friday. “OPM has stated repeatedly that revenues would be monitored carefully because of the slow economy.”

But the top Republicans in the state House and Senate said Malloy must realize that the $1.5 billion in new taxes he and his fellow Democrats in the legislative majority enacted in 2011 have weakened Connecticut’s economy.

“I think this latest report is proof you cannot tax your way out of a recession,” Senate Minority Leader John P. McKinney, R-Fairfield, said, adding that Malloy shouldn’t wait until he is legally compelled to unveil his budget mitigation efforts.

“This is not a surprise to me or to any observers of our spending and revenue trends,” House Minority Leader Lawrence F. Cafero, R-Norwalk, said. He added that when the only revenue growth involves federal aid to help meet the needs of Connecticut’s poor, “that’s a sad commentary on our economy.”

The next official budget assessment, which is prepared by the comptroller’s office, is due Dec. 1.

And if Lembo certifies a deficit greater than 1 percent of the general fund, then Malloy is compelled by state law to submit a deficit-mitigation plan to lawmakers. In the context of this year’s $20.54 billion total budget, the general fund — which covers most operating expenses — totals $19.14 billion, leaving the 1 percent threshold at $191.4 million.

Friday’s report includes equally bad news for the next state budget — just one day after Malloy repeated his intention not to raise taxes again.

The report says state government can expect $231 million less next fiscal year than originally anticipated.

And that’s on top of hundreds of millions of dollars worth of additional potential holes facing the next state spending plan — a total gap many lawmakers say privately they fear exceeds $500 million.

There were signs as early as February that state finances were headed for trouble in the fiscal year that begins July 2013.

When Malloy proposed the 2012-13 budget nine months ago, his administration’s numbers showed it was on pace to run $424 million in the red one year later.

Legislators and the governor cut $186 million from that plan before they adopted it in May. But even as they also reduced the potential shortfall in 2013-14, new forces widened it even more.

Specifically, fiscal analysts downgraded revenue expectations last spring, dropping expected resources for 2013-14 by another $311 million. In fact, Friday’s downgrade was the fourth such report since October 2011.

The potential for a deficit in the hundreds of millions of dollars in the next state budget grew even larger this fall as surging demand for Medicaid services helped open an early deficit this year — and represents a growing expense that could continue into 2013-14.

No agency has put a precise number yet on the potential hole facing the next state budget — but that will change next Thursday.

That’s when the Fiscal Accountability Act directs analysts for both branches to submit detailed analyses of finances — both for the current year and the year-to-come — to the legislature’s Appropriations and Finance, Revenue & Bonding committees.

Those panels are expected to conduct an informational meeting on those reports later this month.

On Thursday, Malloy reiterated his vow to balance the next budget without new taxes. He said he is open to working with Republicans, but the GOP leaders say his analysis of the Democrats’ 2012 legislative victories indicate otherwise.

“I have no intention of raising taxes,” the governor said Thursday, adding that the re-election of President Obama leaves him hopeful that federal aid to states will not be slashed in the next term. “I have been saying that for weeks that I have no intention of raising taxes, and I think the election of the president takes off some of the pressure, some of the provisions I had supplied you with previously. I have no intention of raising taxes.”

Barnes added Friday, “It is far too early to know what revenues will look like as we get closer to the fiscal year that starts next July — but Connecticut residents and businesses should know that the Governor intends to do whatever is necessary to ensure that the budget is balanced and that we are living within our means. We will continue our progress in making government run more efficiently.”

But Cafero accused the Malloy administration of issuing a misleading press statement to try to hide the scope of the state’s problems.

The administration and the legislature’s nonpartisan Office of Fiscal Analysis released “estimates that show state tax revenue is running approximately $52.7 million behind what was anticipated when the budget was passed … last Spring,” Malloy’s budget office wrote.

Technically, revenues for this year are $52.7 million below a consensus estimate prepared on April 30, 2012 — an estimate that was not included in the budget by the legislature’s Finance, Revenue & Bonding Committee.

That panel adopted a revenue plan on June 22 that counted on an extra $75 million.

“Deficits are built off the budget that was passed,” Cafero said. “To have a governor who is denying that, who is trying to camouflage that by playing a shell game, is irresponsible.”

McKinney added that the numbers were hidden for the same reason that Malloy and his fellow Democrats in the legislature moved the deadline for the fall revenue report from Oct. 15 until after the November elections: to minimize the political impact.

“They clearly didn’t want these numbers to come out,” McKinney said.

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