Projected deficit for next fiscal year tops $1.1 billion

State analysts Thursday projected more than a $1.1 billion state budget deficit in the fiscal year beginning July 1, a gap roughly one-third the size of the record-setting shortfall that Connecticut’s governor and legislature tried to close just two years ago.

The projected shortfall for the coming year is sandwiched between the $365 million deficit Gov. Dannel P. Malloy’s administration reported Wednesday for the current fiscal year and a long-range forecast for another gap of more than $1 billion in 2014-15.

But since the governor and legislature must balance the current books and craft a new two-year spending plan this spring, that means they must wipe $2.5 billion in real and projected red ink off the state’s books before the 2013 session ends next June.

Gov. Dannel P. Malloy checks the numbers.

The $1.1 billion gap means state government has recovered nearly one-third of the mammoth-sized deficit Malloy inherited just two years ago. And it threatens the governor’s often stated goal of not increasing taxes in the budget that begins July 1 — a plan he must propose to the General Assembly in early February.

Malloy reiterated his intention not to raise taxes in a press conference after his monthly commissioners’ meeting. The OPM projections, which were reported earlier Thursday by The Mirror, were released during the meeting by Ben Barnes, who oversees the state budget as secretary of policy and management.

Both the legislature’s nonpartisan Office of Fiscal Analysis and the administration’s Office of Policy and Management must submit detailed analyses of finances — for the current year and the next few years — to the legislature’s Appropriations and Finance, Revenue & Bonding committees.

Malloy’s budget office released projections that include a $1.16 billion hole in the coming fiscal year, and just over $1 billion in fiscal 2014-15, which begins July 1, 2014.

Legislative analysts also reported Thursday that the cost of keeping services at their present level will run more than $1.1 billion beyond expected revenues in 2013-14, and more than $1 billion beyond the fiscal year after that.

Meanwhile, the governor put a brave face on the shortfall estimates, arguing state finances have improved relative to the deficit he inherited two years ago, and government is “smaller, leaner and more cost effective than it’s been … in recent times.”

The revenue shortfalls are due to national economic factors, not wrongheaded policy decisions in Connecticut, he said.

Malloy said the main reason Connecticut’s budget remains plagued with negative numbers is “a sluggish national recovery at the national level” that has weakened revenues and driven up demand for medical and social services in most states.

“None of this is unique to Connecticut,” he said.

The administration’s two-year estimate exceeds $1.9 billion in red ink. Just nine months earlier, members of the administration said the state could look forward to surpluses totaling more than $1.1 billion over the same two-year period, so the new deficit estimate is a $3 billion shift for the worse.

When the governor proposed a $20.7 billion budget for the 2012-13 fiscal year in February, the administration used a PowerPoint presentation that said Connecticut would enjoy surpluses of $226 million in 2013-14 and $942 million in the final budget year of Malloy’s term.

But those numbers depended on state officials’ keeping expenses under the constitutional spending cap — a goal that required finding $1.7 billion in yet-to-be-identified spending cuts.

If those conditional cuts were ignored, the budget Malloy proposed nine months ago was only written to stay in balance for one year and was headed for a $424 million deficit by 2013-14.

The state’s fiscal condition has worsened considerably since that relatively rosy outlook was offered.

Legislative and executive branch fiscal analysts downgraded revenue expectations earlier this month, both for the current year and for the next two.

According to that report — the fourth consecutive report to downgrade revenues since October 2011 — receipts from sales, corporation and gasoline taxes are shrinking, as well as Connecticut’s share of video slot revenues from the two Indian casinos.

The potential for a big deficit grew even larger this fall as demand for Medicaid services surged. Analysts are projecting a $190 million cost overrun in Medicaid accounts this year.

Still, the governor noted that nonpartisan legislative analysts in January 2011 were projecting a more than $3.65 billion hole in the upcoming state budget when he took office.

Malloy pointed to the deficit in the current budget and said $365 million is about one-tenth the massive gap he faced. “That’s a lot of progress to be made in a short period of time.”

But the Democratic governor’s Republican critics have challenged that claim, countering that not only is the current budget running a deficit, it is far from sustainable — a trend they say is proven by the growing deficit projection in the year to come.

“None of this news is a surprise to me,” House Minority Leader Lawrence F. Cafero, R-Norwalk, said. “When you spend more than you did before, when you save less than you planned, and when the taxes you raised bring in less than you planned, you have a deficit.”

In a brief presentation to the commissioners, Barnes noted that the problem is far smaller than what the administration faced its first year, but it has fewer tools. As a result of the concession deal of 2011, layoffs are off the table, except in limited circumstances, such as new employees.

The governor also repeated his pledge not to raise taxes to close this year’s $365 million deficit. He said he he has no intention to raise taxes for the following year, but left himself a little wiggle room.

“I have no intention of raising taxes” in the next budget, the governor said. But when pressed why he kept discussing his “intention” rather than ruling taxes out as he has in the current year, Malloy said he couldn’t do so until he has a clearer picture of the economic climate.

“I’m giving you as definitive language as I feel comfortable using,” he said, adding that too many variables remain unresolved.

What if gridlock on Capitol Hill blocks resolution of the federal budget crisis, resulting in many federal tax increases and cuts in aid to states?

What if Congress and President Obama compromise on tax relief for the middle class, and the economy picks up steam?

Malloy also rejected suggestions that he would move away from some of the chief positions of the fiscal platform that he campaigned on in 2010, or that he established during his first year in office.

The governor acknowledged that he can’t count on another major concession package from unionized state employees, having received a deal in 2011 that protects most workers from layoffs through 2015.

He categorically ruled out trying to reduce the workforce through an early retirement offer.

A critic of paying extra incentives to encourage veteran state workers to retire — a move that cuts salary costs in the short term but drives up pension expenses even more over the long haul — Malloy said nothing has changed.

“We don’t pay people to retire,” he said. “It further burdens the retirement system, which none of my predecessors funded properly.”

Another major pledge offered repeatedly on the campaign trail was “we’re not going to shred the safety net” of social and medical services state government offers to the poor and disabled. But if the governor is trying to avoid tax hikes and conceded major labor savings are hard to achieve, social service cuts represent one of the last remaining options to significantly reduce a major deficit.

“We will maintain the social services safety net,” Malloy said Thursday, quickly adding “to a higher degree than other states.”

Cafero also said the legislature should be called into special session immediately to begin considering spending cuts. The regular 2013 session doesn’t begin until Jan. 9, more than six months into the current fiscal year.

The Norwalk lawmaker accused Malloy of hiding the growing deficit until after the November elections to help Democrats maintain their leads in the House and Senate.

“He’s wrong,” Malloy said Thursday. Cafero hasn’t ruled out a gubernatorial run in 2014 and “you folks are going to have to get used to putting that into perspective,” the governor told Capitol reporters.

“I have been the House minority leader since 2007 and I haven’t changed my views and I haven’t changed the way I express them,” Cafero responded.

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