Gov. Dannel P. Malloy dug his heels in Monday, rebutting criticisms of his budget and insisting it is not a departure from his espoused principles of fiscal responsibility.

Appearing on WNPR’s “Where We Live,” Malloy insisted that state finances would not fall into deficit down the road –even though his budget office projects a shortfall after the 2014 state elections.

“I think we’re going to end up with a very good budget, a very sound budget that continues us down the path to restoring fiscal health in the state of Connecticut,” the governor told host John Dankosky.

Malloy and state lawmakers have their work cut out for them before the regular 2013 General Assembly adjourns June 5.

Both the administration and nonpartisan legislative analysts had projected a $1.2 billion deficit for the fiscal year that begins July 1.

And that was before they downgraded revenue projections last week for the next budget by more than $250 million. That pushed the potential shortfall close to $1.5 billion, or more than 7 percent of annual operating costs.

Though Malloy said, “We’ve got to figure out more ways to save money,” he also said, “We won’t have a deficit in the future.”

The Mirror reported in a three-part series last week (Part I is available herePart II here; and Part III here) that Malloy’s own numbers show that a $682 million deficit would await him — or his successor — in the first budget of the next term. By the second year the red ink approaches $800 million. And if the economy doesn’t heat up dramatically before then, those deficits worsen.

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Among the economic assumptions the governor used in that plan are that state unemployment, which hasn’t dropped below 8 percent since the recession ended, will average 7.4 percent next fiscal year, and 6.0 percent in 2014-15.

Personal income in Connecticut would have to grow by 11.5 percent in total over those two years.

“It’s very hard to see how the state could achieve that level of income growth,” Fred V. Carstensen, who heads the University of Connecticut’s economic think-tank, told The Mirror in a recent interview.

“The assumptions are very aggressive,” said Peter Gioia, chief economist for the Connecticut Business & Industry Association, who said he expects the state’s economy to grow — albeit probably not at that pace.

Malloy also insisted that his new budget doesn’t raise taxes.

It does, however, rely on more than $220 million extra from taxpayers.

More than $140 million would come from extending tax increases on businesses and power plants that otherwise would expire next year.

Another $21 million would come from reducing a tax credit for working poor families.

And Malloy would implement one of the largest fuel tax increases in state history — signed into law in 2005 by Gov. M. Jodi Rell — and transfer the $60 million it would raise, plus an additional $15 million, from transportation to non-transportation programs.

Malloy rejected an idea favored by many of his fellow Democrats, boosting income taxes on the wealthy.

“The taxes under my administration are more progressive than they’ve ever been in the state of Connecticut,” he said.

But Connecticut’s top marginal income tax rates have been below those in New York and New Jersey for decades.

And even considering the state income tax increase Malloy approved in 2011, the top marginal rate here is 6.7 percent. New York’s is 8.8 percent and New Jersey’s stands just below 9 percent.

The governor said he is wary of punishing the flourishing hedge fund businesses, which could yank millions of state income tax dollars out of Connecticut’s coffers by relocating to another state.

Malloy also insisted his budget doesn’t really cut funds for Connecticut’s 29 acute care hospitals, even though the industry insists it would be one of the largest reductions it ever faced.

Despite Malloy’s insistence Monday, the legislature’s nonpartisan Office of Fiscal Analysis notes that the governor’s plans for the next two fiscal years would reduce existing categories of aid to hospitals by about $500 million.

The administration asserts that increased revenues hospitals would collect for treating Medicaid patients would offset this.

Since the state moved its health-care program for poor adults without minor children under the federal Medicaid umbrella in 2010, enrollment has grown from about 45,000 to 86,000.

But hospitals and their advocates counter that the state’s approach toward hospitals has been unbalanced for some time, and that the administration’s argument about swelling hospital revenues is a distortion.

Before state officials converted the State Administered General Assistance program (SAGA) into Medicaid for Low-Income Adults (LIA), the state used to reimburse hospitals for a portion of the cost of treating program patients. In fact, those payments used to mirror federal Medicaid payments — until 2004, when total state payments were capped.

From then until the conversion to LIA in 2010, state payments were frozen while enrollment grew. As program enrollment grew from 27,500 in 2004 to 44,700 in 2010, hospitals saw state payments per SAGA patient steadily erode.

Converting State Administered General Assistance into LIA and moving it under the federal umbrella in 2010 brought those payments back up to Medicaid level.

In fact, more than half of the revenue growth the Malloy administration likes to cite only involves ending the reimbursement cut hospitals faced between 2004 and 2010, rather than helping them gain fiscal ground.

In addition, hospital officials argue that Medicaid reimbursement rates still fall short of covering the hospitals’ full cost of treating patients. Facilities lose — on average — 30 cents for every dollar they spend treating Medicaid patients, according to the Connecticut Hospital Association.

Keith has spent most of his 31 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut’s transportation and social services networks. He has been the state finances reporter at CT Mirror since it launched in 2010. Prior to joining CT Mirror Keith was State Capitol bureau chief for The Journal Inquirer of Manchester, a reporter for the Day of New London, and a former contributing writer to The New York Times. Keith is a graduate of and a former journalism instructor at the University of Connecticut.

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