Promises, gimmicks and historic shortfall

When Dannel P. Malloy became the state’s 88^th governor on Jan. 5, 2011, he inherited a financial mess unmatched in Connecticut history.

The Stamford Democrat faced a state government on pace to spend almost 20 percent more than it would receive in its next budget — unless something changed dramatically.

Forced to fill a $3.7 billion shortfall, Malloy challenged legislators, unions, businesses and the public to embrace his “shared sacrifice.”

“I truly believe Connecticut’s best days are ahead,” Malloy told lawmakers two years ago. “The tide is turning for us if we step up and work hard with courage and conviction.”

But a sober look at the state’s finances two years later shows that one-third of that historic deficit still remains.

Back in 2011, the steps he implemented included:

• The largest — $1.5 billion — tax increase in state history;
• A state employee concessions package that would freeze wages, curtail retirement benefits and promote both preventative health care and leaner government;
• The merger of 82 agencies down to 58;
• And cuts to public colleges and universities that would, he hoped, boost tuition no higher than inflation.

With a gap of $1.2 billion projected for the fiscal year that starts in July, Malloy not only is seeking more sacrifices, but he’s also turning to taxes and some of the gimmicks he swore off of two years ago:

He has proposed:

• Extending expiring tax increases on businesses and power plants;
• Reducing tax credits for working poor families;
• Cutting more funding to colleges and universities, even as tuition and fees continue to rise beyond inflation and spark student, and some faculty, protests;
• Making deep cuts to hospitals and in health coverage for thousands of low-income adults;
• Raiding the transportation fund;
• And, borrowing hundreds of millions of dollars to pay ongoing bills.

In submitting these steps, the governor cited an unusually sluggish recovery that plagues most states and that neither party foresaw.

But while there is evidence to support this assertion, it doesn’t reflect the whole picture. What it sidesteps in particular is that a significant portion of Malloy’s current troubles are of his own making.

Despite the warnings of many economists — and even after evidence of a lethargic recovery accumulated — the governor also took some chances with his budgets. Specifically:

• He introduced a new multi-year program to fix the state employees’ pension fund without a plan to fund it fully after the first year;
• He underfunded health care for the poor so that it didn’t meet the demand anticipated by his own administration;
• And, his concessions deal with state unions — expected to cut annual costs by more than $900 million — would come up several hundred million dollars short.

Malloy, who two years ago promised an uncompromising paradigm shift in state finances, is now asking Connecticut to compromise, to meet him in the middle and keep a glass-is-half-full perspective.

‘No simple answers’

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“We knew there were no simple answers,” the governor told legislators in his budget address in February. “It no longer matters who caused those problems. What matters is that, together, we started to fix them.”

When he took office, the deficit was larger than the amount of money raised in one year by any single tax other than the income tax. Malloy may have set an unofficial record in Connecticut politics in the number of times he’s reminded everyone that he didn’t create the 2011 deficit. But that’s correct. The scope of the mess he inherited cannot be understated.

A $3.7 billion gap was equal to roughly the state’s annual Medicaid costs — not just for nursing homes, but also for services for the poor, aged, blind and disabled — in the last budget before Malloy took office.

The 18 percent gap between projected costs and revenues was 3½ times the size of the deficit Gov. John G. Rowland and the legislature closed in February 2003. And the solution 10 years ago still included an across-the-board increase in the state income tax.

And the political hurdle Malloy had to clear was as daunting as the fiscal problems he had to resolve, said Senate President Pro Tem Donald E. Williams Jr., D-Brooklyn.

To close the deficit left behind by Gov. M. Jodi Rell, Malloy had to convince lawmakers that he would shield them from the public backlash for the tax increase — something his Republican predecessor refused to do.

Rell had infuriated Democrats in 2009: first, by proposing a two-year budget that was a whopping $2.7 billion out of balance; and then, after the scope of the shortfall she’d ignored had been confirmed, by using a procedural gimmick to allow a $1 billion tax increase to become law without her signature.

“It is critical to have the leadership of a strong executive as opposed to someone who runs away from their responsibilities and then rushes to blame others,” Williams said.

Not the only governor with problems

Still, despite the massive challenge he faced, Malloy in 2011 had a bullish view of Connecticut’s future.

According to the economic forecast he used to prepare his budget two years ago:

• Unemployment would drop to 6.8 percent by the second quarter of 2013;
• And, household income would be 11 percent higher now than it was in 2011.

With strong ties to Wall Street, Connecticut’s economy and its state budget bounced back relatively quickly after the recession of 2001-2003. And, the Malloy administration’s 2011 economic forecast noted, “Since March of 2009 the markets have performed much better and should help boost state revenues in the near-term.”

But two years later, this is where we are:

• Connecticut’s jobless rate through March still hadn’t cracked the 8 percent floor;
• And the administration now estimates household income growth since mid-2011 at less than 4 percent.

What does that mean for the state budget?

The administration thought in 2011 it would have $932 million more in tax receipts to spend in 2013-14 than it now is counting on.

Office of Policy and Management Secretary Benjamin Barnes, the governor’s budget chief, questioned how many people would have known the nation’s economy would remain so slow-moving more than five years after the start of the last recession. Malloy is not the only governor to have his dreams of budget stability doused by a slow recovery. Entering this fiscal year, 31 states had to close projected shortfalls that totaled $55 billion to balance their budgets, according to the Washington-based Center on Budget and Policy Priorities.

Foley was even more optimistic

Members of both parties misread the economy.

As hopeful as Malloy’s first budget might have been, it was pessimistic-bordering-on-depressing compared with the fiscal plan of his Republican opponent in the 2010 election.

Greenwich businessman Tom Foley had infuriated Malloy supporters for months by insisting that he could eliminate a cavernous deficit without any tax increases.

When pressed during the campaign to disclose how he would cover a $3.7 billion gap in one fiscal year, Foley told The Mirror that he expected 40 percent of the problem — about $1.5 billion — to be solved by economic growth alone. Income, sales and other taxes would raise more because additional people would be working, getting raises and spending more.

Malloy’s budget closed that deficit with about $2.3 billion in new revenue, including about $800 million stemming from economic growth to go with the $1.5 billion from tax increases.

In other words, Foley expected nearly double the economic good fortune Malloy counted on.

And while Foley defended his assumptions recently, saying that Malloy’s tax increases choked economic growth, not one of the economists interviewed by The Mirror said averting those hikes would have spurred the huge and immediate revenue growth Foley needed.

Some Republican state legislators actually accused Malloy two years ago of being too timid in his economic assumptions. The governor, they said, had rigged the budget to produce excessive surpluses — so he could dole out tax breaks as re-election neared.

‘Not your father’s recovery’

But there were dissenting voices two years ago coming from the community of Connecticut economists. From the liberal to the conservative, most warned that this recovery would be far more meager, and take much longer, than its most recent predecessors.

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“We said, ‘This is not your father’s recovery,’ ” Donald Klepper-Smith, chief economist for DataCore Partners in New Haven, recalled of his 2010 prediction for post-recession Connecticut.

“So many people are still saying, ‘What recovery?’” said Klepper-Smith, who was head of the council of economic advisers under Rell.

Over the last five recessions, dating back to 1974, it has taken increasingly longer both for the nation and Connecticut to return to its employment peak, Klepper-Smith said.

And the state has recovered only 48,600, or 40.1 percent, of the 121,200 jobs it lost during the most recent recession, which ran from March 2008 through February 2010, according to the state Department of Labor.

Klepper-Smith said the structural changes in business and society are gradually weakening the cyclical upswing that politicians expect from the economy more and more after each successive recession.

Globalization, increasing business reliance on the Internet and temporary workers to replace permanent staff, demographic shifts, older workers’ delaying retirements and other factors are sapping Connecticut’s economic strength.

“I think there’s kind of a national unwillingness to face this fact,” said Fred V. Carstensen, who heads the Connecticut Center for Economic Analysis, the economic think-tank at the University of Connecticut. “People don’t want to hear that the competitive environment has changed dramatically since the 1960s. We’re just not accustomed to that.”

New Haven Democrat William Dyson, a retired lawmaker who skillfully co-chaired the Appropriations Committee for 16 years (under four governors) through 2004, said wishful thinking is something that politicians, and the news media, are guilty of all too often.

“People want to think: ‘How long can things be bad?’” he said. “One is inclined to look for the silver lining. You don’t have to do a lot (politically) to get people there.”

Because of Connecticut’s history as one of the wealthiest states per capita, it historically enjoyed rapidly growing income tax revenues that always seemed to solve any fiscal crisis — at least in the short term.

“There was always a pot of money that popped up somewhere,” Dyson said. “People don’t want to hear that’s not happening anymore.”

Pension fix hinged on economic rebound

But not all of Malloy’s present fiscal woes can be attributed to bad economic luck.

Having demanded concessions from state workers in 2011, the governor sought to return the favor one year later, unveiling a plan to dramatically ramp up state payments into the cash-starved pension fund.

Malloy offered that plan in late January 2012, even though the administration had downgraded its revenue expectations for its current budget that same month as the economy lagged.

In fact, when the governor proposed his budget in February 2012 for what is the current fiscal year, his numbers showed that budget falling $424 million into deficit by 2013-14. Though the pension fix technically started this fiscal year, the major surge in new spending doesn’t begin until 2013-14.

Malloy officials defended the red ink at the time, noting there was plenty of time for the economy to improve.

But administration officials have reduced revenue estimates three more times since then, in April and November 2012 and again in January.

By the time Malloy released his 2013-14 budget three months ago — and had to close an overall deficit of $1.2 billion — he proposed scaling back the pension fix to spend $150 million less than originally planned.

And while another report this week finally raised revenue expectations for this year by $240 million — due largely to a one-time bump in gift tax receipts — it also lowered them for 2013-14 by an even greater $259 million. Based on those changes, the potential shortfall in the next budget approaches $1.5 billion.

Medicaid budget built on ‘wishful thinking’

Surging demand for Medicaid-funded health care has been another fiscal thorn in Malloy’s side. But this is another example of the governor being plagued by a problem at least partially of his own making.

The governor’s budget office estimated in November that Medicaid would cost the state $5.23 billion next fiscal year, but in February, the governor proposed spending $185 million less than that.

The governor and legislature budgeted $156 million less for Medicaid programs in the Department of Social Services this year than Malloy’s own fiscal staff projected would be necessary.

The administration has tried to mitigate these Medicaid gambles by proposing cost-cutting measures.

But state legislators didn’t warm to some of them. And federal Medicaid officials balked this spring at a series of cost-cutting restrictions Malloy sought for Connecticut’s Medicaid for Low Income Adults program (LIA).

Through mid-April, Medicaid spending was running $247 million in deficit this fiscal year.

“I don’t believe we have proposed budgets that have unrealistic Medicaid savings,” Barnes said, adding that getting approval from state legislators and federal officials isn’t the only challenge.

The administration also inherited a Social Services Department saddled with severe limits in staffing and technology.

“Sometimes we have a very difficult time implementing changes,” Barnes said. “Some of the cost-saving changes started later than we had hoped.”

“We argued with Ben Barnes over and over again,” Harp said. “We said we don’t think they (federal officials) will give approval for this. But the administration assured us their calculations were right. It didn’t fully make sense.”

And Sheldon Toubman, an attorney and health care advocate with the New Haven Legal Assistance Association, said the governor is guilty of more than just “wishful thinking” when it comes to Medicaid budgeting. The administration has used this red ink to justify cutting more services for the poor.

Toubman’s group has sued the state on behalf of social service clients, in part on grounds that it has failed to process applications for Medicaid assistance in a timely fashion.

“I am not expecting a dramatic decline” in demand for Medicaid next year, said Toubman, who added that a new administration proposal to tighten eligibility for the HUSKY health coverage plan for the poor would be devastating.

“This would leave a gaping hole in the health safety net for Connecticut’s most vulnerable.”

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Follow Keith M. Phaneuf on Twitter

Part 2: The Mirror looks at the linchpin of Gov. Malloy’s solution to the deficit — a major state employee concessions plan. Two years later, questions still swirl around the deal, including: Why did it fall short of expectations? How much did it really save? And, why can’t state analysts answer that final question?

Part 3: The series looks at how the deficit problems have been postponed until after the next gubernatorial election and the consequences of that.