The state budget finished moderately in the black last week after officials struggled much of the just-completed fiscal year with red ink.

But whether state government remains free of deficits in the new budget year — and in the next few to come — could hinge on how realistic officials are about Connecticut’s gradually recovering economy, Comptroller Kevin P. Lembo said.

Though the state’s chief fiscal watchdog won’t officially close the books on 2012-13 until early September, Lembo projected a $236.6 million surplus for the fiscal year that ended June 30.

And though most of that bonus, which represents about one-ninth of the year’s operating budget, is committed to help pay for state spending in 2013-14 and 2014-15, about $15.8 million is available for deposit into the emergency budget reserve.

That account, commonly known as the Rainy Day Fund, already holds more than $93 million, and should hold just over $109 million once the books on the outgoing year officially are closed.

“I’m generally bullish on the Connecticut economy,” Lembo told The Mirror in an interview, though he was quick to add that doesn’t mean the Nutmeg State should expect boom times anytime soon. “I think it is chugging along in the positive direction, but it’s redefining itself at the same time.”

That redefinition clearly means a slower recovery than the economy enjoyed as it bounced back from recessions in 2003 and in 1992.

While the state income tax collected almost $8.7 billion in the last budget, about $110 million more than anticipated, the sales and corporation taxes are expected to fall $189 million and $66 million, respectively, below budgeted levels for 2012-13.

In fact, the most significant revenue growth over the past fiscal year involved the inheritance tax, which surpassed expectations by almost $270 million. Unfortunately, Lembo said, this is one of the state’s most volatile taxes, and numbers can skew upward significantly if even one large estate changes hands unexpectedly.

In other words, that isn’t the type of growth state government can count on year after year.

“Conservative approaches to budgeting and to projecting revenue are critical,” the comptroller said. “It’s in everyone’s interests to tell the truth.”

That also means recognizing that demand for state-sponsored health care services through Medicaid is likely to remain strong, even as the economic recovery progresses, Lembo said.

Medicaid spending has surpassed expectations by wide margins in each of the past two fiscal years as Connecticut has regained only about half of the roughly 120,000 jobs it lost in the last recession.

Connecticut employment grew by about 12,500 jobs over the 12 months that ended in May, an increase of just 0.08 percent, or half of the national average.

Still, there are several signs, Lembo added, that further economic improvement is on the horizon:

  • The education and health care, leisure and hospitality, and construction job sectors have enjoyed solid growth, and state unemployment claims are down about 7.2 percent over the last year.
  • Housing permits in Connecticut posted strong gains early in the 2013 calendar year, after experiencing double-digit growth in 11 out of 12 months in 2012.
  • Retail sales in May were up 4.3 percent compared with May 2012.
  • And the Dow Jones Industrial Average, the leading indicator of the health of blue-chip stocks, has been growing about 20 percent faster in the early part of 2013 compared with 2012.

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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