As state government prepares to close the books on the last fiscal year, there are two very different visions of Connecticut’s finances.
Gov. Dannel P. Malloy’s administration notes that the state is once again building an emergency budget reserve, while tax receipts – which frequently fell short of projections over the last two years – finally appear to have caught up to the forecasts.
But one of the Democratic governor’s GOP gubernatorial rivals noted Wednesday that most of the state’s modest fiscal cushion can be attributed to fiscal gimmicks and to luck. Senate Minority Leader John P. McKinney, R-Fairfield, also noted that Connecticut’s jobless rate and its sales tax receipts – two key indicators of economic health – remain poor.
Malloy’s budget office projected this week that the surplus for the 2012-13 fiscal year would climb to nearly $360 million.
Though the last fiscal year ended on June 30, officials still are adjusting the final numbers. Certain tax receipts received during the summer are applied to the prior year. Comptroller Kevin P. Lembo won’t close the books officially on 2012-13 until Sept. 1.
Though about $221 million of that $360 million windfall already is committed to support spending in new state budget, that still leaves about $139 million to deposit into the budget reserve, commonly known as the Rainy Day Fund.
“Given the deficit forecasts issued earlier in the fiscal year, we note that this deposit is a significant accomplishment,” Malloy’s budget chief, Benjamin Barnes, wrote in his monthly report to Lembo. “…Rebuilding reserves will serve the state well as a contingency against the next economic downturn.”
That $139 million deposit, coupled with $93 million placed in the Rainy Day Fund last summer, brings the overall reserve to $232 million, which represents about 1.4 percent of this year’s operating budget. The state is allowed to place up to 10 percent in the reserve, which had been emptied before Malloy took office by former Gov. M. Jodi Rell and by the 2009-10 legislature.
Barnes’ latest report also showed tax receipts for last year’s operating budget appeared to finish $102 million above projections, thanks in part to a last-minute surge in income tax receipts.
That’s a reversal from a string of fiscal retreats the Malloy administration made over the last two years. Between October 2011 and January 2013 the administration scaled back tax revenue forecasts five times as actually receipts continually came up short.
But McKinney said the administration’s days of budgetary wishful thinking haven’t ended.
The $37.6 billion, two-year budget Malloy and his fellow Democrats in the legislature’s majority approved to cover this fiscal year and next leaves state finances on pace for a $712 million operating deficit in the first fiscal year after the November 2014 gubernatorial election. That represents a gap of about 4 percent in the annual operating budget.
And while McKinney notes that post-election shortfall was created largely by hundreds of millions of dollars in borrowing, fund raids and other fiscal gimmicks used to balance the current budget, he also is fearful that the projected deficit is larger.
That’s because the budget is built upon some controversial economic assumptions, including a dramatic drop in unemployment and a sharp rise in personal income starting 12 months from now.
“It’s good that we are seeing some bright news in the budget,” Peter Gioia, chief economist for the Connecticut Business and Industry Association, said of the last budget surplus. “But we are still in the beginning stages of a sustainable recovery. There is still weak growth.”
Gioia estimates Connecticut would need to add 35,000 jobs and see personal income rise by about 7 percent to generate enough tax revenues to meet the projections for the 2014-15 fiscal year – the budget that will be in effect when the next gubernatorial race comes to a conclusion.
That projection “is too rosy,” Gioia added, noting that unemployment remains just over 8 percent. “We’ve still got a long way to go.”
Malloy spokesman Andrew Doba said Wednesday that “we are adding private-sector jobs at a faster clip now than at any other time since the last 1990s.
McKinney noted that the state’s inheritance tax raked in $440 million – more than 2 ½ times what was expected. Had not what even Malloy conceded was a budgetary fluke occurred, three-quarters of last year’s surplus would vanish and overall tax receipts would again have fallen short of projections.
And while Malloy deposited $93 million into the budget reserve last summer, he did so by raiding funds that were supposed to be used to pay down state operating debt from 2009.
Last year’s budget “was not a positive sign,” McKinney said, adding that sales tax receipts – a key indicator of consumer confidence – came in $189 million, or 5 percent, below expected levels. “It shows people are still struggling, and if they have money they are afraid to spend it. We’re still headed in the wrong direction.”
Doba responded, “If it were up to Senator McKinney there would be no money in the Rainy Day Fund at all.”
McKinney had said back in April that any surplus might be used to bolster state grants to cities and towns, or to reverse cuts in the new budget aimed at hospitals.
McKinney also had called for reforms to reduce spending in other areas of the budget though, including tightening state employee benefits and delivering more social services at a lower cost by using private, nonprofit agencies.