Gov. Dannel P. MalloyThe CT Mirror

Gov. Dannel P. Malloy

Though projected surpluses have grabbed recent headlines, legislators’ options for the next state budget are limited on many fronts.

Election-year politics. A large future deficit. A sticky constitutional cap. These are three of the budget obstacles legislators face when they return Wednesday to the Capitol for the 2014 General Assembly session.

“This is a time to be cautious,” said Rep. Patricia Widlitz, D-Guilford, co-chairwoman of the legislature’s tax-writing Finance, Revenue and Bonding Committee.

Widlitz praised Gov. Dannel P. Malloy for his recent proposals to dedicate much of the surplus to paying down debt, noting that the Democratic governor’s proposed tax relief is modest and limited – which minimizes its impact on future budgets.

“Everyone has a sense that we need to be cautious, with an eye to the future,” the Guilford lawmaker said.

That caution is atypical of past election years, when surpluses abounded. But for now, there appears to be a hefty sum of bonus dollars to spend.

There’s $271 million in the emergency reserve, commonly known as the Rainy Day Fund.

Comptroller Kevin P. Lembo certified a $506 million surplus for the current fiscal year.

And after improved revenue projections are applied to estimates —from nonpartisan analysts — for the fiscal year that begins July 1, Connecticut would run up another $160 million surplus based on current spending trends.

Combined that’s almost $940 million officials have to work with this legislative session.

Some lawmakers have argued to reverse earlier cuts to hospitals. Others have suggested budgeting more for debt service to accelerate job-creating capital projects. Cities and towns want to reclaim their share of state sales and real estate conveyance tax revenues – a $90 million annual boost they lost last spring.

And legislators traditionally have sought funding for pet projects in their districts in state election years.

Election Year Plans

But Malloy already has big plans for much of the surpluses, plans that mesh closely with his own re-election bid.

About $155 million from this year’s bonus would go back to middle-income taxpayers as a rebate. And roughly one-third of the projected $160 million cushion in 2014-15, about $53 million, would go for tax relief for teachers, consumers, municipal governments and business investors.

The governor has, in particular, clashed with teachers – a key part of his base – during his first term.

According to Malloy, it is simply fair treatment for taxpayers who faced increases three years ago when the state faced a big deficit.

“As our state economy continues to improve, we need to make sure that everyone shares in our emerging recovery,” Malloy said. “The package I am proposing is no panacea, but rather a modest, responsible way to begin reducing the tax burden on Connecticut residents.”

But for the governor’s GOP rivals, it is an election-year stunt.

“Will the real Dan Malloy please stand up?” said Senate Minority Leader John P. McKinney of Fairfield, who is running for governor. “During the last three years as governor, while not running for re-election, Governor Malloy raised taxes, punished teachers and retirees, and saw deficits everywhere.

“Now, in an election year,” McKinney said, “he proposes tax cuts, panders to teachers and sees surpluses even in the face of a … deficit.”

Dancing around the post-election deficit

The shortfall McKinney cited is the $1 billion deficit that nonpartisan analysts say has been built into the first budget after the election, a plan Malloy – or his successor – must craft starting 12 months from now.

Both the post-election deficit and the current surpluses stem in part from borrowing and other gimmicks Malloy and Democratic legislators have used to put off paying several hundred million dollars’ worth of current expenses until 2015-16.

On one hand, Malloy has tried to dismiss the projections of the Office of Fiscal Analysis.

“We won’t have deficits. We don’t have deficits,” the governor said last week, boldly predicting that a surging recovery would enable more tax cuts after the election.

But on the other hand, Malloy has been careful not to worsen that post-election deficit, even as he denies its existence.

Nonpartisan analysts already built a significant economic recovery into their forecast. In other words, they assume tax receipts will grow by hundreds of millions of dollars over the next 12 months – and state finances still will be deep in deficit after the election.

And most of Malloy’s tax relief — about three-quarters — is one time, applying only to the next state budget. Any tax cuts or spending increases that apply year-after-year would expand, and draw attention to, the deficit awaiting after the election.

The governor also wants to hang onto some of the current surpluses to help offset any future problems.

About half of this year’s surplus, $250 million, would go into the Rainy Day Fund, which would keep the $271 million it already holds. Another $100 million would become a special, supplemental payment into the cash-starved state employees’ pension fund.

Constitutional spending cap won’t go away

But priority election initiatives and future deficits aren’t lawmakers’ only obstacles.

The constitutional spending cap, a frequent nemesis to legislators’ budget dreams, is back just one year after many lawmakers thought they’d gained a lengthy reprieve.

The 1991 legislature enacted the cap to ease public outrage over the new state income tax. It is supposed to keep spending increases in line with the annual growth in personal income, taking an average of the prior five years.

But since the mid-2000s, it’s become increasingly problematic for governors and legislators as government spending in key areas like health care and employee salaries often outstrip personal income.

Lawmakers took a controversial step last spring when they decided to “net appropriate” one of the single-largest components of the budget: Medicaid-funded health services.

Instead of reporting $5.1 billion in initial state spending for Medicaid and another $2.8 billion in related federal reimbursement payments, Connecticut officials just reported a net Medicaid cost of $2.3 billion.

But while $2.8 billion in spending officially came off the books, that didn’t mean $2.8 billion in spending cap room opened up. Most of those dollars had to be removed from future spending cap growth calculations.

And nonpartisan legislative analysts say that if all current programs are continued in the next budget, the overall cost would eclipse the cap by $12 million.

It wouldn’t be that difficult to cut $12 million – which is less than 1/15 of 1 percent of this year’s budget. But any efforts to spend surplus dollars next year would have to be limited to those few areas exempt from cap rules – or else matched by spending cuts elsewhere in the budget.

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Keith M. PhaneufState Budget Reporter

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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