Citing declining state revenue projections, Gov. Dannel P. Malloy gave up Monday on two of his biggest re-election year budget initiatives: a $55-per-person rebate and a supplemental payment into the state employees’ pension fund.
“We do not anticipate enough revenue to provide a tax refund or to make a supplemental pension payment, as we had hoped in January,” Benjamin Barnes, who oversees the budget as secretary of policy and management, wrote in a letter sent Monday morning to legislators.
Nonpartisan legislative analysts reported Friday that based on state income tax returns to date, income tax revenues for this fiscal year were expected to fall $330 million short. That also likely means expected income tax receipts for the next budget, which begins July 1, must be lowered, possibly by several hundred millions of dollars.
Meeting with Capitol reporters at midday, Malloy tried to put the best political face on his fiscal woes. He noted that sales-tax revenue and income-tax withholding are meeting or exceeding projections, indications that his retreat is not a sign of a weakening economy.
“We won’t have enough money to do everything we thought in February,” he said, adding that the budget for the fiscal year starting July 1 would fund the administration’s top priorities: investments in education and economic development.
The governor also defended offering the rebate in February, even though the optimistic projections it was based upon proved to be wrong.
“It wasn’t a gimmick,” he said. “I still believe when we have lots of money coming in … it should be shared with the taxpayers.”
January optimism is gone
Malloy was very optimistic about the direction of state finances just a few months ago when he touted a $500 million surplus projection for the current fiscal year.
The governor proposed using $155 million of that surplus to give a $55 rebate to all individuals earning less than $200,000, and a $110 rebate to all couples earning less than $400,000.
The foundation for that proposal — and for the optimism behind it — was a mid-January report from his budget office and by the legislature’s nonpartisan Office of Fiscal Analysis. That consensus document predicted that an extra $364 million in revenues would be collected before June 30. The single-biggest factor behind that jump was a $213 million anticipated surge in income tax collections.
But some economists warned this forecast could be soft.
They noted that about 40 percent of Connecticut’s income tax receipts come from returns filed quarterly, rather than from paycheck withholding. And the bulk of those quarterly returns involve earnings from capital gains, dividends and other investment-related income.
Such earnings surged in Connecticut — and in many other states – in late 2012 as many households sold stocks before anticipated increases in federal income tax rates governing capital gains could be applied in 2013.
But how much of that surge in investment-related income was due to a one-time phenomenon, and how much was due to continued economic growth?
In other words, was the January 2014 revenue forecast from the Malloy administration and nonpartisan analysts counting too heavily on investors repeating their 2012 earnings in 2013?
“The economy’s actually doing pretty darn well,” mistakes in the January revenue estimates notwithstanding, Malloy said. The governor said the state underestimated how many investors had cashed in on their gains before the expiration of the Bush-era tax cuts in 2012.
But House Minority Leader Lawrence F. Cafero, R-Norwalk, said the drastic drop in revenue projections going on now shows that “the economy is not nearly as good as everyone predicted.”
“You have to ask the question ‘why?’” Cafero said, adding that the $1.5 billion in taxes Malloy and the legislature raised in 2011 to close a historic deficit has kept Connecticut’s economy in sluggish shape.
One of Malloy’s GOP gubernatorial rivals, Danbury Mayor Mark Boughton, quickly pounced on the Democratic governor for his rebate reversal, drawing a return volley at Boughton from the Democratic Party .
“Priority Number 1 for Dan Malloy when he was elected in 2010 was to lead Connecticut out of the Great Recession,” said Boughton. “After four years of trying, Dan Malloy has clearly failed at the task.”
The Danbury mayor also noted that in a March 6 poll by Quinnipiac University, 63 percent of those surveyed called the rebate a gimmick, not good public policy.
“Mark Boughton’s press release is laughable at best given that he just proposed raising taxes and fees on Danbury residents for the tenth time. Boughton says in his release, ‘We need tax relief,’ so why doesn’t he put his money where his mouth is and cut taxes in Danbury? The answer is he couldn’t and he can’t,” said Nancy DiNardo, the Democratic state chairwoman.
Supplemental pension payment gone as well
Malloy also had sought to deposit $100 million in the state employees’ pension fund.
The state employees’ retirement system has been the weakest of the pension programs. As of the last actuarial valuation June 30, 2012, the fund had $9.7 billion worth of assets, enough to cover just over 42 percent of its $23 billion worth of long-term obligations. This marked an all-time low in the nearly 30-year history of this fund.
Analysts typically cite 80 percent as a healthy funded ratio.
One of the largest unions representing state employees, Council 4 of the American Federation of State, County and Municipal Employees, reaffirmed its confidence in Malloy Monday, while mourning the lost supplemental pension payment.
“The governor’s decision to suspend the supplemental pension payment is a disappointing development but not an altogether surprising one in light of the budget situation,” the union wrote in a statement.
Council 4 also noted that Malloy undertook a major initiative in the second year of his term to bolster the pension fund.
“Contrary to his predecessors, and virtually every other governor in this country, Governor Malloy has made a commitment to stabilize our unfunded pension liability by making contributions above the required contribution levels,” the statement read. “He’s followed through on this commitment and we expect him to continue down that path, because, unlike his predecessors, he knows it’s in everyone’s best interest to do so.”
“I think it was the right decision,” Sen. Beth Bye, D-West Hartford, co-chairwoman of the Appropriations Committee, said of the decision to cancel the rebate and the pension payment. “It really was the only decision he could make” in light of declining revenue projections.
Sources close to the budget negotiations between the administration and the legislature’s Democratic majority said the alternative would have been to impose drastic cuts in health care, social services, education and municipal aid.