Plummeting tax receipts have ripped a nearly $300 million hole in the next state budget, leaving legislators and Gov. Dannel P. Malloy just one week to fix it, according to a new report Wednesday from fiscal analysts.

Meanwhile, proposed new spending for pre-kindergarten programs, the elderly and working poor, public colleges and universities, and for cities and towns hang in the balance – as do tax breaks for teachers and consumers and the potential expansion of legalized gambling in Connecticut.

New projections from the administration and the legislature’s nonpartisan Office of Fiscal Analysis also worsened the deficit in the first budget after the November election, pushing it close to $1.4 billion or 7.4 percent of annual operating costs.

Meanwhile, the $500 million-plus surplus Malloy touted just two months ago when he proposed a tax rebate has disintegrated to $43 million.

Combined with the $271 million already in the emergency reserve, that surplus leaves the Democratic governor with a fiscal cushion of less than 2 percent against a post-election deficit more than four times its size as he enters his re-election campaign.

Still, the Malloy administration insisted it was prepared to deal with the bad news.

From left, budget Secretary Benjamin Barnes and Chief of Staff Mark Ojakian
From left, budget Secretary Benjamin Barnes and Malloy administration Chief of Staff Mark Ojakian CT Mirror

“At the end of the day, we will have a balanced budget and it will reflect our priorities,” Mark Ojakian, the governor’s chief of staff, said.

But Republican legislative leaders said the disappointing revenues that have plagued state finances since the last recession stem, in large part, from the $1.5 billion tax hike Malloy signed three years ago to close the historic budget deficit he inherited.

Senate Minority Leader John P. McKinney, R-Fairfield, who is running for governor, said administration officials were overly optimistic projecting tax receipts in January to bolster the governor’s image entering an election year.

“Connecticut’s economy and revenues are crumbling,” he said. “It’s time to get serious.”

Barnes responded that the January revenues also were endorsed by nonpartisan analysts.

“It’s a lot easier to heckle from the sidelines than do the hard work,” Ojakian said.

Nonpartisan analysts began warning two weeks ago that income tax receipts were running well below projections. Taxes tied to capital gains and other investment-related earnings in particular came up short.

But the new report also lowered expectations for sales and corporation tax receipts.

Revenue loss hits new budget the hardest

The biggest impact of Wednesday’s report involves the next state budget, which begins in less than nine weeks.

Malloy recommended a $19.03 billion plan in February, adding a modest $37.2 million to the preliminary 2014-15 budget adopted last spring. Most of those new dollars went into pre-kindergarten programs, rental subsidies for low-income seniors, an extra $8 million in municipal aid and additional supportive housing for people with mental illness.

The governor also recommended a two-tiered income tax exemption for retired teachers living in Connecticut that would be retroactive to Jan. 1.

Malloy’s plan also retained several tax changes built into the preliminary 2014-15 budget including:

  • The first step of a two-step effort to reverse a tax hike on Connecticut’s working poor. The state’s Earned Income Tax Credit was reduced in the current budget from 30 percent to 25 percent of the EITC. That state credit was supposed to rise to 27.5 percent of the federal one in 2014-15, and reach 30 percent in 2015-16.
  • Restoration of the sales tax exemption on clothing and footwear costing less than $50. This is supposed to happen in June 2015, the last month of the new budget.
  • And allowing for the launch of keno, an electronic lottery-like game, in hundreds of restaurants and bars, later this year.

A few questions were raised in late March about the stability of Malloy’s plan, though, when the legislature’s Office of Fiscal Analysis concluded it was almost $70 million out of balance, largely because it failed to budget for contractually required retirement benefits for unionized prison guards.

Combining that $69.4 million shortfall in the governor’s February proposal with new revenue projections for 2014-15, put the Malloy plan more than $300 million out of balance.

‘Everything is on the table’

“All of the revenue and expenditure items (in the governor’s budget) are uncertain” now that revenues are down, Barnes said.

“Everything is on the table,” Ojakian added.

From left, Senate Minority Leader -- and gubernatorial candidate John McKinney, R-Fairfield, and House Minority Leader Lawrence Cafero of Norwalk.
From left, Senate Minority Leader, and gubernatorial candidate, John McKinney, R-Fairfield, and House Minority Leader Lawrence Cafero of Norwalk. The CT Mirror

House Minority Leader Lawrence Cafero, R-Norwalk, and McKinney said the Republican minorities in the House and Senate would develop their own plan over the next week to close the deficit in the next budget through spending cuts alone.

The 2014 legislative session ends May 7.

The GOP leaders added they think most Democrats in both chambers oppose legalizing keno, and that the initiative is being driven exclusively by Malloy, and by his fellow Democrats in top legislative leadership posts.

Cafero and McKinney said they may not be able to stop keno’s legalization, but they at least can force all legislators to go on public record on the issue. Republicans have attached amendments to prohibit keno to a host of Democratic-sponsored bills.

“If they don’t get rid of keno, they own it,” McKinney said.

The legislature’s Appropriations and Finance, Revenue & Bonding committees’ spending and tax plans for 2014-15 also were left in poor shape by the latest revenue projections.

The $19.04 billion spending plan the Appropriations panel endorsed for 2014-15 is now $282 million in deficit, based on the new projections. And that plan used this year’s surplus dollars to plug the $70 million deficit in the governor’s proposal.

The Appropriations Committee also added funds for support programs for the mentally ill.

The finance committee backed all of major tax changes proposed by the governor, and also recommended retaining keno and sending revenues from the game to cities and towns.

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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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