Malloy warns of workforce cuts, affirms opposition to tax hikes

Gov. Dannel P. Malloy’s administration confirmed Friday the downward trend in state revenues — though not the precise numbers — that nonpartisan analysts reported earlier this week.

While the governor never used the word “layoff,” he told reporters Friday that state government’s workforce must shrink considerably soon, and that the next state budget, for the 2016-17 fiscal year, still must be balanced without tax hikes.

And Malloy’s budget chief, Office of Policy and Management Secretary Benjamin Barnes, told legislators Friday that the administration has been monitoring negative trends in state income tax receipts since mid-January. The administration’s decision not to report this before Friday prompted one Republican on the legislature’s tax-writing panel to call the choice “reprehensible.”

“I think there’s a bigger downside than there is an upside” to state tax revenues at this time, Malloy told reporters after a press conference to promote a constitutional amendment to protect state funding for transportation.

Malloy said, “I’m not fully endorsing” the deficit numbers released Thursday by the legislature’s nonpartisan Office of Fiscal Analysis, largely because his staff hasn’t fully reviewed them yet.

But for any legislators suggesting that Connecticut’s April state income tax filings might produce the booming upswing in revenues it often yielded before the last recession, the governor quickly dashed all hopes.

That’s just not going to happen,” he said.

Nonpartisan analysts downgraded revenue projections dramatically this week, with most of the reductions focused on income tax receipts tied to capital gains, dividends and other investment earnings.

This added about $190 million in red ink to the current fiscal year, which ends June 30. OFA now projects a deficit of $266 million, equal to about 1.5 percent of annual operating costs.

More importantly, it worsened deficits in each of the next three fiscal years by about $340 million.

The $900 million hole built into 2016-17 finances represents a 5 percent gap.

And the new biennial budget to be written a few months after this November’s state elections — covering the 2017-18 and 2018-19 fiscal years — now has deficits in excess of $2 billion, or 10 percent, in each year.

Malloy also conceded that the revenue erosion largely is due to a financial services sector of the Connecticut economy that simply is not as strong as it was before The Great Recession.

“We are quite dependent on our highest-income earners,” he said.

Unlike most other states, about 40 percent of Connecticut’s annual income tax receipts come from quarterly filings rather than paycheck withholding. And most of those quarterly receipts are tied to investment earnings.

Barnes told a similar story Friday morning when he appeared before the legislature’s Finance, Revenue and Bonding Committee.

Though his office hasn’t reviewed or confirmed legislative analysts’ precise numbers, “I certainly agree that their direction is correct, that we are likely to see a significant decline in revenue available to support the fiscal ’17 budget as a result of this new economic reality or change in capital gains tax collections.”

Before Thursday’s new revenue projections, analysts still had been projecting a hole in 2016-17 finances, albeit a gap of about $550 million to $570 million.

Malloy had proposed in February closing that margin exclusively with spending cuts.

The Democratic governor’s plans drew criticism from some legislators for not identifying precise reductions on a line-item-by-line item basis. Rather Malloy largely proposed 5.75 percent reductions from about 60 percent of the budget, which his administration described as “discretionary.”

This included all areas except: debt payments; contractually required pension contributions and other retirement benefit costs; education aid to cities and towns; and Medicaid.

Barnes estimated this would mean reducing the state workforce by “several thousand” employees, though he never pledged — nor ruled out — layoffs.

Both Malloy and his budget chief said Friday their strategy to balance 2016-17 finances remains to cut spending, even if it now means reductions closer to $900 million.

“The governor has made it very clear to me over the last day in our conversations regarding this that our commitment to balance the budget without new taxes remains intact,” Barnes told the finance panel, “and that we are going to need to make additional spending adjustments both in fiscal ’16 and in fiscal ’17 to live within our means.”

When pressed on whether the larger deficit means a larger workforce reduction, or if layoffs would be necessary to hit whatever target the administration has in mind, Malloy replied:

“State government’s going to get substantially smaller in the not-too-distant future.”

Barnes also told the finance committee that his administration has been tracking negative trends in income tax receipts since Jan. 15.

There were three days during which tax collections being monitored fell short of expectations by as much as $50 million, he said.

Rep. Vincent J. Candelora, R-North Branford, a veteran member of the finance committee, said the administration should have warned lawmakers of this problem back on Feb. 3 — the opening day of the regular 2016 legislative session, as well as the day Malloy proposed his revisions to the 2016-17 budget.

That revised plan was based on revenue projections developed before Jan. 15, Candelora noted. “We’ve been in session now for four weeks and this just came to us today?” he said afterward. “I find it reprehensible.”

Despite the considerable worsening of deficit projections — both this fiscal year and the next three — Malloy also said Friday he’s confident the General Assembly won’t seek to scale back sales tax receipts it committed last June to Connecticut’s transportation program.

Transportation is owed about $220 million in sales tax receipts in the 2016-17 fiscal year. But some other general fund resources previously earmarked for transportation also are being removed. After that, the transportation program comes out $97 million ahead.

“I think people in the legislature realize that the lack of investment in transportation is the headwind which our economy faces,” the governor said. “And if we are not going to be committed to resolving this issue, then our tax base won’t grow again. Jobs won’t come to our state.”