Comptroller Kevin Lembo
Comptroller Kevin Lembo file photo

Connecticut officially closed its second consecutive fiscal year in deficit Friday, shrinking its budget reserve to a low level as threats of another shortfall loom.

Comptroller Kevin P. Lembo certified a $170.4 million deficit for the 2015-16 fiscal year, a gap equal to 1.5 percent of General Fund spending. (Though the last fiscal year ended June 30, the comptroller cannot close the books until late September, since certain tax receipts received over the summer are applied to the prior budget.)

Lembo must again cover the deficit by drawing from the rainy day fund, which will be left with just $235.6 million. The new reserve is less than half of what Connecticut had before the consecutive annual deficits. More importantly it leaves Connecticut with a fiscal cushion equal to just 1.3 percent of annual operating costs.

The comptroller recommends a rainy day fund of 15 percent, given the large fluctuations in state income tax receipts Connecticut traditionally faces in very good and very poor economic times.

If Connecticut faces another deficit this year, the modest cushion increases the prospect the state might have to order emergency borrowing for the first time since 2009 to balance its books.

“The disappointing revenue results for Fiscal Year 2016 were largely produced by an economy that has yet to reach past recovery growth levels, as well as considerable stock market volatility,” Lembo wrote in his report on the deficit to Gov. Dannel P. Malloy.

Though Connecticut added about 15,800 payroll jobs last fiscal year, personal income grew just over 3 percent, Lembo noted. That’s less than half of the income growth experienced during the recovery from the 2001 recession, he added.

“The year that ended on June 30, 2016, was an extraordinarily difficult one,” Malloy spokesman Chris McClure said. “Income tax receipts were $650 million below budget, and the state was repeatedly compelled to take difficult steps to mitigate a developing deficit. We should be gratified that the hard work of state workers and the commitment of the legislature helped us to preserve more than $200 million of our Rainy Day fund, even in the pouring rain.

“We will continue to hold the line on the budget to ensure we fulfill our solemn obligation to balance the budget for FY17,” McClure said. “Our most current budget estimate, issued September 20th, is that the state is on track to meet its budget targets for FY17.”

The governor insisted throughout his 2014 re-election campaign that nonpartisan deficit forecasts were wrong, and that growth projections for Connecticut’s economy — and correspondingly for state revenues — were too conservative.

But state government has had nothing but deficits since the governor’s re-election. Connecticut closed the 2015 fiscal year with the General Fund $113.2 million in the red.

Malloy began to acknowledge in the summer of 2015 that the economic growth he’d predicted was lagging, and by January 2016 he’d begun declaring repeatedly that Connecticut faced a “new economic reality” of modest growth. The Democratic governor’s Republican critics say this economic shift was evident years earlier and that the governor would not admit it until after he had won a second term.

One of those GOP critics, House Minority Leader Themis Klarides of Derby, warned Friday that the governor and his fellow Democrats in the legislature’s majority still have not stabilized state finances.

Gov. Dannel P. Malloy with his budget chief Benjamin Barnes
Gov. Dannel P. Malloy with his budget chief, Benjamin Barnes

“The state’s precarious fiscal health leaves us no room for error,” she said. “Connecticut finished the 2016 fiscal year $170 million in deficit that had to be covered by the Rainy Day Fund, which is now significantly depleted. The Democrats want to avoid talking about the projected multi-billion deficit that will have to be dealt with after the November elections.’’

“Another failed Democrat budget has all but decimated our state’s rainy day fund and set us up for another year of struggle,” Senate Minority Leader Len Fasano, R-North Haven, said. “Given the fact that next year’s budget is already showing signs of deficit, lawmakers should be meeting now to figure out how to address the budget problems we already see cropping up.  But Democrats have consistently shown that they won’t act until it is too late or, at the very least, until after the election. Democrat legislators wouldn’t even extend our special session this week to address the budget issues they claim they agree with Republicans on.”

There have been several signs this past summer that more red ink is in Connecticut’s future.

The Malloy administration reported in late June that it had downgraded expected income and sales tax receipts for the 2015-16 fiscal year by more than $100 million combined.

And since prior year’s tax receipts are a crucial factor used to project likely revenues in the following year, the new 2015-16 revenue numbers lowered expectations for the 2016-17 fiscal year.

Legislators set very aggressive savings targets in June for the executive branch to achieve in the current fiscal year. Nearly $190 million in efficiencies and other cost-savings were built into the budget this way.

But one key cost-saving measure has gotten off to a slow start.

The governor announced in April he expected to eliminate 2,500 state jobs by mid-June. The bulk, about 1,900 to 2,000, would come from layoffs, and the remainder from retirements in the final three months of the 2015-16 fiscal year.

A mid-June deadline was set, Malloy said, to ensure the state could reap the savings from these job cuts both during the last two pay periods of the outgoing fiscal year and during all of 2016-17.

But layoffs executed to date total less than 1,100.

And the legislature’s nonpartisan Office of Fiscal Analysis projected in June that finances, unless adjusted, are on pace to run $1.3 billion in deficit in 2017-18 — the first new fiscal year after this November’s state elections.

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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