Less than three weeks after legislators approved a new state budget, eroding revenues have opened deficits topping $175 million this fiscal year and nearing $150 million in 2018-19.
Eroding income and sales tax receipts in particular also probably have worsened the multi-billion-dollar projected shortfall Connecticut must solve after the next election.
The consensus report from Gov. Dannel P. Malloy’s administration and the legislature’s nonpartisan Office of Fiscal Analysis also raises the risk the state might exhaust its emergency reserves.
“The governor’s caution regarding our ability to get through FY 18 in balance under the bipartisan budget passed by the General Assembly was well-warranted,” Office of Policy and Management Secretary Ben Barnes, Malloy’s budget director, said Monday. “This consensus revenue projection will likely place us more than $178 million in deficit before we have even had an opportunity to effectuate the large lapses and spending cuts built into the budget. OPM will finalize our projection in our letter to the comptroller next week, and the administration will continue to do its part to monitor revenues and expenditures closely.”
The estimated budget deficits tied to this revenue erosion — $178.4 million this fiscal year and $147.1 million in the next — total $325.5 million, easily exceeding the modest $213 million Connecticut holds in its rainy day fund.
Comptroller Kevin P. Lembo recommends a reserve more than 12 times that level.
And Connecticut won’t finish paying off the operating debt from the last time it exhausted its reserves — roughly $1 billion borrowed in 2009 — until January.
The new deficit estimate for the current fiscal year also falls dangerously close to the threshold that would force Malloy to craft a deficit-mitigation plan.
Such a plan is required whenever the state certifies a deficit in excess of 1 percent of the General Fund. In the context of the current fiscal year, that represents a shortfall topping $187.4 million.
The new budget faces major challenges on the spending side as well as the revenue component. It requires Malloy to achieve unprecedented savings after the budget is in force — a level that the governor already has warned would be difficult to achieve.
New state budget isn’t sustainable…
Even before Monday’s report, one of the chief criticisms of the new budget was that it sets up the winners of the next state election to face a deficit much worse than the one lawmakers just tackled.
Analysts had said state finances, unless adjusted in the present budget, were on pace to run $1.6 billion in deficit this fiscal year and $1.9 billion in the red in 2018-19 — or a biennial shortfall of $3.5 billion.
Much of that gap stemmed from surging retirement benefit costs and sluggish overall revenue growth.
Legislators boasted that they averted the shortfall without increasing income or sales tax rates, relying on smaller tax hikes and significant spending cuts. But they also diverted hundreds of millions of dollars from off-budget, specialized and one-time sources — moves that shift burdens onto the next governor and legislature.
Further complicating matters, the new budget orders tax cuts for businesses, estates, retirees, students and others — about $130 million per year. But it delays most of the relief until after the next election, when analysts say state finances will be in worse shape than they are now.
Even as the new budget was adopted last month, nonpartisan analysts warned that plan wasn’t sustainable.
If continued into the 2019-20 and 2020-21 fiscal years, the plan would amass red ink totaling $1.9 billion and $2.7 billion respectively — gaps of 10 and 13 percent.
In other words, while legislators averted a potential, two-year deficit of $3.5 billion, they set up the winners of the next state election to close a $4.6 billion gap.
… And post-election finances look worse
The new report downgrades expectations for income and sales tax receipts not just in the current budget, but at the start of the next two-year cycle as well.
For example, projections for income tax receipts in the 2020 fiscal year now are about $70 million less than they were three weeks ago, when analysts warned of a major post-election deficit.
Similarly, sales tax projections for the first fiscal year after the election are down about $56 million from where they were three weeks ago.
Malloy, whose administration was excluded from the bipartisan negotiations that produced the last budget, warned that while he would sign the plan — and end a four-month budget impasse — he was worried about the fiscal problems it would push down the road.
“This [bipartisan] budget makes these known problems worse because part of the gap was closed using one-time savings or revenues and also because the legislature has enacted significant tax cuts to take effect after 2019,” the governor said when he signed it on Oct. 31.
“I want to be clear that this is not a document that I would have negotiated,” he added.
Joseph F. Brennan, president and CEO of the Connecticut Business and Industry Association, praised legislators for not raising income or sales tax rates. But Brennan also cautioned that an unstable budget — and dangling future tax cuts that might not be delivered — could harm business confidence in Connecticut.
“Anything that exacerbates the problem by building more volatility or reducing predictability is problematic,” he said.
Legislative leaders responded shortly after the budget’s adoption not with specifics about how they would counter the worsening deficits, but with optimism based on the new wave of bipartisan cooperation.
“What we did was a historic move in Connecticut politics, coming out with a bipartisan budget, and under these extreme pressures, is pretty amazing,” said House Speaker Joe Aresimowicz, D-Berlin. “And we’re going to continue to work together.”
“It was profound,” Senate Republican leader Len Fasano said. “We talked about issues that I don’t think we’ve ever talked about in this building.”
But it took the legislature an unprecedented nine months — including four months after the fiscal year began — to adopt a new budget. What happens in 14 months when the challenge is likely to be much greater?
“Nothing we can’t handle,” Fasano said during the Senate debate on the new budget. “After this — nothing we can’t handle.”
“These numbers are disappointing but not unexpected,” the Senate leaders wrote. “It’s clear that now is the time to give cooperation and collaboration a chance to build on the bipartisan budget passed into law last month, which makes important long term systemic reforms. Many of these structural changes may not result in an instantaneous change, but rather will begin the process to improve financial management and eliminate this type of volatility and unpredictability in the future. We will continue to examine this report, monitor these numbers closely and remain committed to working together to make adjustments to the budget if needed in the coming months.”
House Minority Leader Themis Klarides, R-Derby, placed the blame on the Malloy administration, saying the concessions deal the governor and state employee unions struck this past summer “mitigated our ability to achieve savings in state.”
That deal, which included a three-year wage freeze, furlough days, increased worker contributions toward health care and pensions, and new restrictions on retirement benefits, also greatly limits the state’s ability to order layoffs for four years. It also extends the workers’ benefits contract from mid-2022 through mid-2027.