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Deficit projections hamper state's 'sustainable future'

By KEITH M. PHANEUF The Connecticut Mirror

Publication: The Day

Published 05/04/2013 12:00 AM
Updated 05/03/2013 11:50 PM
Budget gap predicted to exceed $680M when Malloy, or a successor, wins election next year

After reminding people almost unceasingly for two years that he inherited - not created - the largest budget deficit in state history, Gov. Dannel P. Malloy struck a different tone this year when he presented his latest spending plan.

"It no longer matters who caused those problems," the governor said in his February budget address. "What matters is that, together, we started to fix them."

And more importantly, Malloy added, Connecticut's finances were stable once again. "The budget I'm proposing today keeps us firmly in balance. Slowly, deliberately, and sometimes painfully, we're building a more sustainable future for Connecticut," he said.

But that "sustainable future" lasts only through the next state election - and possibly not even that far.

If Malloy's latest plan is adopted, his own numbers project that a deficit topping $680 million would await him - or his successor - in the first budget of the next term. By the second year the red ink approaches $800 million. And if the economy doesn't heat up dramatically before then, those deficits get worse.

Republican legislative leaders argue that the budget math leads unavoidably to a significant tax increase - one that Malloy is trying to postpone until after the 2014 election. That's when two crucial budget-balancing tools - taxes and state employee concessions - come back into play.

After signing an unprecedented $1.5 billion increase in taxes in 2011, Malloy would endanger his chances of re-election if he ordered another major increase this term, according to many political observers.

Republicans also note that government typically hasn't closed shortfalls of this size with minor tax hikes on items like cigarettes, liquor or gasoline. Only two taxes - income and sales - raise more than $800 million per year.

Malloy could tackle those projected deficits by reducing spending. But with the surging costs of Medicaid, pensions and retiree health care devouring more of the budget even in good times, cuts aren't an easy prospect. When deficits swell, these obligations push transportation, municipal aid, education and other priorities out of the picture.

Similarly, the governor called upon his labor base to accept a wage freeze, benefit restrictions and other givebacks two years ago. And because unions were exempted from layoffs, Malloy has no leverage to seek more concessions now, even if there were no political price.

But that protection expires in the first budget after the election. And some in the governor's labor base, still smarting from the most recent concessions deal and wary of another, are pressing for higher income and corporation taxes to stabilize finances for the long term.

Administration officials counter they have more than enough time to address the long-range red ink. The governor's fellow Democrats add that Republicans are long on criticism but become noticeably silent when it comes to alternatives.

Still, having painted himself fiscally into a corner with his concessions deal, and faced with a sluggish recovery and a political imperative to avoid more tax increases, Malloy has employed many of the same gimmicks he decried as a candidate and as a new governor.

Raids on transportation funding, borrowing and debt refinancing, other one-time revenues and a major exception to the constitutional spending cap all are part of a larger effort to postpone the burden of the 2011 budget deficit.

Fix it 'once and for all'

"This is our time to do what we were elected to do, to fix what's broken once and for all," Malloy told legislators five weeks after taking office in 2011.

That was, perhaps, the biggest promise offered by the new governor's "shared sacrifice" plan for closing a nearly 20 percent gap in state finances: uncompromising forward progress.

It might take time to recover, but government wouldn't make things worse with gimmicks that saved a dollar today but cost a buck-and-a-quarter tomorrow. Fiscal shortcuts would be a thing of the past.

"I believe (people) are willing to make sacrifices, if they understand why they're being asked to do so, and if they believe that Connecticut is serious about fixing what's broken," Malloy said.

The governor and his fellow Democrats in the legislature's majority have taken plenty of political heat over the last two years, both for the tax increase and for the concessions deal. But officials hoped that this approach, coupled with a cooperative economy, would leave the state rolling in budget surpluses by now.

That didn't happen.

Malloy now looks ahead to the last two fiscal years of his term with projected annual shortfalls of $1.2 billion and $1.3 billion, respectively.

'Kicking the can'

With the re-election campaign nearing, critics say Malloy no longer is committed to painful-but-necessary fiscal medicine, but instead embraces budget maneuvers to delay resolving much of the deficit until after the November 2014 election.

Both as a candidate and a new governor, Malloy had blasted the practice of running government on the credit card.

"We borrow not one penny for operating expenses," he told lawmakers in February 2011. "Too much borrowing over the years for ongoing expenses is one of the reasons we're in the bad shape we're in."

Since then, though, the state's cash pool has dipped dangerously low at times, forcing Treasurer Denise L. Nappier to transfer funds temporarily from capital programs to pay bills. And the emergency reserve holds only about one-half of 1 percent of annual operating expenses.

The governor's new budget would extend recent tax increases on businesses and power plants and trim a tax credit for working poor.

It also would impose big spending cuts on hospitals, part of $1.8 billion in spending reductions from the level needed to maintain current services over the next two fiscal years combined.

But rather than seek further tax increases or spending cuts to strengthen the cash pool, Malloy would borrow $750 million and refinance a $1 billion operating debt from 2009.

The interest costs on those moves, which total about $217 million, would be delayed until the next gubernatorial term.

Malloy's new budget also would move $90 million in grants to cities and towns from the operating budget onto the credit card.

Borrowing isn't the only gimmick in Malloy's latest plan. It also would strip one-time dollars from a medical research fund and offer amnesty to tax delinquents in hopes of getting them to settle their accounts.

And Malloy, who repeatedly accused Gov. M. Jodi Rell during the 2010 gubernatorial campaign of "kicking the can down the road," now faces similar charges.

"The governor is continuing to push our problems off to a future date - with interest," Senate Minority Leader John P. McKinney, R-Fairfield, said. "It is something he campaigned against, something he politicked against, and yet he is doing it."

Siphoning off gas taxes

After criticizing Rell for boosting fuel taxes and then repeatedly siphoning off much of the revenue to support non-transportation programs, Malloy's latest budget imposes one of the largest fuel tax hikes in state history.

When the wholesale tax on gasoline and other fuels jumps by one-sixth on July 1, according to a statute adopted in 2005,- the price of gas will rise between 3 and 4 cents overnight, based on current wholesale prices, while the state takes in an extra $60 million per year.

Malloy also would shift $75 million from transportation to non-transportation programs at the same time the state collects an extra $60 million at the pumps. And he still would spend $88 million less on transportation next year than the level needed to maintain current services.

The governor also would extend tax increases that otherwise would have expired in the next fiscal year, including a surcharge on the corporation tax, a cap on an insurance premium credit for businesses, and a levy on power plants.

In addition, Malloy's budget would reduce the new state Earned Income Tax Credit from 30 percent to 25 percent of the federal EITC. That would cost working poor families about $21 million on their state income tax refunds next April.

All totaled, taxpayers would pay an extra $222 million next year, according to the Malloy budget.

But perhaps the governor's biggest retreat from the fiscal high ground involves the constitutional spending cap.

After insisting repeatedly this past winter that he would live within the cap system, he proposed a budget that shatters the limit by $466 million next fiscal year and $691 million in 2014-15.

In the cap's 22-year history, only one new budget ever began with as large of a cap exemption. The 2006-2008 biennial budget Rell signed surpassed cap limits by $497 million in its first year and by $690 in its second.

Malloy insists his proposal complies with cap rules, albeit new rules he has asked the legislature to approve.

This story originally appeared at CTMirror.org, the website of The Connecticut Mirror, an independent, nonprofit news organization covering government, politics and public policy in the state.

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