Sen. Kane: State spending is on an unsustainable trajectory (Waterbury Republican-American)

Budget watchdog advises caution on projected surplus; Volatile markets may impact state

By Paul Hughes

Waterbury Republican-American

While forecasting a slight surplus of $800,000, the state’s chief budget watchdog is uneasy about the outlook for this year’s newly minted $19.8 billion budget.

State Comptroller Kevin Lembo struck a cautionary tone in this first monthly status report since the 2016 budget took effect on July 1, citing the volatility of the financial markets, the potential for revenue shortfalls and ambitious savings targets. He agreed with the governor’s budget office’s assessment that nothing in the early indications requires any adjustments to the slight $800,000 surplus that Gov. Dannel P. Malloy and Democrats in the legislature built into this year’s budget. Lembo also said he shared the concerns of the Office of Policy and Management related to potential revenue shortfalls. Additionally, he said the Malloy administration could be challenged to realize the $200.6 million in forced savings from state agencies. Lembo observed tax receipts and other sources of revenue fell short of expectations in the 2015 fiscal year that ended July 1. He said there is concern this trend could continue into 2016. While state spending was $73.6 million less than budgeted for 2015, according to the comptroller’s initial figures, revenue fell $144.5 million below budget expectations, leaving a $70.9 million shortfall. WHEN THE 2015 BOOKS are audited and closed, any remaining deficit will be eliminated through an automatic transfer from the Budget Reserve Fund at the end of this calendar year. There is $519.3 million in the rainy day fund.

A top Republican lawmaker said people ought to take any talk of a year-end surplus two months into the fiscal year cautiously based on the record of the last several years.

“We have seen this before, and numbers do change,” said Sen. Robert J. Kane, R-Watertown, the ranking Senate member of the budget-writing Appropriations Committee. The comptroller’s office and the Office of Policy Management had been projecting a slight $300,000 surplus for the first three months of the 2015 fiscal year, but the forecast changed just after Malloy’s re-election. Malloy and the legislature confronted a nagging budget shortfall that persisted despite the administration’s efforts to manage the deficit through spending cuts and other cost-saving measures.

Kane said it will be interesting to see what happens this November when the Office of Policy and Management and the legislature’s Office of Fiscal Analysis update the revenue estimates and submit annual budget forecasts. “I wouldn’t be doing any jumping jacks yet,” he said.

Cratering revenues whittled down an estimated $500 million-plus surplus that the Malloy administration and the comptroller’s office had been long anticipating in 2014 to $248.4 million in the end. That surplus was largely the result of a tax amnesty that raised $35 million more than budgeted, the use of $190.8 million from the previous year’s surplus, and an additional $156.2 million in other funding that was carried over from 2013.
Malloy and Democrats also restructured the repayment of bonds issued in 2009 to close an earlier budget shortfall and transferred funds from other budget funds into the general fund.

Kane recalled how Malloy had been proposing to use the projected 2014 surplus to fund tax rebates, but was forced to scrap that plan after income tax receipts plummeted.

A WINDFALL in capital gains in 2013 had led the administration to incorrectly assume the surge would continue into 2014. The bump in 2013 was attributed to the end of Bush-era tax rates on earnings.

Lembo said the current volatility in the financial markets has complicated the budget outlook for 2016. He said receipts from capital gains have fluctuated significantly over the last several years.

“The recent downturn in the market increased sales volume,” Lembo said. “It remains to be seen if the increase in gains related to sales will help to mitigate the negative impact of the present market decline.”

Kane said he is skeptical of the administration’s economic forecasting.

“I think the economy is still in a state of flux, and I think it is not as rosy as they paint it to be,” he said.

Republicans in the legislature have been arguing that the record tax increases imposed under the first two-year budget that Malloy signed in 2011 failed to produce enough revenue to keep pace with spending levels.

GOP lawmakers are now expressing doubts that the second largest round of tax increases contained in the current two-year budget plan will raise enough to support the level of spending that Democrats and Malloy set.

Kane cited a short-term forecast from the Office of Fiscal Analysis to support the Republican arguments that state spending is on an unsustainable trajectory.

The OFA is projecting deficits of $759.1 million for 2018, $649.4 million for 2019 and $720.2 million for 2020.