Sen. Kane: CT’s State Budget is “Built on a House of Cards”

March 5, 2014

From the March 4, 2014 Waterbury Republican-American:

Malloy’s surplus on shaky ground?
Government borrowing from bond market

Budget figures suggest Gov. Dannel P. Malloy could easily be facing a shortfall today instead of a projected $500 million-plus surplus. Malloy came into office intending to save money to finance the estimated $1.2 billion cost for converting state budgeting to Generally Accepted Accounting Principles. It was one of his signature campaign pledges from 2010. Malloy originally planned to put aside $80 million annually for 15 years, starting last July. Instead, the state government is now borrowing from the bond market to pay down the GAAP differential. The legislature’s budget office estimated this change of plan shifted $598.5 million from this year’s operating budget to borrowing. It also reported an additional $155.4 million in other spending is being bonded. This exceeds the latest surplus estimates from the state comptroller’s office, the legislature’s Office of Fiscal Analysis and the governor’s Office of Policy and Management. The Malloy administration does not consider that a valid comparison. Comptroller Kevin Lembo reported Monday that this year’s $18.6 billion budget is running an estimated $504.4 million surplus. That matches the latest estimate from OPM.

If the GAAP funding was not shifted to borrowing, the operating budget would be running a $94.1 million shortfall based on OFA’s budget calculations and the latest estimates from Lembo’s office and the Malloy administration. The administration disputes the OFA characterization that the GAAP funding was shifted from the operating budget. It maintains that the cumulative GAAP deficit was a balance sheet issue that had built up over many years. “The state had a $1.2 billion GAAP deficit that was generated over many years, and that deficit was a balance sheet deficit, not something that was the result of a deficit in any given fiscal year,” said Gian Carl Casa, an OPM spokesman. Lembo reminded Malloy and lawmakers that this year’s budget surplus is largely the result of an one-time tax amnesty, funding that was carried forward from last year’s budget, and volatile capital gains. A 60-day tax amnesty raised $192.6 million, according to the final tally. This was more than five times the $35 million that it was originally budgeted to raise. The additional $156.7 million is equivalent to 38 percent of the $504.4 million surplus that the comptroller’s office and the administration are now projecting. Lembo also observed that this year’s budget includes $190.8 million from last year’s budget surplus of $270.7 million. It also carried forward an additional $112.4 million in funding from last year. This $303.2 million in spending is equivalent to 60 percent of the estimated $504.4 million surplus. The stock market has continued to post double-digit gains that are driving up estimated payments from investors and other taxpayers who pay income taxes on a quarterly basis, Lembo said. He said the reliance on the stock market makes capital gains the most volatile component of the income tax. Malloy and Republicans have clashed over budget policy and this year’s surplus estimates, including potential GOP rivals for governor.

“This budget is built on a house of cards,” said Sen. Robert Kane, R-Watertown, the ranking Senate Republican on the Appropriations Committee. He said the GAAP change is one of many gimmicks that Malloy and his administration have used to paper over budget problems. “We have been screaming this from the rooftop for a while. These numbers really are not accurate. He is just painting a picture that is far rosier than reality,” Kane said.

The governor’s promised transition to GAAP was initially delayed because of the $3.6 billion deficit that he inherited. Last year, Malloy approved a revised plan to borrow $750 million over 13 years to pay down half of the GAAP differential. In October, Treasurer Denise L. Nappier announced the first sale of $560.4 million in GAAP conversion bonds. She reported overall interest cost would be 3.01 percent. The interest charges will come to $186 million. State law prohibits these funds from being appropriated for other purposes without the approval of three-fifths of the legislature and the governor. Additionally, the administration included funding in each agency’s budget to keep the GAAP deficit from increasing. Agencies cannot spend the funds in those budget lines.