Comptroller: State Deficit Increases To Nearly $173 Million [Courant]

April 1, 2015

Hartford Courant
HARTFORD – In bad fiscal news for Connecticut, the comptroller said Wednesday that the state’s budget deficit has increased to nearly $173 million because of worse-than-expected collection of taxes and federal grants.

Comptroller Kevin Lembo said that Gov. Dannel P. Malloy and the legislature should act together in order to reduce the deficit for the current fiscal year that ends on June 30. The projected deficits for the next two fiscal years are even higher at $1.3 billion per year, and Malloy’s plan to reduce those deficits is currently being analyzed by the Democratic-controlled legislature.

In his monthly letter to Malloy on fiscal issues, Lembo said that he increased the size of the projected deficit because of lackluster tax collections. The April 15 tax season is hugely important for the state as officials are expecting millions of dollars to come flooding into state coffers in order to help balance the budget.

If the tax collections are worse than expected by April 15 and beyond, the deficit would increase.

Malloy’s budget director, Benjamin Barnes, stressed that that the upcoming tax collections are crucial for the state coffers.

“As we have assured Connecticut residents, we will make the difficult but necessary decisions to keep our budget in balance,” Barnes said Wednesday. “That said, the April tax receipts will determine whether further action is needed.”

Despite efforts by the Malloy administration, the state was unable to receive $45 million in expected Medicaid money from President Barack Obama’s administration. As a result, the deficit grew by $45 million. The state might appeal the federal decision in an effort to receive the money in the coming months.

As a result of the state’s troubles, Malloy issued another round of mid-year budget cuts Wednesday that cover $13.7 million in reductions from 20 departments and agencies. The largest cuts are $5.8 million from the Office of Early Childhood for child care services, $2 million from the University of Connecticut’s operating expenses, and $1 million from the UConn Health Center in Farmington. The cuts also include $1 million from the Connecticut State University system and smaller cuts from the departments of labor, social services, revenue services, veteran’s affairs and environmental protection, among others.

The state is hoping to collect more money from capital gains taxes, which are paid through the personal income tax, from gains in stocks on Wall Street. That, however, has not been happening at the pace that was expected — prompting the deficit estimates to grow. The state’s fiscal fortunes have been directly affected in the past by trends on Wall Street and changes in federal tax law. A major change was the end of the Bush-era tax cuts on capital gains, which prompted wealthy investors to sell their stocks at certain times and not at others, officials said.

Connecticut multimillionaires and billionaires traditionally make estimated tax payments in January, and this year’s total grew by only 4.9 percent from last year. The money from massive gains or losses on Wall Street can fluctuate widely — leading either to deficits or surpluses in state coffers.

Based on the numbers he has seen, Lembo has been questioning whether Gov. Dannel P. Malloy’s budget office, known as the Office of Policy and Management, is being too optimistic about the money that will come flooding in from the annual April 15 tax deadline.

Malloy’s current projection of a 25 percent increase from last year in the estimated and final payments is at a level that “has not occurred in the last decade,” Lembo said last month.

Even though Wall Street has been setting records, the state receives capital gains taxes only when stocks are sold. So if a millionaire’s portfolio is now swelled with large gains, the state receives nothing unless trades are made.

Lembo notes that the capital gains rates were lower during the state’s 2013 fiscal year, prompting investors to sell at that point — and boosting state revenues. The gains were thus shifted into the 2013 fiscal year instead of the 2014 fiscal year.

As such, some state officials were surprised in April 2014 when tax collections were relatively anemic, and the state’s projected surplus of more than $500 million largely disappeared.

That prompted Malloy to abruptly drop his plans last year for tax rebates of $55 for individuals and $110 for couples because the state lacked the money.

In the current fiscal year, the state’s outlook was boosted partially with a settlement for $36 million that was negotiated by the state attorney general’s office. That money represents Connecticut’s share of a $1.375 billion national settlement with Standard & Poor’s Financial Services LLC after then-Attorney General Richard Blumenthal filed a lawsuit in March 2010 that charged that S&P misled investors “when it rated structured finance securities in the lead-up to the 2008 financial crisis,” the attorney general’s office said.

Republicans have called for bipartisan budget talks since before Christmas, and they reissued that call again.

“Republicans have been saying the legislature needs to get involved every single month since November,” said Senate Republican leader Len Fasano of North Haven. “We shouldn’t be waiting to reach that ‘magical’ one percent before taking action. But now that others are realizing the severity of our budget shortfalls, it is too late to make meaningful changes. The governor dragged his feet and we lost the time we needed to create an effective, bipartisan solution. We wanted to take action early, because a dollar saved today is two dollars tomorrow and three dollars the next day. But too many days have gone by with no dollars saved.”

He added, “Governor Malloy’s newly announced rescissions of $13.7 million show that the governor has run out of options. I fear the budget reserve fund is now the only way to close this shortfall. This is what happens when you have a governor who is trying to raise his national profile instead of focusing on the issues here at home. Governor Malloy’s hesitation has led to devastation.”

Republicans say there has been no progress since the “Cheese Steak Summit” in January in the public cafeteria at the state Capitol complex, where Malloy held an open discussion with House Republican leader Themis Klarides that did not lead to any agreements.

Klarides said Wednesday that it is so late in the fiscal year that the cuts will have less impact. For example, the state would save the full $100,000 if a $100,000-per-year position went unfilled at the start of the year. But if that position was eliminated with only one month left in the fiscal year, the savings would be less than $10,000. Malloy, she said, has miscalculated the deficit.

“Unfortunately, he has been consistently wrong in underestimating its depth,” Klarides said. “This was all predictable and avoidable had he taken us up on our repeated offers to address our vanishing revenues. Now it is likely too late to do anything except a thousand tiny cuts as the budget continues to crumble.”