Lembo Certifies $207.8M Deficit That Triggers Mitigation
HARTFORD, CT — (Updated 3:51 p.m) State Comptroller Kevin Lembo certified a $207.8 million state budget deficit Friday.
That means Gov. Dannel P. Malloy will be required to submit a deficit mitigation plan to the legislature because the deficit exceeds one percent of net general fund spending.
Lembo’s deficit estimate is $5 million higher than what Malloy’s budget office estimated on Nov. 20. The difference in the estimates is not in revenue, but rather on the spending side of the ledger.
In his letter to Malloy, Lembo said his office is projecting a deficiency in the “non-appropriated Adjudicated Claims account.” That account is responsible for paying claims from the SEBAC v. Rowland decision and related attorney fees, along with other negotiated settlements.
With seven months to go in the fiscal year, that account has already paid out over $12.5 million, an average of over $2.5 million a month. “Therefore, this deficiency has the potential to go higher,” Lembo said. “At the same time, this account can be difficult to forecast due to the unpredictable nature of the settlements involved.”
Lembo said another area of concern whether state agencies will be able to reach the large amount of lapses targeted in the bipartisan budget the governor signed on Oct. 31.
“Achieving these lapse targets will be a significant budgetary challenge, especially in light of the high levels of fixed costs for FY 2018, such as debt service payments, pension contributions and the costs of retirement health insurance,” Lembo said.
Lembo agreed with the consensus revenue estimates and believes sales and use taxes are underperforming and observed the lower than expected receipts in the estimated payment portion of the personal income tax.
Lembo also pointed to great uncertainty related to the future of federal tax reform.
“Congress is considering significant modifications to federal tax law that could have profound implications for Connecticut, depending on what specific provisions, if any, are enacted,” Lembo said. “Future revenue forecasts will need to evaluate the consequences of any tax changes on the federal level.”
Senate President Martin Looney, D-New Haven, said legislative leaders will meet with Malloy on Wednesday to discuss their next steps.
House Speaker Joe Aresimowicz, D-Berlin, said a small deficit was not unexpected.
“A small projected deficit at this point is not totally unexpected, particularly with lower than anticipated federal funds coming in,” Aresimowicz said. “The comptroller’s estimate of a shortfall of about 1 percent of the total budget is not an unmanageable number, and we stand ready to work with the administration in the coming months to ensure the budget is balanced going forward.”
House Minority Leader Themis Klarides, R-Derby, said the deficit projections are serious, but she disagrees with Aresimowicz about why they’re cropping up now.
“The deficit was expected because the state’s budget policies over the years have been built on false assumptions, that increasing taxes will be sufficient to meet spending levels,” Klarides said. “The deficits are organic and an organic fix is required.”
She said Connecticut’s finances will likely continue to suffer “because of the state employee union contracts that tie up nearly 40 percent of the state’s budget.”
Senate Republican President Len Fasano, R-North Haven, disagreed with the shortfall from the governor’s office.
However, he reasoned that any budget the governor would have negotiated would also have been in deficit today because it also didn’t include the adjudicated claims data Lembo points to as part of the reason for the shortfall.
“As Gov. Malloy now begins to build his own deficit mitigation plan, I caution him to remember how his past policies have failed our state,” Fasano said. “I also hope that he remembers the importance of protecting the core functions of government, and that he avoids making decisions out of spite if he wants to gain support for his proposals in the legislature.”
This is the first bipartisan budget approved by the General Assembly in 10 years. It was negotiated without Malloy.
Chris McClure, a spokesman for Malloy, said there are “real, structural problems on both the revenue and expenditure sides- and in the General and Special Transportation funds.”
“These deficits must be addressed and done so in a fashion that will avoid recurring problems throughout the remainder of the fiscal year,” McClure added. “Hopefully, now that the Comptroller’s findings affirm the reality of the deficit, we can remove political posturing from these proceedings and return everyone’s focus to the financial health of this state.”
Based on widely accepted indicators, Lembo said he doesn’t expect Connecticut’s economy to make up for some of the revenue losses with an increase in economic activity.
Preliminary data shows Connecticut lost 6,600 jobs in October and over the year “nonagricultural employment in the state grew by only 1,400 jobs (0.1 percent).”
During the last period of economic recovery, employment growth averaged over 16,000 jobs annually in Connecticut.
In November, the Bureau of Economic Analysis released Real Gross Domestic Product (GDP) results by state for the second quarter of 2017 and found that Connecticut experienced a seasonally adjusted annual growth rate of 1.4 percent, which ranked 43rd in the nation overall.
It also found Connecticut’s growth rate was the lowest in the New England region, which had an average real GDP annualized growth rate of 1.9 percent.
Results from the latest housing report from Berkshire Hathaway HomeServices were also mixed. The report found sales of single family homes declined 1.88 percent this October compared with last October. However, the median sale price rose by 2.09 percent, from $245,000 to $250,121.
New listings in Connecticut increased by 3.13 percent and the median list price grew by 3.84 percent. In addition, average days on the market increased 9.76 percent in October 2017 compared to the same month in the previous year.