How do you raise taxes by $1.5 billion, cut state employee costs, and still end up with a state budget deficit of more than $100 million during an economic recovery?
Hold off on the howling — the problem is not out-of-control spending.
It's true that Connecticut's shortfall for the fiscal year ending June 30 was $105 million, including a $144 million deficit in the general fund and a surplus in the transportation fund, Comptroller Kevin Lembo informed Gov. Dannel P. Malloy on Tuesday.
But it's not as bad as it looks.
"The deficit amounts to less than 1 percent of general fund spending," Lembo said — and it's less than the $200 million level, where the deficit was headed earlier this year.
Actually, it's one-half of 1 percent of the $20.1 billion total spending package.
The culprits were a $227 million shortfall in tax collections and other revenue, and a $409 million increase in Medicaid costs over last year, about $95 million of which was not planned.
Adding to the argument that irresponsible budgeting was not behind the deficit, the spending side of the ledger included almost exactly $300 million more money transferred to the underfunded state employees' and teachers' retirement plans. And federal grants were $628 million lower than the prior year, as the stimulus money dried up.
There will be endless debates about how this, Malloy's first budget year, shaped up. And the debates could matter a lot if, as many of us suspect, Malloy's political ambitions continue beyond Hartford.
I give the budget, and Malloy's management of it, a B-plus, now that the books are closing on it.
The tax revenue shortfall was hard to predict at a time when consumer spending was rising, as were overall wages. In fact, the sales tax generated between $40 million and $80 million more than anticipated, depending on which agency does the figuring. Other taxes came in about as expected — higher for the gift and estate tax, lower for the cigarette tax (which raises $420 million a year, mostly from low-income addicts), and about even for the corporate earnings tax.
The problem was the income tax, and specifically, capital gains and bonuses — the big ones that go to traders, hedge fund managers and bankers. That was hard to predict. So, blame Connecticut's latest fiscal woes on Wall Street, but don't feel sorry for the shortchanged finance folks.
On the spending side, overall outlays in the general fund were up by $937 million, or 5.2 percent. That seems out of whack, as Sen. John McKinney, the Senate minority leader, pointed out.
But that increase includes $400 million that was charged to hospitals and nursing homes and immediately returned back to them, as a way of collecting more federal dollars — just like the added Medicaid spending was in part a way of collecting more federal aid. Take it out, and we have a spending increase of 3 percent, which isn't terrible considering the Medicaid jump.
Since the state can't carry a deficit from year to year, the shortfall will be made up with a transfer from an account set aside to speed up payments for the nearly $1 billion the state borrowed in 2009.
Here's the main reason Malloy doesn't get an A: Although we can't tease out the savings from the state employees' concession agreement, by all accounts they total well less than the $1 billion advertised. And Malloy gave up a lot to get those savings.
The concessions included a wage freeze, and they led to as many as 4,000 state employee retirements, which translated to a payroll savings of 4.5 percent. It would have been 8 percent but for a rare, 27th paycheck in the fiscal year because of the way the Fridays fell on the calendar.
McKinney's favorite shortfalls in the agreement with the unions are $205 million for the health plan, which didn't materialize because employees liked the plan, and a smaller, but still large, amount for a "suggestion box" for management changes.
The savings that were realized, he argues, were not worth a four-year, no-layoff guarantee and an extension of the gold-plated health plan for an additional five years, to 2022. "When other states are taking much more difficult steps to control their long-term liabilities, we haven't done that," McKinney said.
That's a bit harsh, because Malloy did make some headway on the pension liability and employee cost issues, and he and budget czar Ben Barnes resisted the urge to rehire many employees — they even cut corners when the deficit looked even bigger.
Looking ahead, the budget for the fiscal year that started July 1 calls for a spending increase of just 2.6 percent — which Lembo called a tight challenge. If Malloy can pull it off without a big deficit, the creds he's building at the Democratic National Convention might really lead somewhere.
