State Comptroller Kevin Lembo told   Gov. Dannel P. Malloy last week that the state ended this fiscal year with an $85.5 million surplus, but warned the rosy outlook is the “ financial equivalent of gluing petals back onto a flower in order to address a budget crisis.”

“This is an example of when a surplus is not a surplus,” Lembo said.

The use of federal stimulus funds, rainy day funds, and other one-time gimmicks, “carried us through the year, but our state needs significant budgetary reform to permanently repair Connecticut’s finances,” said Lembo.

The net increase in surplus from last month, excluding the cancellation of borrowing, is $51.8 million.

In his monthly report to Malloy, Lembo explained that June’s surplus is much lower than last month’s because the legislature decided not to borrow the $646.6 million from consumers’ electric bills in order to cover what they anticipated would be a budget deficit. The surplus for June would have been $736.1 million, if the state had failed to cancel that borrowing.

The state did end up collecting $40 million from consumers’ electric bills since January, but the legislature rejected Republican attempts to give the money back to ratepayers. Instead it will be used to balance the fiscal year 2011 budget and is included as part of the surplus.

Most of that surplus is already accounted for. The State Employees Bargaining Agent Coalition 2009 agreement with the state requires $14.5 million of the surplus to be deposited into the state’s savings program for retiree health benefits and $71 million will be used to pay down $915.8 million in borrowing the state did in 2009.

“The bad news is that this fiscal year surplus – $85.5 million – is a mirage built on one-time fixes,” Lembo said. “The good news is that revenues have surged far beyond our expectations, providing promise for next year if we sustain this upward trend,” said Lembo.

The income, sales, estate, and corporation tax revenues are coming in higher than initially anticipated, but the state overspent its general fund target by $283.2 million.

Further tempering those revenue gains, “Unemployment remains historically high and thousands of homes are in foreclosure – while tens of thousands more homes are on the verge of foreclosure,“ Lembo said.

In May, Connecticut lost 2,900 payroll positions and its unemployment rate hovers at 9.1 percent.

That number is expected to increase over the next few months as Malloy begins laying off 6,700 state employees in order to balance next year’s budget.

Unable to reach agreement with the SEBAC coalition that represents 15 unions, Malloy asked the legislature to give him the power to find the $1.6 billion over the next two years in layoffs and spending cuts. The legislature did increase his rescission authority from 5 percent to 10 percent last week, but it refused to allow him to cut municipal aid. In exchange, Malloy said he would need to layoff 1,200 more state employees.

The process of laying off employees and shrinking the size of state government began in earnest last week from Malloy’s Budget Director Ben Barnes sent a memo to all state agency commissioners asking them to submit their plans to reduce their workforce and department budget no later than July 8.

Malloy will then submit his proposal to the Speaker of the House and Senate President Pro Tempore on July 15.

“The budget challenge facing the state means that we can no longer afford the structure and services currently in place given the failure to ratify the tentative agreement between the State and SEBAC,“ Barnes wrote. “Consequently, and regretfully, we must downsize state government over the biennium.”

If an agency chooses not to eliminate as many positions Malloy proposed in this spreadsheet, then it must come up with “realistic alternative savings proposals.”

And those savings must “meet or exceed the target in each fund administered by the agency,” Barnes wrote.

Also he reminded agency commissioners that effective immediately, all vacant positions, including unclassified positions won’t be refilled.

“Any refill of positions after June 30, 2011 must go through the OPM approval process on a position-by-position basis,” Barnes wrote.

Also all agencies will be expected to evaluate the Temporary Worker Retiree assignments for “continued necessity.” These are state retirees who have been hired back under a 120-day contract. These employees receive both a paycheck and a pension check.

“Note that OPM is evaluating current use of TWRs on an individual basis and agencies may be directed to end these assignments,“ Barnes wrote. “While we understand that there are situations which may warrant the use of this class, agencies should not submit requests for these positions in the absence of a critical need.”

What remains unclear after last week is if Malloy will agree to renegotiate a new contract with SEBAC, since it was announced on Friday the leaders of the 15 unions will reject the one a minority of its members voted down.

“The governor’s been pretty clear that if there are items that need to be clarified within the existing agreement that has now been tabled then he’s happy to do that. But that there will not be a wholesale renegotiation of that agreement,” Roy Occhiogrosso, Malloy’s senior communications adviser, said last week before news SEBAC planned on officially rejecting the deal was made public.

Union leaders are expected to meet today and uphold their current bylaws by voting down the tentative agreement.

“We respect the decisions of our members at the ballot box. There will be no manipulating the rules to change the SEBAC ballot to a ‘yes’ vote,” Sal Luciano, AFSCME Council 4 executive director, said last week. “As Council 4’s representative on SEBAC, I am not requesting a re-vote. I will be meeting with our local union officers to discuss options which may or may not be available to us.”

Two union spokesmen said Friday that their leaders are doing everything they can to avoid the 6,700 layoffs.

“We have a plan going forward and it does involve working directly with the administration,” Matt O’Connor, SEBAC spokesman, said Friday.

Asked if there will be a completely new vote in the future on an agreement, O’Connor said “that’s an option that’s been discussed.”

“But at this point we’re not in a position to announce what the next step is—what the path forward includes,” O’Connor said.

Click here  to read more about that issue.

And check back later this afternoon for news from union officials.