If tax revenues in April are weak, lawmakers may find themselves wrestling with a plan to cut spending at the end of the session, according to a Tuesday letter from Gov. Dannel P. Malloy.
In a letter to executive agency heads, Malloy said a deficit mitigation plan might be required to balance the budget if their savings efforts and tax collections are insufficient.
The letter comes a day after the Office of Fiscal Analysis revised its February deficit projections, which estimated that the budget at the end of the fiscal year will be $124 million in the red.
The Malloy administration is currently projecting the state is on track to end the year with a $62.6 million deficit, which includes the $75 million set aside to transition to Generally Accepted Accounting Principles.
Malloy’s letter said April tax numbers will be “the most critical factor” in whether the state budget can make it across the fiscal year’s finish line in the black. If they’re lower than expected, it could jeopardize the state’s ability to fund the conversion to GAAP, a campaign promise codified by the governor’s first executive order.
In February, Malloy used his executive rescission authority to cut the budget by around $33 million. That cut was on top of $34 million in lapses his administration had already held back from state agencies. In his letter Tuesday, he asks departments to find more ways to cut spending.
“While it is my hope that these collections will be strong enough to eradicate the GAAP deficit and to allow reversal of February’s rescissions, we cannot assume that that will be the case and as a result must prepare contingency plans to reduce spending,” he wrote.
At his monthly commissioners meeting, the governor said the letter was just a matter of prudence, which requires them not to spend more than the state can afford.
“No one’s hair is on fire, the world’s not coming to an end, but to the extent that you all can be helpful in giving us that insurance, I would appreciate it,” he told commissioners.
That insurance includes eliminating or delaying expenditures that aren’t “absolutely critical in nature.” That includes hiring, overtime, and contracts. He also asked agency heads to identify funds that may be unspent at the end of June.
Malloy said he will be making similar requests from the Legislative and Judicial branches as well as the state’s constitutional officers.
Speaking with reporters afterwards, Malloy said he still believes the state will have the money to close the “GAAP gap,” which requires the state to end the year with a $75 million surplus.
“I believe we’re going to be able to close any gap, but we’ll see where this thing plays out based on April numbers and we’re just not going to know enough about that until the end of April to get hard and fast on anything,” he said. “I think it’s within our control, particularly if my commissioners react.”
Reached by phone, Senate Minority Leader John McKinney said it was about time the governor take steps to deal with a deficit that’s looked likely since January.
“I’ve been calling on the governor for months to propose a deficit mitigation plan to the legislature. OPM has known we were running a GAAP deficit since January, but the governor’s been ignoring it and hoping it goes away. I’m glad he’s finally acknowledged it,” he said.
Though McKinney said he’s encouraged by Malloy’s letter, he said it will be a tough sell to get legislative Democrats to agree to significant spending cuts. He said he thinks Democrats would prefer to ignore it and hope that revenues turn around so they won’t have to address it.
Adam Joseph, communications director for Senate Democrats, said they were committed to balancing the budget through the rescissions the governor already proposed and additional savings they will enact if needed.
“Republicans who are pointing fingers of blame should remember that if the legislature had enacted their alternative budget the state would be facing nearly $1 billion in red ink through their smoke and mirrors budget tricks and borrowing,” he said.
Earlier this month, state Comptroller Kevin Lembo revised his budget numbers downward to account for the increase in Earned Income Tax Credit refunds.
Lembo told the governor the Earned Income Tax Credit is generating refunds about 20 percent above budget projections and estimated the program would exceed expectations by $22 million.
On the revenue side of the ledger, Lembo said revenues are falling $94.7 million short of budget projections under GAAP accounting. Add in the additional $22 million in tax refunds under the EITC and the revenue shortfall could be as high as $116.7 million.
But no one will be certain until after April 17.