(Updated 3:30 p.m.) Despite a drop in the unemployment rate and the largest tax increase in state history, state Comptroller Kevin Lembo is predicting that Connecticut will end the year with a $120.8 million budget deficit.
The projections Lembo shared Monday with Gov. Dannel P. Malloy’s administration are about $52.8 million higher than the $62.6 million deficit the administration estimated on March 20.
Lembo’s deficit projections are higher than the that of the Malloy administration because Lembo says he doesn’t believe they will achieve $36.2 million in state agency lapses. Lembo concluded that based on a four-year average, general fund spending through February represented about 65 percent of the year’s total spending. So Lembo said that if that trend holds true, it is unlikely the additional lapses will be realized.
But Malloy has been adamant about having a balanced budget with enough surplus to transition to Generally Accepted Accounting Principles — one of his campaign promises codified by his first executive order.
Last week, at a meeting with state agency heads, Malloy asked them to hold the line on spending. The message came just one day after the legislature’s Office of Fiscal Analysis pegged the deficit at $124.4 million.
“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,” Malloy told his commissioners March 27. That insurance includes eliminating or delaying expenditures that aren’t “absolutely critical in nature.”
However, Lembo’s larger deficit number isn’t only based on spending. Lembo expects the state to hand out nearly $22 million more in tax refunds than the $107.5 million the administration is projecting. The increase in tax refunds this year is attributable mostly to the creation of an Earned Income Tax Credit.
The deficit Lembo certified Monday is still below 1 percent of the total fund appropriation, which is the threshold at which the governor is required by law to submit a deficit mitigation plan to the General Assembly.
Like Malloy, Lembo noted that the deficit could easily be erased if April tax collections exceed expectations.
“All eyes are on April,” Lembo said in a press release. “The complex 2011 income tax withholding changes may have distorted the trend analysis used for projections. As a result, final and estimated income tax payments received in April could differ significantly from those projections.”
The income tax hike was instituted retroactively and caused a lot of confusion for employers, including state government, which had to refund payments to thousands of employees who saw their paychecks shrink this past winter.
It’s unclear what the retroactive income tax hike means for April collections.
What Lembo does know is general fund revenue is falling $118.2 million short of original budget projections and net state spending is $49.7 million below the original budget plan. Lembo said his spending projection reflects caution with respect to the lapse because of the large increase in spending posted in January.
Despite the difference in their deficit projections, “we all agree that we’re operating in a challenging fiscal climate,” Office of Policy and Management Secretary Ben Barnes, said Monday. “This is to be expected given that we have undertaken a number of measures to stabilize our state budget, specifically the implementation of GAAP. We remain confident that we’ll end the year in the black.”