The mood was decidedly better Thursday than in recent years at the state Capitol, with sunlight splashing down on a row of former House speakers and the governor promising money for teachers, doctors, college students and poor children, even a little for regular taxpayers.
Certainly it was an improvement over last year, when the fiscal crisis was so dire that Gov. Dannel P. Malloy had to sell his plan to borrow more than $1 billion to keep the state afloat. And that was nothing compared with the pall of Newtown, which Malloy only mentioned on Thursday with the words, "our darkest day just over a year ago."
Yes, a $500 million budget surplus in an election year will bring a few smiles — and not only for Malloy's Democrats. Don't let those dour Republicans fool you. They're running for re-election too, and a healthy state budget can't hurt them either, when they knock on doors back home.
How healthy is the budget, really? There's the rub. Republicans say the whole surplus is a mirage. Malloy insists not only that this year's surplus is legitimate, but that we can fly all the way to 2018 with balanced budgets just by keeping spending increases under control.
That means the projected budget shortfalls of $1 billion-plus in 2016 and 2017 — made in November by the nonpartisan Office of Fiscal Analysis — are not going to happen in Malloyworld. That's remarkable, since Malloy's own budget office conceded three months ago that the 2016 shortfall could be $600 million.
But like Reagan and Obama, Malloy knows the voters love an optimist above all. "Even as sunshine begins to break through the clouds, there are some intent on hoping for thunderstorms," the governor said Thursday.
No, the Republicans are not hoping for rain. They're just not convinced that the forecast has improved enough for Malloy to claim the stormy era is over.
"No matter what he's done, none of that is changing the direction the state's going," said Rep. Themis Klarides, a Republican who's in the camp that says there's no real surplus.
The best argument backing the things-are-not-rosy position is powerful. While the surplus for this year arose from taxes on Wall Street gains, corporate earnings, wealthy people dying, real estate sales and the wildly successful amnesty program, the income taxes we regular folks pay are falling short by $141 million so far this year, according to the Office of Fiscal Analysis.
Whoa. This year's budget called for income tax withholding — basically from wages we all earn — to grow by 4.4 percent, and instead it's growing at less than half that rate, 1.7 percent. That is an ominous sign. Jobs and wages are the best sign of the state's health, and if they don't grow, Malloy's budget for the next administration, which he most likely wants to head, is suddenly a butterfly caught in that thunderstorm.
Still, even with a Main Street shortfall, the Wall Street rescue of recent months is absolutely real. It won't last forever, but certainly we are fine in this fiscal year, which ends June 30. And Malloy was right about all that borrowing because there was no other viable option, and interest rates are at all-time lows.
One budget expert at the Capitol, a nonpartisan more closely linked to Republicans than Democrats, suggested that the market downturn in the past several weeks could actually increase this year's surplus to $1 billion. In the downturn, investors have sold stock in order to lock in their gains, and in so doing they created even more income for themselves — which will yield another tax windfall.
Looking ahead, we need a broad recovery, and there are signs of it happening, and signs it will fall short. Malloy's claim that the state's employers have added 40,000 jobs since 2011 is correct. His opponents who point to the so-called household survey, which shows no job growth, are just plain wrong.
But even 40,000 jobs represents a growth of less than 1 percent a year. Now let's look at the state's forecast that projected deficits of more than $1 billion in 2016 and 2017. That forecast assumed job growth averaging a full 2 percent in each of those years, real estate price gains averaging 4.5 percent a year, and income gains of nearly 8 percent a year. We are nowhere near any of that, folks. Not close.
So how can Malloy and his budget chief, Ben Barnes, say we even have a chance at a deficit-free era? First, they agree with that economic forecast, which came from the respected Moody's Economy.com. And second, they say state spending will increase by only 2.8 percent a year, which has been happening in recent years. The Office of Fiscal Analysis forecast uses 4.8 percent.
Can spending gains stay at 2.8 percent? There are arguments both ways. The 4.8 percent figure includes more inflation than the state needs to account for, and it includes some spending that the state hasn't done in decades but is still on the books. But to reach the 2.8 figure, Malloy had to cut 1,200 state jobs. Maintaining it depends on smart, corporate-style management and controlling Medicaid deftly.
That's why the word Thursday from everyone at the Capitol, in both parties, was "caution." And that's a lot better than desperation.