July 1 marks the start of a new fiscal year in Connecticut amid a slightly improving employment outlook and a modest state budget surplus for the fiscal year just ending.

But a closer look reveals long-term problems. Not the least among them, the revised budget for fiscal year 2011 is a short-term solution that sets up tougher decisions to be made to tackle projected deficits of more than $3 billion in each of the next two fiscal years.

That will be the task of the new state legislature and administration. Policymakers crafted the revised, $19 billion state budget this spring without any tax increases but with a patchwork of borrowing, federal aid, payment deferrals, some spending cuts and surplus dollars from this year’s budget.

It’s a tenuous solution. While the surplus dollars are coming in higher than anticipated, the federal dollars counted on to make the budget work—$365.6 million that includes $266.5 for Medicaid and child welfare programs, and $99.1 million for education--are still in doubt.

What’s more, the state’s plan to borrow $956 million to cover the budget deficit for the next fiscal year is a development that helped convince a third Wall Street credit assessment to downgrade Connecticut’s bond rating.

Fitch Ratings said the state is relying “on borrowing to address its ongoing fiscal challenges in the context of already high liabilities and large projected structural gaps.”Previously, Moody’s Investor Services and Standard & Poor’s also downgraded their ratings for Connecticut.

“Lower bond ratings hurt the state in two ways,” says CBIA economist Pete Gioia. “First, they increase the cost for the state to pay back its already large sum of borrowing. And they hurt bondholders—which includes many Connecticut residents and organizations in the state.”

Borrowing and one-time fixes are reflective of a trend that puts off tough decisions with long-term impact in favor of short-term solutions.

The reality, however, is that state government has grown beyond the ability of Connecticut taxpayers to afford it. In response, policymakers need to focus on streamlining the budget—especially in areas such as long-term care and incarceration, and a greater use of nonprofit agencies to provide state services more cost-effectively with equal quality.

State employee and retiree health care and benefits should also be looked at for possible reforms.

This fall, Connecticut voters should look for and support candidates who understand the difficult challenges facing the state and who will make the tough decisions to bring fiscal restraint and a greater long-term stability to the state budget process.

For more information, contact CBIA’s Pete Gioia at 860.244.1945 or peter.gioia@cbia.com.