Gov. Dannel P. Malloy unveiled a $40.6 billion two-year budget Wednesday that seeks $1.5 billion in labor concessions, imposes $400 million of annual pension costs on municipalities and reorganizes the financial relationship between the state, communities and hospitals.
The governor also would increase taxes by close to $200 million, scaling back income tax credits for the middle class and working poor and boosting the cigarette levy by 45 cents per pack.
The plan, which would spend $20.1 billion next fiscal year and $20.5 billion in 2018-19, would eliminate major projected deficits totaling $3.6 billion over the coming biennium.
The pension fees and the hospital funding changes were designed not only to close major shortfalls in state finances, driven largely by surging retirement benefit costs, but also to shield Connecticut’s financially distressed cities.
The labor savings target has an ugly alternative. According to Malloy’s budget director Ben Barnes, the administration’s backup plan would be to seek at least 4,200 additional layoffs.
The governor’s new proposal would boost overall spending in the General Fund — which covers the bulk of annual operating costs — by about 0.8 percent next fiscal year and 1.8 percent in 2018-19. Still, it would spend $1.4 billion less next fiscal year than the level necessary to maintain current services.
The new budget does not recommend tolls, gasoline tax hikes or any other major revenue initiative to fund Malloy’s long-term plan to rebuild the state’s transportation infrastructure. Barnes said the governor remains determined not to have that debate until after legislators approve a constitutional “lockbox” amendment to safeguard those funds.
“Our economic reality demands that we re-envision state government,” Malloy said. “Together we need to provide essential core services, and we need to find ways to do it at less cost to to taxpayers.”
Malloy’s big ask: $1.5 billion in union givebacks
The single-biggest spending cut in the governor’s new plan hinges on an assumption: that unionized state employees can be convinced to provide wage and benefit concessions worth $700 million next fiscal year, and $800 million in 2018-19.
That is no easy figure to achieve, given that the last estimate from nonpartisan analysts involving the savings from a statewide wage freeze was less than $200 million.
Labor and management have held informal talks for several months now, and Barnes said striking a “mutually advantageous deal” is “the greatest priority for the Office of Policy and Management right now.”
But one of the top labor officials in Connecticut, state AFL-CIO President Lori Pelletier, said Malloy’s chances to getting concessions that large, even as he boosts taxes on the poor and middle class, are slim.
“He’s got to realize it’s dead on arrival,” she said. “Why are they going after the poor? Why are they going after workers?”
Barnes estimated that if concessions are not achieved, at least 4,200 layoffs would be needed. Based on savings estimates developed last spring by the legislature’s nonpartisan Office of Fiscal Analysis, it might take more than twice that number of layoffs to save $800 million per year.
Regardless, Barnes said the “alternative of mass layoffs is extraordinarily difficult for us to achieve” and would be “extraordinarily hard” on both affected workers and on the public services they provide.
Shaking up municipal aid
Perhaps the biggest change in the governor’s new budget is tied to municipal aid.
To help pay for spiking contributions to the state pension fund for municipal teachers – a $1 billion expense now that will grow by more than 33 percent over the next two fiscal years combined – Malloy is proposing to bill cities and towns for one-third of the cost.
That would amount to $408 million next fiscal year and $421 million in 2018-19.
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The administration notes this system would place the heaviest proportional burden on the wealthiest communities. Those districts typically pay the highest teacher salaries, giving their retirees the most generous pension benefits.
At the same time, the administration also would overhaul how Connecticut finances local education, including special education services.
The Education Cost Sharing grant, the state’s largest program for local school aid, would be revised to shift greater resources to poor communities. The state also would reallocate a portion of ECS grants to a new initiative to pick up a much greater share of local special education costs.
The governor’s budget would maintain an existing initiative to share sales tax receipts with municipalities.
Big cities praise local aid realignment
Despite that, Barnes estimated that just 31 out of Connecticut’s 169 cities and towns would see in their state aid grow next fiscal year after factoring in the new pension billing system and education funding changes.
What are the chances the legislature would pass any budget that reduces aid for the overwhelming bulk of communities?
“I appreciate that this is a challenge for a lot of people,” Barnes said, adding Connecticut must accept that, “The days when we can budget by spreading (funds) around to everybody” are over. “I hope we can begin to challenge that do what’s right.”
“We will rise or fall together as one Connecticut,” the governor said in his budget address.
The mayors of two of Connecticut’s largest cities both gave a cautious endorsement to Malloy’s proposal to realign municipal aid.
But both Luke Bronin of Hartford and Joe Ganim of Bridgeport said they still needed to analyze the plan in much greater detail
“The proposal, as I understand it would get us a long way toward addressing those deep structural challenges,” said Bronin, who warned Malloy and legislators last year that the capital city was at risk of fiscal insolvency in the coming years without increased state assistance.
House Majority Leader Matt Ritter, D-Hartford, called it “a good step in the right direction.”
“I’m very pleased the governor’s taken the approach to try to address the problem that we have,” Ganim said, adding that these changes make it “a bold and courageous budget.”
Hospitals also will play a role in how Connecticut finances its cities and towns moving forward.
Malloy wants to give communities the option of levying property taxes on nonprofit hospitals, which currently are exempt from this expense.
The administration estimates this would result in $212 million in property tax levies on the industry.
In return, the state would increase its payments to hospitals by $250 million per year. But because those payments would be eligible for federal Medicaid reimbursement, the net cost to the state would be less than $88 million per year.
The state currently reimburses communities for a portion of the property tax revenues they lose because of nonprofit hospitals tax-exempt status. This payment to cities and towns would be eliminated under the Malloy plan once that exempt status is lifted.
Transportation will have to wait
The governor’s new budget does include some investments in transportation, including 104 new positions over the next two years. Most of those jobs would support capital project planning or would help meet the growing demand for transit services.
But Barnes acknowledged there is nothing to fund the major transportation initiative the governor unveiled two years ago beyond the start-up money that expires in 2020.
Further complicating matters, the administration is projecting a modest deficit in this fiscal year’s Special Transportation Fund, and nonpartisan analysts say the fund will begin running in the red year after year starting in July 2018.
Though the fund has enough reserves to cover shortfalls for a few years, Barnes conceded a long-term solution does not to be found soon.
“We have not yet addressed the solvency of the Special Transportation Fund,” he said, adding that “a day of reckoning” would come in the next few years.
The initial stages of the governor’s long-term transportation program, which run through 2020, largely involved planning and catching up on deferred work. Major capital projects long overdue — such as redesigning the junction of Interstate 84 and Route 8 in Waterbury and replacing the elevated section of I-84 in Hartford — remain in fiscal limbo.
“We don’t have the resources to pay for the mixmaster (in Waterbury,) and we don’t have the resources to pay for the viaduct (in Hartford,)” Barnes said.
“The governor has been very clear we are not interesting in pursuing additional revenues for transportation until such time as a “lockbox” has been put in place,” Barnes added.
More cuts to social services, higher education
Though Malloy hopes to save the most money by cutting labor costs, the budget still cuts $236 million from the level of funding needed to maintain current services next fiscal year.
The new plan reduces income eligibility levels for poor families receiving health care through Medicaid, eliminates $11 million in annual assistance for small hospitals, caps dental benefits provided to poor adults, limits enrollment in an state-funded home care program and would close one prison and four units scattered in other correctional institutions.
But Barnes said the new budget still preserves funding in other social services priorities such as programs to eliminate homelessness.
Connecticut’s public colleges and universities, which have absorbed major cuts in most state budget since the last recession ended seven years ago, would see their block grants reduced, on average by 4.5 percent.
Towns would have to pick up the full cost of the resident state trooper program. Currently municipalities pay 85 percent of the cost for the first trooper and 100 percent for each additional trooper.
