If labor talks fail, Malloy’s choices are few and difficult

Throughout the 2010 gubernatorial campaign, Dannel P. Malloy repeatedly charged that his Republican opponent, Tom Foley, would slash aid to towns and shred the social safety net to balance the state’s budget. Unless state unions agree to massive savings in labor costs soon, Malloy may have little choice but to follow the course he decried.

In recent weeks, Malloy has warned that failure to reach an agreement with the unions could result in “thousands and thousands” of state workers’ being laid off. But it would take layoffs of enormous and likely unachievable scope to even come close to the $1 billion in labor savings he’s counting on to erase next year’s budget deficit.

In addition to that $1 billion, Malloy’s budget includes $750 million in program cuts and $1.5 billion in tax increases to overcome a deficit estimated at $3.2 billion to $3.67 billion in 2011-2012. If the labor savings don’t materialize, Malloy would find his options limited by contractual obligations and sheer math:

  • 25 percent of annual spending is tied to salary and benefit accounts. These expenses approach 28 percent, or more than $5.9 billion, after considering block grants to public colleges and universities, most of which involve personnel costs. Without a concession deal, these expenses only can be reduced quickly and significantly through layoffs or a retirement incentive program. But both options entail significant short-term costs that limit their value in solving an immediate budget problem.
  • 11 percent, or nearly $2.2 billion, involves debt service on bonds, a legal obligation that must be met.
  • 3 percent is budgeted for equipment purchases and other expenses, which Malloy already has reduced and could seek to cut further, but this involves total spending of less than $600 million this year.

That still leaves nearly 60 percent of the state budget.

But $2.8 billion, or 15 percent of the entire budget is for grants to cities and towns, two-thirds of which are education payments Malloy promised not to reduce during the last campaign.

And the remainder–over $8.5 billion–is budgeted for “other grants” and other “current services” in budget lexicon. In actuality, the overwhelming bulk of these dollars is targeted for health care and social services. More than $4.6 billion, or another 25 percent of the entire budget is tied to Medicaid, welfare for single mothers and payments to hospital for treating the uninsured.

And the governor, who spent much of the campaign promising “not to shred” the social service safety net, already has proposed eliminating that last item.

Roy Occhiogrosso, Malloy’s senior adviser, said “the governor has upheld every single one” of his campaign promises, issuing a budget proposal that called for “true shared sacrifice. If he can’t get the framework, then he has no choice but to propose more spending reductions.”

If Malloy is going to find $1 billion in further cuts outside of labor–or even several hundred million dollars in reductions in the event a smaller concession savings deal is struck- municipal aid and the safety net are the only large pools of money left to tap.

“We’re telling municipal officials to use the figures that the governor has already proposed in their budgets,” James Finley executive director of the Connecticut Conference of Municipalities, said Friday, adding that most communities must adopt their local budgets by mid-May, well before the state’s fiscal drama is expected to be resolved.

Finley made no secret of the strategy behind that advice. “We want to keep the pressure on the governor and the legislature to adopt the plan that’s already been proposed.

Municipal officials have been particularly hopeful about the Education Cost Sharing program, the single-largest state grant, since last fall, when Malloy promised that if elected, he would keep ECS funding at its current $1.89 billion level. And that was despite the loss of $271 million in emergency federal aid that propped up the ECS grant this year, but vanishes in 2011-12.

Another place to cut, if the governor ultimately proposes further reductions, might be non-education grants. These total about $900 million, and while he has stressed the importance of not passing the state’s fiscal problems onto communities–both during the campaign and since taking office–he made no direct pledge to spare these grants.

Still, non-education aid has remained largely flat for much of the past decade. And the two largest programs — one that shares casino revenues with towns and another that reimburses municipalities for a portion of the local taxes they lose on exempted properties–were cut by over $100 million in total during the last two years of Gov. M. Jodi Rell’s administration.

There are complications if Malloy tries to cut social services and health care as well.

Nearly $4.4 billion is spent under the federal Medicaid umbrella alone, and most of that spending triggers between 50 and 60 percent reimbursement from Washington. In addition, the money is provided under entitlement programs, meaning that once the eligibility rules are set for a particular service, Connecticut must provide it to all eligible citizens, regardless of the cost.

Rule changes can be made, with federal approval, and past administrations have cut Medicaid spending even at though it cost them federal revenue in turn. But the governor has criticized Rell for not pursuing more federal aid.

Still, there are hundreds of millions of dollars worth of social service and health care programs that the state pays for without Washington’s help.

The problem here, though, is that so many characterize the safety net Malloy pledged to protect, such as services for the homeless and AIDS patients, vocational programs for the developmentally disabled, and teen pregnancy prevention.

Sen. Toni Harp, D-New Haven, co-chairwoman of the budget-writing Appropriations Committee, said her panel’s budget plan, due in late April, “is already going to make cuts we wouldn’t normally recommend,” and that’s based on the assumption that the $1 billion in labor concessions is achieved.

Harp has said the social service programs Connecticut funds without federal help are vital nonetheless, having been launched despite the lack of Medicaid assistance because a clear need was identified.

Cutting deeply into this area “would be ugly,” she added.

And Terry Edelstein, president of the Connecticut Community Providers Association, one of the largest coalitions of private, nonprofit social service agencies, said there are complications to cutting even non-Medicaid programs. For example, state law requires minimum staffing levels for group homes and certain other services for the developmentally disabled. “Beyond the fact that the care would deteriorate, you can’t just reduce staff just because of a budget cut,” she said.

The governor made clear this week that he likely would use layoffs to provide some of the cuts necessary if concessions aren’t achieved, and that the projected annual savings is $100 million for every thousand state employees.

But even if were Malloy to lay off an unprecedented 5,000 employees, more than 1/10th of the workforce, for example, he wouldn’t achieve $500 million in savings in the first year of his new budget, due to contractual obligations.

Several factors typically cut the first-year savings in half, according to an Office of Legislative Research report.

  • Depending on the union involved, workers must receive two to eight weeks’ notice.
  • Because the first two weeks of all state workers’ salary is withheld and not paid until they end employment, that expense also must be met.
  • Accrued sick and compensatory time must be paid.
  • Payments to the Unemployment Compensation fund increase
  • Pension fund contributions, which average 39 percent of workers’ salaries according to the Office of Fiscal Analysis, are fixed for the year based on an actuarial study prepared the prior fall.

Malloy could avoid some or all of these hard choices, even if labor talks fail or come up short, by increasing taxes beyond the $1.5 billion mark he has proposed.

But the governor not only has ruled that out, and even has begun to hint that if labor concessions aren’t sufficient, he might not want to boost taxes that much.

When asked last week about the $1.5 billion tax hike and its likely appearance in any revised budget, Malloy interrupted:

“At the most,” he said.

Why do you make that point right now?

“I’ve got to keep in balance the concept of shared sacrifice, so what I’m saying is we are not going to ask the taxpayers for any more money than that. In a reconfigured budget, I’m not guaranteeing you I’m going to ask for that,” he said. After a pause, he added, “I’m not saying I’m not going to, but I’m not taking things off the table.”

In good fiscal times, Connecticut has upgraded its expectations for revenue by more than $500 million simply based on the state income tax returns filed in mid-April.

The last state tax forecast for this year from the legislature’s nonpartisan Office of Fiscal Analysis, issued March 25, was $59.2 million above the level Malloy used when he submitted his proposal on Feb. 16.

Malloy’s budget director, Office of Policy and Management Secretary Benjamin Barnes, acknowledged that while the potential for further modest revenue growth, what it represents for the future isn’t clear.

Citing political unrest in North Africa and the Middle East as well as the recent Pacific tsunami’s effects on the Japanese economy as examples, Barnes added that “there are a lot of reasons to mitigate your optimism” for 2011-12.

One tax proposal that could be a target for change is an area that many legislators view as an expenditure: Malloy’s proposal to establish a state earned income tax credit. Designed to help working poor families save money, the governor’s plan would allow them to claim a state income tax credit equal to up to 30 percent of a similar federal credit. The administration estimates this would cost about $100 million annually.

In an alternative budget, Malloy could seek to reduce that percentage and still retain the overall program.

Senate Majority Leader Martin M. Looney, D-New Haven, one of the legislature’s most vocal advocates for a state EITC, conceded Friday that was a distinct possibility, though he added he remains optimistic the credit would be created this session in some form.

Why, if labor savings aren’t achieved, is Looney concerned the EITC might be scaled back? “Because, I think our caucus for the most part feels that the level of taxes the governor already has proposed is an appropriate one,” he said, adding that holding that line would lead to a myriad of painful choices. “But we’re still hoping it won’t come to that.”

Mark Pazniokas contributed to this story.