Deal to trim deficit hits hospitals and businesses, cuts bonuses for senior state workers

State legislative leaders and Gov. Dannel P. Malloy's administration have struck a tentative bipartisan deal to reduce the state budget deficit by cutting aid to hospitals, ending longevity bonuses to senior, non-union state workers and scaling back business tax credits, sources said Monday.

The deal would order other cuts and launch new income tax fraud recovery initiatives, including a focus on the new credit for working poor families.

But it would preserve a small rate increase for the community-based, private, nonprofit agencies that provide the bulk of state-sponsored social services.

The tentative plan, coupled with emergency spending cuts ordered by Malloy last month, would cover the entire $365 million deficit projected by the administration for the fiscal year that ends next June 30.

It would cover all but $50 million of the $415 million shortfall projected Dec. 1 by state Comptroller Kevin P. Lembo.

Neither Malloy's budget office nor legislative leaders from either party had any immediate comment on the deal, reportedly reached early Saturday.

Rank-and-file representatives were expected to get their first look at details of the deficit-mitigation plan in closed-door meetings late Monday afternoon and early evening.

Senate caucuses also were expected to review the plan Monday, with both chambers meeting in special session Wednesday to consider its adoption.

Hospitals in line for a big hit

Sources close to the negotiations said one of the largest proposed cuts centers on payments to most of the state's 29 acute care hospitals.

When Malloy released rough numbers -- but no details -- behind his deficit-mitigation plan earlier this month, it included a $122 million cut to the Department of Social Services.

Sources said that actually involves reducing both supplemental Medicaid payments to hospitals, as well as funding given to help these facilities treat uninsured and underinsured patients.

But if the state reduces payments in this area, it would only keep about half of the $122 million savings. That's because reducing this spending, in turn, would trigger the loss of more than $58 million in federal assistance sent to Connecticut through the Medicaid program.

A spokeswoman for the Connecticut Hospital Association had no immediate comment Monday morning.

Though it didn't comment early Monday, the administration has said in the past that hospitals have gained significant revenue since late 2010 when the state brought its health care program for adults without minor children under the federal Medicaid umbrella.

Enrollment in the Low Income Adults program has shot up over the past two years from about 47,000 to more than 83,000. LIA serves adults who earn less than 56 percent of the federal poverty level.

Most of the reductions ordered or proposed to date by the Malloy administration focus on health care and social services.

But sources said the deficit-mitigation plan would not affect the rate increase built into the current budget for the private, nonprofit social services community.

The state, which spends roughly $1.5 billion annually contracting with nonprofits to serve the disabled, the mentally ill, abused children, drug addicts and others in need, included a 1 percent rate hike in the budget. But because it doesn't begin until Jan. 1 -- halfway into the fiscal year -- its effective value this year is just 0.5 percent.

Cutting tax credits equals tax increase?

Despite a strong, last-minute appeal from the state's chief business lobby, legislators and the administration also agreed on a plan to scale back the level of tax credits businesses can claim.

Full details were not available, but sources said limits were placed on credits related to film production and insurance costs.

The deal also reduces the current cap on corporation tax credits, though it was unclear how far it was scaled back. Businesses currently cannot offset more than 70 percent of their corporate tax liability in one year with credits, regardless of how much the credits are worth.

Scaling back these credits "will undermine business confidence in the state as a place to grow and create jobs," the Connecticut Business & Industry Association wrote in a recent online policy newsletter, warning it could hinder job growth efforts.

"Ironically, the change would penalize the very businesses that have chosen to increase their investments and stake their futures in Connecticut."

Savings from the tax changes were expected to be a relatively small portion of the overall deficit-mitigation plan.

Longevity Pay and Tax Fraud

Another controversial component, according to sources, involves ending the bonuses paid twice per year to veteran state workers, provided they are not in a union.

Longevity pay has been an increasing source of controversy at the Capitol since the last recession.

Unionized employees, under a concession agreement ratified in August 2011, forfeited their fall 2011 longevity payment. That agreement also makes all workers hired after October 2011 ineligible for longevity pay, regardless of their collective bargaining status.

But non-union personnel have continued to receive them. According to Lembo's office, just over $6.1 million in total longevity payments were distributed this fall among 3,200 non-union workers.

Republican minorities in the House and Senate have been pushing for the state to ramp up efforts to stop tax fraud.

Though details were not available, sources said the plan assumes more revenue this fiscal year by clamping down on income tax fraud this spring.

And that effort will include a focus on the new state earned income tax credit.

More than 181,000 filers shared a total of $110 million in state income tax refunds made possible by the credit, which is patterned after the federal EITC and cannot exceed 30 percent of the federal benefit.

Technically families earning up to $49,000 per year can qualify for a credit, depending on the number of children they have. But most EITC recipients earn less than $20,000.

The average state EITC payment is roughly $500. Though its stated purpose is to help poor families save more, advocates say a significant portion is spent on energy bills, groceries, clothing and other basic needs -- thereby stimulating the local economy.