Malloy’s push to avoid taxes, preserve education, spurs more borrowing

While Gov. Dannel P. Malloy pledged to avoid new taxes and preserve education reforms, the legislature's top Republicans charged Tuesday that the governor's new budget dramatically expands the state's hefty credit card balance.

Besides refinancing debt from the last recession and borrowing to prop up municipal aid and support the conversion to Generally Accepted Accounting Principles, the new budget would offer new rules to soften the constitutional spending cap.

The plan also raises about $140 million in new tax revenue by continuing expiring taxes on power plants and other businesses, and by reducing a tax credit for working poor families.

That's according to the Senate and House minority leaders, John P. McKinney of Fairfield and Lawrence F. Cafero of Norwalk, both of whom are weighing bids for governor in 2014.

John McKinney

It's a ''dishonest and disingenuous budget,'' Senate Minority Leader John McKinney charged.

The administration provided advance budget briefings to key legislative leaders and others Monday and Tuesday.

"This is the most dishonest and disingenuous budget I've seen at a time when we are facing $2.5 billion in deficits and increasing unemployment," McKinney said. He was referring to the combined deficits projected for the 2013-14 and 2014-15 fiscal years.

"I expect to see a lot of shifting of resources from one pot to another, and that doesn't solve the problem," Cafero said.

The Norwalk lawmaker also charged that Malloy, who campaigned on a pledge not to use the state's credit card to balance day-to-day operations, wants to do so now in hopes that it will buy time until a state economic recovery rides to the rescue.

"In an attempt to begin budget negotiations in a bipartisan manner, [the Office of Policy and Management] briefed Republican leaders on the proposal earlier today," Malloy spokesman Andrew Doba said.

"It's unfortunate that Senator McKinney and Representative Cafero used that confidential briefing and their ambitions for higher office to serve as an opportunity to leak half-truths about the governor's budget. It may not fit in with their political agendas, but tomorrow the governor is going to present a balanced budget with no new taxes, one that grows our economy and creates jobs."

The task of crafting the next budget "is especially difficult because of the deficit and the tough choices we face," Senate President Pro Tem. Donald E. Williams Jr., D-Brooklyn, said. "Democrats and Republicans have the opportunity to play constructive roles in setting our priorities for the future.  My hope is that we avoid partisan bickering -- simply attacking the governor and his proposal is not helpful -- and build on the bi-partisan cooperation we achieved on the budget last year."

Financing provides $750 million in budget revenue

The governor's objective is complicated by a projected deficit for next year that represents 6 percent of annual operating costs.

A big part of that gap will be closed, Republican leaders said, through a financing scheme to raise an extra $750 million over the next two fiscal years.

That plan includes delaying repayment of $1 billion Connecticut borrowed in 2009 under Gov. M. Jodi Rell to avoid further tax hikes and spending cuts during the recession. Rell and legislators delayed the start of debt payments until the next term, saddling Malloy -- who took office in January 2011 -- with that problem.

Originally scheduled to be paid off in the 2015-16 fiscal year, the debt would be extended at least until 2018 in Malloy's new budget.

"It would be like being two years away from paying off the mortgage on your home, and then refinancing so you could push it back," McKinney said.

Doba declined to discuss specific proposals in the governor's plan, adding that the administration would present them in a media briefing Wednesday morning.

The governor also has struggled with his GAAP initiative, and another $600 million would be raised through financing to kick-start that effort, the GOP leaders said, though the precise method of financing wasn't available Tuesday.

Unlike the modified cash basis system currently used, under GAAP, expenses must be promptly assigned to the year in which they are incurred. Similarly, revenues are counted in most situations in the year in which they were received.

In the context of the state budget, that would end an array of accounting gimmicks that have pushed current expenses into future years and similarly used revenues received in one year to balance the books of the prior year.

If GAAP standards are used, state finances are $1.5 billion in the red. And that number grows annually due to inflation. Malloy and the legislature approved a two-pronged effort in June 2011 to close that margin, but it has bogged down since then.

  • The state would set aside $75 million from surplus in 2011-12 and $50 million this fiscal year to cover inflation and stop the GAAP margin from growing.
  • And another $100 million would be set aside -- starting in the new budget Malloy must unveil Wednesday -- and continuing for 14 more years, to amortize that differential.

But budget deficits in recent years means there's no surplus to make the inflation payments.

And with $1.2 billion in red ink built into the next fiscal year, several legislators have said they won't cut programs just to make payments toward the GAAP conversion.

With more than $19 billion in bonded debt, Connecticut already ranks as one of the most indebted states per capita in the nation.

More municipal aid on the credit card

The administration moved a relatively small amount of municipal aid -- $30 million for road repair grants -- onto the credit card this year. The new budget will double this grant in 2013-14, but keep the expense on the credit card.

Malloy also wants to cancel most of the Mashantucket Pequot grant program, which shares about $60 million in video slot revenues from the state's two casinos with cities and towns.

To offset that cut, Malloy wants to increase a local capital improvement grant program by $60 million. But this program, unlike the Mashantucket Pequot grant, also is financed with bonding.

And one last major change to municipal aid is in the works, though this one doesn't involve borrowing.

The governor announced Tuesday that an extra $50 million would be added next fiscal year to the single-largest grant system, the Education Cost Sharing program. And last week he announced an extra $14.1 million in new funds for an initiative to bolster underperforming school districts.

"We did important work last year... We are going to fund education reform," Malloy said during a tour of a school in Norwalk last week.

But the governor's budget also will funnel about $74 million that currently helps communities pay for non-education programs and move those dollars into local school systems.

Malloy's proposal would end a program that reimburses municipalities for some of the property tax revenue they lose on tax-exempt state land and buildings. The $74 million given to communities through this program will instead go to local schools through the ECS program, in addition to the $50 million increase, according to Republican leaders.

Rewriting the constitutional spending cap

Another controversial wrinkle in the Malloy plan centers on the constitutional spending cap, a budget control Malloy has said he would comply with on several recent occasions.

According to Malloy's budget office, to fall under the cap as it is currently calculated, the governor's budget would need to be cut $1.2 billion below the level needed to maintain current services.

But while Malloy never mentioned he would comply with the cap after its rules had been modified, that is what the governor is proposing, McKinney said Tuesday, though full details of those changes weren't available.

The 1991 General Assembly tried to temper outrage over enactment of the state income tax by drafting a statutory spending cap. Voters would add the cap requirement to the state Constitution one year later by adopting the 28th Amendment.

That cap is designed to tie the annual growth in state spending -- with some exceptions -- either to the growth in personal income or the inflation rate. Exempt areas include debt service, certain pension contributions, aid to poor towns and programs tied to court orders.

But the cap can be circumvented if the legislature and governor see eye-to-eye.

If the governor signs a declaration of fiscal "exigency," effectively declaring a budgetary emergency, the legislature can change the spending rules with the approval of 60 percent of both the House and Senate.

Raising taxes?

Malloy's budget also would raise about $140 million in taxes by extending two taxes set to expire, and by reducing a new tax credit for working poor families.

A new tax on power plants and a surcharge on the corporation levy -- both of which were set to expire next fiscal year -- remain in play in the Malloy budget. The governor has said on several occasions he doesn't consider these to be tax increases, and therefore they don't violate his pledge to propose no new taxes.

The governor also will propose reducing the state's new Earned Income Tax Credit from 30 percent of the federal EITC down to 25 percent.

The state credit, which began in 2011, distributed about $111 million to working poor families last spring. The governor's proposal would reduce the tax benefit by roughly $18 million.

Follow Keith M. Phaneuf on Twitter.

 

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