Serious deficit awaits Malloy — or his successor — after 2014

After reminding people almost unceasingly for two years that he inherited — not created — the largest budget deficit in state history, Gov. Dannel P. Malloy struck a different tone this year when he presented his latest spending plan.

“It no longer matters who caused those problems,” the governor said in his February budget address. “What matters is that, together, we started to fix them.”

And more importantly, Malloy added, Connecticut’s finances were stable once again. “The budget I’m proposing today keeps us firmly in balance. Slowly, deliberately, and sometimes painfully, we’re building a more sustainable future for Connecticut.”

But that “sustainable future” lasts only through the next state election — and possibly not even that far.

If Malloy’s latest plan is adopted, his own numbers project that a deficit topping $680 million would await him — or his successor — in the first budget of the next term. By the second year the red ink approaches $800 million. And if the economy doesn’t heat up dramatically before then, those deficits get worse.

Republican legislative leaders already argue that the budget math leads unavoidably to a significant tax increase — one that Malloy is trying to postpone until after the 2014 election.

* Taxes

After signing an unprecedented $1.5 billion increase in 2011, Malloy would endanger his chances of re-election if he ordered another major increase this term, according to many political observers.

Republicans also note that government typically hasn’t closed shortfalls of this size with minor tax hikes on items like cigarettes, liquor or gasoline.

Only two taxes, income and sales, raise more than $800 million per year.

Malloy could tackle those projected deficits by reducing spending. But with the surging costs of Medicaid, pensions and retiree health care devouring more of the budget even in good times, cuts aren’t an easy prospect. When deficits swell, these obligations push transportation, municipal aid, education and other priorities out of the picture.

* State Employee Concessions

Similarly, the governor called upon his labor base to accept a wage freeze, benefit restrictions and other givebacks two years ago — a deal unions initially rejected before adopting it on a second vote. And because unions were exempted from layoffs, Malloy has no leverage to seek more concessions now, even if there were no political price.

But that protection expires in the first budget after the election.

And some in the governor’s labor base, still smarting from the most recent concessions deal and wary of another, already are pressing for higher income and corporation taxes to stabilize finances for the long term.

Administration officials counter they have more than enough time to address the long-range red ink. And the governor’s fellow Democrats add that Republicans are long on criticism but become noticeably silent when it comes to alternatives.

Still, having painted himself fiscally into a corner with his concessions deal, and faced with a sluggish recovery and a political imperative to avoid more tax increases, Malloy now has employed many of the same gimmicks he decried as a candidate and as a new governor.

Raids on transportation funding; borrowing and debt refinancing; other one-time revenues; and a major exception to the constitutional spending cap all are part of a larger effort to postpone the burden of the 2011 budget deficit.

Fix the budget ‘once and for all’ 

“This is our time to do what we were elected to do, to fix what’s broken once and for all,” Malloy told legislators five weeks after taking office in 2011.

That was, perhaps, the biggest promise offered by the new governor’s “shared sacrifice” plan for closing a nearly 20 percent gap in state finances: uncompromising forward progress.

It might take time to recover, but government wouldn’t make things worse with gimmicks that saved a dollar today but cost a buck-and-a-quarter tomorrow. Fiscal shortcuts would be a thing of the past.

“I believe (people) are willing to make sacrifices, if they understand why they’re being asked to do so, and if they believe that Connecticut is serious about fixing what’s broken,” Malloy said.

The governor and his fellow Democrats in the legislature’s majority have taken plenty of political heat over the last two years, both for the tax increase and for the concessions deal.

But officials hoped that this approach, coupled with a cooperative economy, would leave the state rolling in budget surpluses by now.

That didn’t happen.

Malloy now looks ahead to the last two fiscal years of his term with projected annual shortfalls of $1.2 billion and $1.3 billion, respectively. Each represents roughly one-third of the $3.7 billion annual deficit Malloy had to close two years ago.

Factor in the latest negative revenue forecast released this week, and the shortfalls in the next two fiscal years top $1.4 billion and $1.5 billion, respectively.

Borrowing and ‘kicking the can down the road’

With the re-election campaign nearing, critics say Malloy no longer is committed to painful-but-necessary fiscal medicine, but instead embraces budget maneuvers to delay resolving much of the deficit until after the November 2014 election.

Both as a candidate and a new governor, Malloy had blasted the practice of running government on the credit card.

“We borrow not one penny for operating expenses,” he told lawmakers in February 2011. “Too much borrowing over the years for ongoing expenses is one of the reasons we’re in the bad shape we’re in.”

Since then, though, the state’s cash pool has dipped dangerously low at times, forcing Treasurer Denise L. Nappier to transfer funds temporarily from capital programs to pay bills. And the emergency reserve holds only about one-half of 1 percent of annual operating expenses.

The governor’s new budget would extend recent tax increases on businesses and power plants and trim a tax credit for working poor.

It also would impose big spending cuts on hospitals, part of $1.8 billion in spending reductions from the level needed to maintain current services over the next two fiscal years combined.

But rather than seek further tax increases or spending cuts to strengthen the cash pool, Malloy would borrow $750 million and refinance a $1 billion operating debt from 2009.

The interest costs on those moves, which total about $217 million, would be delayed until the next gubernatorial term.

Malloy’s new budget also would move $90 million in grants to cities and towns from the operating budget onto the credit card. 

Borrowing isn’t the only gimmick in Malloy’s latest plan. It also would strip one-time dollars from a medical research fund and offer amnesty to tax delinquents in hopes of getting them to settle their accounts. 

And Malloy, who repeatedly accused Gov. M. Jodi Rell during the 2010 gubernatorial campaign of “kicking the can down the road,” now faces similar charges.

“The governor is continuing to push our problems off to a future date — with interest,” Senate Minority Leader John P. McKinney, R-Fairfield, said. “It is something he campaigned against, something he politicked against, and yet he is doing it.”

“The very premise upon which this budget was built was false,” added House Minority Leader Lawrence F. Cafero, R-Norwalk.

Both Cafero and McKinney are weighing bids for governor in 2014.

But Malloy’s fellow Democrats counter that his difficult budget choices pale in comparison with the fiscal shenanigans of his Republican predecessor.

Rell had infuriated Democrats in 2009 by proposing a two-year budget that, according to nonpartisan analysts, was a whopping $2.7 billion out of balance.

Only after lawmakers overrode a veto and enacted a new law requiring their respective budget staffs to reach consensus on the deficit did the Rell administration — four months later — concede its budget was way out of balance.

“We labored for months just to get the administration to recognize the deficit,” Senate President Pro Tem Donald E. Williams Jr., D-Brooklyn, said. And GOP legislative leaders, who now scrutinize the sustainability of Malloy’s budget, “were quiet while their governor pretended a $2 billion deficit didn’t exist.”

Siphoning off gas taxes and bursting the spending cap

Rell’s heel-dragging on facing the deficit was just one of the budgetary issues for which Candidate Dan Malloy blasted her on the campaign trail.

Another was hers — and the legislature’s — record of boosting fuel taxes and then repeatedly siphoning off much of the revenue to support non-transportation programs.

But Malloy’s latest budget imposes one of the largest fuel tax hikes in state history.

When the wholesale tax on gasoline and other fuels jumps by one-sixth on July 1 — according to a statute adopted in 2005 — the price of gas will rise between 3 and 4 cents overnight, based on current wholesale prices, while the state takes in an extra $60 million per year.

Administration officials note that Rell signed that fuel tax increase into law in 2005, and Malloy continues to insist his budget doesn’t raise taxes. 

But Malloy would shift $75 million from transportation to non-transportation programs at the same time the state collects an extra $60 million at the pumps. And he still would spend $88 million less on transportation next year than the level needed to maintain current services. 

That isn’t the only fiscal sleight-of-hand in the governor’s budget that makes Malloy’s claim of not raising taxes a hollow one, Republican leaders said.

The governor would extend tax increases that otherwise would have expired in the next fiscal year, including:

  • A 20 percent surcharge on the corporation tax, raising an extra $44 million next year;
  • A cap on an insurance premium credit for businesses, raising an extra $27 million;
  • And a levy on power plants, raising $70 million.

In addition, Malloy’s budget also would reduce the new state Earned Income Tax Credit from 30 percent to 25 percent of the federal EITC. That would cost working poor families about $21 million on their state income tax refunds next April.

All totaled, taxpayers would pay an extra $222 million next year, according to the Malloy budget.

But perhaps the governor’s biggest retreat from the fiscal high ground involves the constitutional spending cap.

After insisting repeatedly this past winter that he would live within the cap system, he proposed a budget that shatters the limit by $466 million next fiscal year and $691 million in 2014-15.

In the cap’s 22-year history, only one new budget ever began with as large of a cap exemption. The 2007-09 biennial budget Rell signed surpassed cap limits by $497 million in its first year and by $690 in its second.

Malloy still insists his proposal complies with cap rules, albeit new rules he has asked the legislature to approve. But Cafero and McKinney called it a prime example of the governor shelving his commitment to responsible finances in order to enhance his chances at re-election. 

“We were under the belief this governor wouldn’t sign onto things like that,” said Cafero, who recently called Malloy’s fiscal maneuvers a “tax increase guarantee” in 2015.

“Well, first off, it’s flattering that both McKinney and Cafero expect the governor to be re-elected,” Malloy spokesman Andrew Doba said. “Clearly, they recognize that his leadership has been instrumental in addressing many of the critical issues facing the state. That said, what’s also pretty clear is that they will say literally anything to distract from the fact that they have no budget plan.”

House Speaker J. Brendan Sharkey, D-Hamden, also said recently that the GOP criticism means little, since Republicans have offered no alternatives to keep finances in balance.  

During tough fiscal times, “the political tendency is to run away … and not make the tough decisions,” he said. “That’s what you saw.”

“If the Republicans don’t produce their own budget proposal, I think they will have marginalized themselves and revealed they don’t have the answers,” Williams said.

Both Sharkey and Williams said Malloy makes some “difficult choices” in his new budget but nonetheless has moved state government far down the road toward greater fiscal responsibility.

Doba added that the administration continues to rein in spending with a budget “that contains no new taxes” and “continues the investments that will reinvent our economy. Leadership is about laying out priorities for the state, and getting them done. So far, the Republicans haven’t done that.”

Gambling on a big recovery in 2014-15

Still, it isn’t just Malloy’s Republican rivals who question the soundness of his latest spending plan.

Among the economic assumptions the governor used in that plan are that state unemployment, which hasn’t dropped below 8 percent since the recession ended, will average 7.4 percent next fiscal year, and 6.0 percent in 2014-15.

Personal income in Connecticut would have to grow by 11.5 percent in total over those two years.

“It’s very hard to see how the state could achieve that level of income growth,” said economist Fred V. Carstensen, who heads the University of Connecticut’s economic think-tank.

Carstensen cited a recent article by the Hartford Business Journal, which noted that Connecticut’s personal income growth ranked second worst in the nation last year. The 2 percent growth recorded by the U.S. Bureau of Economic Analysis was exceeded by every state except for drought-plagued South Dakota.

“The assumptions are very aggressive,” said Peter Gioia, chief economist for the Connecticut Business & Industry Association, who said he expects the state’s economy to grow — albeit probably not at that pace.

Limited Options?

Malloy’s budget chief, Office of Policy and Management Secretary Benjamin Barnes, said that while the governor’s budget does bank on considerable economic growth starting by July 2014, the administration hasn’t put all of its fiscal eggs in one basket.

Though the administration is blocked from laying off most unionized state workers for two more fiscal years, it continues to look for other ways to make government leaner and more efficient.

“I see state government as being a long way from being optimally run, from providing the best services in all situations at the best quality price,” he said.

But the Democratic governor’s Republican critics remain skeptical.

“This governor continues to gamble that the economy will turn around in a big way, that revenues will come in soon by the busloads,” Cafero said.

Shying away from more taxes

But it’s no longer just Republicans who are questioning the soundness of Malloy’s fiscal approach. The governor also is starting to hear from some supporters.

“Our members remain active and working for a more progressive tax system,” attorney Daniel Livingston, chief negotiator for the state employees’ unions. “There has been some success moving in that direction, but we feel there is a long way to go.” 

The state unions comprise a big part of Better Choices for Connecticut. This coalition, which also features several nonprofit advocates for children, the poor and disabled, has issued several statements this spring challenging Malloy’s resistance to tax increases — and specifically his hesitancy to boost state income taxes on the very wealthy.

The 2011 tax package the governor signed did broaden the income tax system from three rates to five. But the top marginal rate rose only slightly, from 6.5 percent to 6.7 percent.

“I do not believe we should punish success,” he told lawmakers in his 2011 budget address.

Malloy, who was mayor of Stamford for 14 years through 2009, has a strong sense that Connecticut’s tax policy should reflect the need to compete with neighboring states for the enormous wealth of Fairfield County’s businesses and residents. For the huge pocket of wealth centered on Wall Street, Connecticut’s competitors are New Jersey, westernmost Massachusetts, New York City and its closest suburbs.

New Jersey’s top marginal rate is just under 9 percent. Massachusetts has a flat rate of 5.3 percent on most earnings, but it taxes short-term capital gains at 12 percent, forcing many of its high-end earners to pay more than they would in Connecticut.

Malloy was particularly wary of New York state in 2011, when officials there decided to lower their top rate to 6.85 percent. But budget problems have since forced New York officials to maintain the top rate of 8.8 percent.

Given that development across the border, New Haven Democrat Martin M. Looney, the Connecticut Senate’s majority leader, introduced a bill to raise the income tax rate to 6.9 percent on earnings above $500,000 for couples and $250,000 for individuals.

“We will, I think, need some additional revenues to have a balanced budget, and I’ve always believed we should have more progressivity in our income tax,” Looney, who represents one of the state’s poorest cities, told The Mirror when he proposed the tax in February.

“The governor believes the taxes approved in 2011 are adequate to fund our government in reasonable economic times,” Barnes said. But he quickly added that one could argue Connecticut currently is not in “reasonable economic times.”

So are spending cuts to social services and hundreds of millions in new borrowing the best way to go?

“Clearly we had to make some difficult choices,” Barnes said. “And I’m not going to downplay the impact of those.”

Candidate Malloy vowed repeatedly in 2010 that “we’re not going to shred the safety net” to solve the budget crisis, and his first two-year spending plan kept that promise.

But since then Malloy has proposed some reductions to social services. And the governor’s Democratic allies in Connecticut’s largest cities say the safety net can’t absorb much more without showing signs of “shredding.”

“This economic contraction is making poverty hurt like never before, and this budget isn’t doing enough to offset that,” said Sen. Toni Harp, another New Haven Democrat.

Harp, who co-chairs the legislature’s Appropriations Committee and is running for mayor of the Elm City, said the social services safety net that Malloy vowed as a candidate not to “shred,” now is starting to show some big holes.

Malloy latest budget plan would slash aid to hospitals to offset the cost of treating uninsured patients. It also would eliminate Medicaid coverage for thousands of poor parents with the expectation that they would get private coverage as part of federal health reform — a prospect many social services advocates call unrealistic.

Wade Gibson, a policy analyst with Connecticut Voices for Children and an active member of the Better Choices coalition, said Malloy’s efforts to reverse the state’s long-ignored failure to save for the retirement benefits it owes workers is laudable.

Connecticut ranked dead last among all states in 2011 in an assessment of bonded debt as well as unfunded retirement benefit obligations, owing $50,900 for each taxpayer.

The second-worst state, Illinois, had per capita debt of $38,500.

And Gibson said the governor’s reluctance to raise taxes on the wealthy, coupled with the push to bolster pension savings, is putting the squeeze on programs for the state’s poorest families.

Federal officials blocked a Malloy administration plan last winter that would have ended health care for an estimated 13,000 poor Connecticut adults without minor children. The governor came back in February with a proposal to end Medicaid coverage for approximately 37,500 poor parents served by the state’s HUSKY program.

Critics of the cut warned that many parents would likely forego coverage for their entire family and that it could leave their children less likely to have insurance or to get medical care.

“We have a solemn responsibility to our state employees,” Gibson said. “But we also have a solemn responsibility to the children of this state. We can’t take care of both of them as fully as we ought to unless we find a way to increase the state’s revenues.”

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Part I, “Promises,  gimmicks and a historic shortfall.”

Part II, “Major concessions deal undermined by bad guesses, secrecy.”