Senate budget debate offers opposing visions of fiscal future

The state Senate sent a $37.6 billion biennial budget to Gov. Dannel P. Malloy’s desk Monday night after nearly seven hours of partisan debate that offered opposing visions of Connecticut’s fiscal future.

Majority Democrats described it as a responsible plan that meets a rising demand for social services, preserves municipal aid and builds on the education reforms approved last year  — all while avoiding increased taxes.

Republicans countered that the two-year plan features hundreds of millions in new taxes and is riddled with fiscal gimmicks that will produce another fiscal crisis in the near future.

The debate was a synopsis of campaign talking points for 2014, when Malloy is up for re-election to a second term, possibly opposed by the man who delivered the GOP’s closing argument, Senate Minority Leader John McKinney, R-Fairfield.

The Senate minority said that while the plan officially spends $18.6 billion in the fiscal year beginning July 1 and $19 billion the next, in reality, the biennial total is more than $6.3 billion greater.

That’s because it relies on a new method of reporting Medicaid spending, an interpretation that shifts more than $2.2 billion out from under the constitutional spending cap next year and about $6 billion over the biennium.

The new budget also launches a Keno lottery game and delays one key element of Malloy’s promised conversion of state finances to Generally Accepted Accounting Principles.

The Senate adopted the measure 19-17, with three Democrats joining all 14 Republicans in opposition.

“At every step this budget is a responsible one,” said Senate Majority Leader Martin M. Looney, D-New Haven. It funds key priorities including health care, education, and aid to cities and towns, he said.

“I believe this budget will satisfy the needs of the people of this state,” said Sen. Toni N. Harp, D-New Haven, co-chairwoman of the Appropriations Committee.

But while Democrats described the plan as a responsible, cost-efficient plan that doesn’t overburden taxpayers as the economy gradually recovers, Republicans argued it overspends and overtaxes a state still reeling from the last recession, setting state finances on a collision course with a big deficit in the next few years.

“You’re asking for serious fiscal trouble and everyone ends up being a loser,” said Sen. L. Scott Frantz, R-Greenwich.

“We’re setting up the next budget cycle … for a terrific hit,” added Sen. Len Fasasno, R-North Haven, “and no one seems to care.”

Malloy, a Democrat, told reporters during a conference call that he intends to sign the budget for the coming fiscal year that begins July 1.

“This budget, like all budgets, is not perfect. Compromises have to be made, and no one ever ends up getting everything that they’d like or agreeing with every provision,” Malloy said.

“I think that if you take a step back and look at the final product, this budget continues to move Connecticut forward in a big way,” he added. “Is this perfect? Not by a long shot.”

A shattered spending cap?

A federal program offered in cooperation with states, Medicaid helps pay for health care for the poor and disabled and nursing home services for the elderly.

Next fiscal year, that cost amounts to about $5.3 billion. To offset that, the state expects about $3 billion in federal aid.

Rather than post the first number as a state cost, and the second as revenue, the new budget simply subtracts those amounts from the state’s $5.3 billion cost, and records the difference as a “net appropriation” of $2.3 million next year. 

With this approach, more than $2.9 billion in Medicaid spending comes off the state’s books next year, and another $3.4 billion follows in 2014-15.

Otherwise, the proposed budget would far exceed cap limits, and would have required a 60 percent vote of approval in both chambers to pass.

Democrats, who control both chambers, conceded weeks ago they were struggling to hit the 22 votes needed in the Senate. But they also noted most other states use the “net appropriation” approach to budget for Medicaid.

Senate Republicans tried unsuccessfully to amend the bill to reverse the new interpretation of Medicaid spending, arguing the Democrats’ approach ignores the intent of voters.  

“There was a sacred deal made with the people of Connecticut,” said McKinney, the GOP leader. He reminded senators that 80 percent of voters ratified the spending limit amendment in 1992. “We have officially said the spending cap does not exist in the state of Connecticut, that this legislature can ignore the Constitution whenever it wants to.”

The new Medicaid interpretation greatly changes how the next budget might be viewed.

Based on how Medicaid spending currently is counted, the budget grows by more than 9 percent over two years. Under the new interpretation, it grows by 6 percent over the biennium.

And the plan falls under the cap by $12 million next fiscal year.

Senate President Pro Tem Donald E. Williams Jr., D-Brooklyn, told Capitol reporters shortly before the budget was adopted that this change is long overdue. By having to count all federal assistance as spending for cap purposes, state officials have been forced too often to under-fund education, municipal aid and other priorities besides health care.

“Finally taxpayers are going to get their fair share of federal funding without risking the crushing out … of other vital services” from the budget, Williams said.

The three Democrats to oppose the plan were Paul Doyle of Wethersfield, Gayle Slossberg of Milford and Joan Hartley of Waterbury.

“I’m concerned about the level of spending,” Doyle said.

Slossberg also expressed concern about whether this budget would keep state finances in the black down the road. “The issue has always been the sustainability,” she said.

But Hartley rejected one of her party’s central arguments about the new budget: that the new spending cap interpretation was essential to provide Connecticut with its fair share of federal funds.

The existing spending cap system allows the state to exceed the cap legally, whether it’s to spend new federal dollars or for any other purpose. In fact, the 2005 legislature and then-Gov. M. Jodi Rell legally exceeded the cap to spend new federal aid on nursing homes.

But that requires the governor to sign a declaration of fiscal exigency — effectively, to declare a budget emergency. It also requires the 60 percent vote in both chambers.

“I am not comfortable with the taking of billions of dollars off the budget” and out from under the cap, said Hartley, who served in the House when the cap was created two decades ago.

“It’s not about us leaving federal dollars on the table,” she said, adding that the cap is designed to force state officials to make tough budget choices, or to be held accountable to the voters should officials choose to exceed the cap. “It’s about what do we prioritize.”

Education, town aid boosted

The new budget takes several steps to expand the education reform initiatives enacted last year, including an intervention program for the lowest-achieving schools, enhanced teacher evaluations that tie student performance to tenure and dismissal decisions and an initiative to have students spend more time studying nonfiction materials.

Public colleges and universities also received more funding.

The University of Connecticut’s operating grant of $205 million drops by $2.6 million next year. But it receives a $27 million boost in 2014-15 to add staff for its “Next Generation” initiative to expand science and engineering programs to begin to boost enrollment by 30 percent.

The merged system that includes four state universities and a dozen community colleges gets an extra $27 million over the new biennium, much of which will go toward mandatory pay increases for unionized staff. Some funding was also provided to hire additional faculty and counselors.

The new budget largely preserves the state’s $3 billion-per-year aid package to cities and towns. A town-by-town breakdown was not available Monday.

Nearly two-thirds of all municipal aid is funneled through the Education Cost Sharing program, the principal grant to local school districts, and that jumps by 2 percent, or $152.2 million in total over the next two years.

Almost all of that additional funding is directed at the 30 lowest-performing districts, Malloy said.

But the new budget does use the state’s credit card to protect overall town aid.

The budget ends a program that gave municipalities a $90 million-per-year share of state sales and real estate conveyance taxes.

That largely was offset by annual increases of $30 million in road repair aid and $56 million for other local capital improvements.

But both of those increases involve grants that are financed with borrowing.

The final budget also does not implement Malloy’s proposal to end the municipal property tax on motor vehicles in 2014-15.

Cities and towns stood to lose more than $600 million per year, and legislators balked at taking that step now.

Taxes, raids and gimmicks

Though the governor has insisted since February that this budget would contain “no new taxes,” there are several changes that will affect taxpayers’ wallets in the new budget.

Three taxes set to expire in the next biennial budget will continue longer than expected. These involve a levy on electricity generators, a corporation tax surcharge and a cap on insurance premium credits.

These changes would raise an extra $88.5 million next year and $101 million in 2014-15.

The new budget imposes a two-year moratorium on the state’s film production tax credit program, costing production companies $6 million over the next two years.

Connecticut’s working poor would lose $21 million next fiscal year as the state Earned Income Tax Credit shrinks by one-sixth. Half of that credit reduction would be restored one year later.

Hospitals argue they are facing the largest tax hike in the budget, worth about $400 million over two years.

Since mid-2011 they’ve been paying a provider tax worth $350 million per year. But the state had been reimbursing hospitals for all of those dollars, using the tax as a mechanism to qualify for more federal health care assistance.

But this new budget reduces overall aid to hospitals by more than $500 million over two years, including about $400 million in tax reimbursements.

The Malloy administration says the hospitals would make back those lost funds due to broader coverage and surging demand for Medicaid services. But to do so, hospitals will have to treat thousands more poor patients.

Sen. Toni Boucher, R-Wilton, called Democrats’ insistence that the budget was free of tax hikes and gimmicks “very disappointing,” and misleading to voters.

“This budget breaks so many promises,” she said.

There also are some tax cuts in the new budget.

It restores the sales tax exemption on clothing items costing less than $50 starting in July 2014. That will cost the state $11.5 million in the second year of the budget.

It replaces the 7 percent luxury tax on boat purchases with the regular sales tax rate of 6.35 percent. And it also exempts boats from the sales tax if they are going to be docked in Connecticut for less than 60 days each year.

Democrats staved off the need for more tax revenue with more than $500 million raised over two years by raiding specialized funds or sweeping one-time sources.

“We were also promised [by Malloy] that the era of gimmicks was over,” said McKinney, who called using more than $500 million in limited revenues to support ongoing spending “the very definition of kicking the can down the road.”

During the 2010 gubernatorial campaign, Malloy used the “kicking the can” expression to describe how one-time revenues used by Rell, his GOP predecessor, had helped create the mammoth-sized, $3.7 billion annual budget deficit he inherited in 2011.

On Monday, Malloy said this budget has very limited use of one-time revenue.

“Let’s put this in perspective. The last budget by my predecessor raised taxes by a billion dollars and then used another over a billion dollars in one-time revenue… We’re not doing that,” Malloy told reporters. “This is a very small fraction of what’s been done in the past and I believe it is sustainable.”

One of the most controversial moves in the new state budget involves the shifting of $91 million from transportation into non-transportation programs starting July 1– as motorists brace for one of the largest fuel tax hikes in state history.

The state’s wholesale fuel tax will grow by one-sixth in four weeks according to a statute adopted in 2005.

Based on the current wholesale price of gasoline, that would add 3.8 cents per gallon to the price right away. Nonpartisan legislative analysts estimate the increase would raise $60 million at the pumps next fiscal year.

Further complicating matters, the new budget leaves the state’s transportation program with $104 million less next year than the funding needed to maintain current services.

“We could have stopped that” fuel tax increase, said Sen. Kevin Witkos, R-Canton. He said Democrats are only allowing it to take effect so the funds can be redirected to support non-transportation programs in the general fund. “Our budget is based on greed. We need the money.”

Williams said he’s concerned about the transfer of fuel revenues away from transportation, but said hard choices have to be made in tough fiscal times, noting that minority Republicans in both chambers opted not to submit a budget plan. “In the future, we are committed to rebuilding our infrastructure,” he said.

The new budget also refinances the $1 billion operating debt state government bonded in 2009.

It cancels $392 million in payments due over the next two years, pushing them back until after the 2014 state elections -– when they come due along with $45 million in new interest.

And the budget counts on raising $25 million this fall by offering an amnesty program, waiving penalties for tax delinquents. It would be the third amnesty program the state has offered since 2002 and the fifth since 1990.

Keno and Generally Accepted Accounting Principles

After passing on proposals in 2009 and 2010 to add Keno, an electronic bingo-style game that some other states allow in bars, restaurants and other venues, lawmakers endorsed the new game in this budget.

But that hinges on successful negotiations with the Indian tribes that run the two casinos in Connecticut’s southeastern corner. The tribes, which share their video slot revenues with the state, assert that deal gives them exclusive rights to certain games, including Keno.

The new budget authorizes the administration to award the Mashantucket Pequot and Mohegan tribes 12.5 percent each of the state’s Keno proceeds.

Nonpartisan legislative analysts estimate this arrangement would leave the state with just under $31 million in total Keno revenues over the next two years.

“I think the Keno question came down to a couple decisions that the legislature made. They didn’t want to auction [which company gets to deliver energy to raise $80 million.] They began looking for other opportunities,” Malloy said. “We are not an island here in Connecticut. We are surrounded by Massachusetts, Rhode Island, New York, all of which have Keno.”

The new budget also postpones an element of the state’s conversion to GAAP beyond Malloy’s current term –- and into the 2015-16 fiscal year.

If GAAP standards are used, state finances are deep in the red. Fiscal analysts estimate that differential at $1.2 billion. And because of inflation, that number can grow over time.

The state was supposed to begin reserving money next year to amortize making up that $1.2 billion shortfall. The next budget pushes the start of that task back to 2015-16. But while the amortization plan starting in July 2013 would have taken 15 years, the one now set to begin in July 2015 would take 13 years.