CT budget deal delays tax breaks, dumps keno, employs iffy savings

Gov. Dannel P. Malloy with the speaker of the House and Senate president pro tem

Jacqueline Rabe Thomas / The CT Mirror

Gov. Dannel P. Malloy with House Speaker J. Brendan Sharkey, and Senate President Don Williams.

Gov. Dannel P. Malloy and Democratic legislative leaders announced a tentative budget deal Friday that postpones tax relief for teachers and consumers, repeals the launch of keno and relies on tens of millions of dollars in questionable assumptions about savings.

Full details of the agreement – the product of hectic last-minute negotiations to counter shrinking tax revenue projections this week — were not released during a late morning press conference at the Capitol. Malloy’s budget director, Office of Policy and Management Secretary Benjamin Barnes, confirmed that the agreement preserves $70 million in new grants to cities and towns, but that it suspends a new, $9 million tax break for municipalities.

The deal also cuts about $20 million over several years from a new initiative to shore up the finances of the merged public college and university system.

And this year’s budget surplus, once projected at $505 million but reduced this week to $43 million, would be deposited in the emergency reserve, commonly known as the Rainy Day Fund.

Meanwhile, Malloy tried to put the best face on this agreement while downplaying a projected deficit in the first new budget after the election that now approaches $1.4 billion, or 8 percent of annual operating costs. Even with the surplus deposit, the reserve holds just $314 million – less than one-quarter of the post-election deficit.

“Like any legislative session, this one wasn’t without its surprises and challenges,” Malloy said. “But the bottom line is that this budget is balanced, puts the surplus in the Rainy Day Fund and makes real, necessary investments in the future of Connecticut’s families.”

“We have come a long way in Connecticut with regard to our fiscal soundness,” added House Speaker J. Brendan Sharkey, D-Hamden, who urged reporters to remember the $3.67 billion deficit Malloy inherited when he took office three-and-a-half years ago.

Republican legislative leaders sounded an alarm just before 2 p.m., Friday noting that the administration and Democratic caucuses still hadn’t released line item details of the agreement several hours after disclosing the highlights they wanted to emphasize.

The tentative deal is expected to go to a vote before the House and Senate Saturday.

Pulling back tax breaks for teachers and consumers

Malloy and his fellow Democrats in the legislature’s majority had to scramble this week after fiscal analysts downgraded projected tax receipts for this fiscal year and the next two.

That meant the roughly $19 billion plans Malloy and the legislature’s Appropriations Committee proposed for the fiscal year beginning July 1 were each more than $280 million out of balance.

More than $50 million of that problem was solved by delaying or suspending tax relief announced earlier this year.

Back in February, when he believed the tax outlook was much rosier, Malloy proposed a two-stage income tax break for retired teachers living in Connecticut. His budget would exempt 25 percent of their pensions from taxation retroactive to this past January, saving teachers about $23 million on their tax filings next spring. And the exemption would jump to 50 percent in 2015.

Though full details weren’t available early Friday, Barnes confirmed that the tax break for teachers now would be phased in over three years, and won’t begin until January 2015 – with a 10 percent exemption and affecting tax returns filed in the spring of 2016.

A proposal to restore the sales tax exemption on nonprescription drugs remains in the budget, but was delayed nine months. It now starts in April 2015 rather than this July.

Similarly, restoration of the sales tax exemption on clothing costing less than $50 was pushed back from June to July of this year.

Unfortunately for teachers and consumers, pushing these breaks back means they will happen closer to, or during the 2015-16 fiscal year, when analysts say the state is facing a large budget deficit.

Deal relies heavily on questionable savings

Though details were limited Friday, sources close to the negotiations between the administration and Democratic legislative leaders said they relied heavily on questionable savings targets rather than specific cuts to eliminate much of the remaining deficit created by shrinking tax receipts.

For example, the legislature’s nonpartisan Office of Fiscal Analysis reported in late March that the governor’s original 2014-15 budget proposal failed to fund $50 million in health care benefits contractually owed to retiring state prison guards.

The Appropriations Committee restored those funds, but the final deal removes them again. The benefits must be paid to retiring guards. But if nonpartisan analysts are right, that means the new budget already features a $50 million built-in hole.

Barnes said the final agreement also features $20 million in savings not tied to specific cuts, but rather from eliminating jobs and freezing positions not yet identified.

Meanwhile, Republican legislative leaders questioned whether Malloy and Democrats were withholding details of their agreement to ensure early media coverage of their solution to the budget crisis would remain positive.

“There are many questions left unanswered,” Senate Minority Leader John P. McKinney, R-Fairfield, said, urging reporters to question “the frightening lack of detail.”

For example, while Democrats insisted they had preserved the most important tax breaks in their plan, even though they had to be pushed back, they failed to address the likelihood of those breaks ever being implemented after the election — given the big deficit that awaits in the next term, GOP leaders said.

“The same governor who says out-year (deficits) don’t matter is promising tax cuts in those years,” McKinney said.

House Minority Leader Lawrence F. Cafero, R-Norwalk, jokingly called the tax relief “coming attractions” arriving “in 26 years.”

Education

The budget increases the amount the state will send school districts for education by $48 million — $7 million more than the governor had proposed earlier this year, said Sen. Beth Bye, the co-chairwoman of the legislature’s budget-writing committee.

The increase allows the state to provide the level of support dictated by the much-touted education-funding formula that directs money to high-need towns based on poverty, student need and ability to raise revenue locally. The budget still provides funding for three new state charter schools to open for next school year, but reduces scheduled funding increases by $500,000.

The budget still increases the amount the state will send the state’s largest college system – but it scales back the size of the increase.

The “Transform CSCU” plan that would have given $47.6 million to the college system that includes four state universities and 12 community colleges to balance its budget — and implement a new law for students who show up for college not ready to take courses for credit — is scaled back to $42 million for the Board of Regents to use next year.

The deal moves forward Malloy’s proposal to offer 1,020 more 3- and 4-year old children from low-income families a spot in preschool next year. The governor’s budget director said the $11.5 million originally proposed to be spent was scaled back to $9.4 million by not enrolling 300 children in the spots until three months into the fiscal year.

The Democratic legislators’ proposal to increase the number of pre-kindergarten spots in public schools is not funded in next year’s operating budget. Legislators intend to include funding for that pre-K expansion in future budgets.

Barnes said the new deal increases magnet school spending by $13.5 million. But that falls short of the $19 million that nonpartisan fiscal analysts say is needed to maintain services based on this year’s enrollment levels.

State Education Commissioner Stefan Pryor said magnets also needed $35 million to cover planned enrollment increases, pre-school and other costs in 2014-15. But that wasn’t included in the final budget.

Town aid preserved; Outlook mixed for mental health

The tentative deal also suspends a Malloy proposal to exempt cities and towns from paying the state’s insurance premiums tax, which would have saved municipalities $8.7 million next fiscal year.

But cities and towns fared better when it came to major grant programs.

Besides the $48 million increase in the ECS grant, Democrats added $20 million in total to grants that reimburse communities for part of the revenue they lose because private colleges, hospitals and state-owned land are exempt from municipal property taxes.

The new budget also includes $12 million in state and real estate conveyance tax revenues owed to communities this year – but not paid.

The budget deal includes $10 million in increased funding for certain outpatient mental health care providers.

That restores some funding that the current two-year budget would have cut. This year, mental health and substance abuse providers were slated to lose more than $15 million in state funding, although the state Department of Mental Health and Addiction Services (DMHAS) has not implemented most of the cut. The providers were facing another $10 million cut in the coming fiscal year, before this budget deal.

The Malloy administration proposed the cuts last year under the assumption that the funding, which covers the cost of treating uninsured people, would be unnecessary once more people gain coverage as part of the federal health law known as Obamacare. But a recent analysis by DMHAS suggested that the administration’s assumptions aren’t being realized, and that some mental health providers, particularly those that run outpatient clinics, would be left with major shortfalls if the cuts went through.

The budget deal also includes between $3 million and $4 million in increased Medicaid rates for mental health services for children and adults, Barnes said.

Another $4 million would be used to provide residential services to 100 people with developmental disabilities. Families of people with developmental disabilities say they have been told that their children won’t receive any state help with housing until their parents die. Democratic legislators had previously proposed spending $4.4 million to provide the services to 100 people whose parents or caregivers are 70 or older, but Barnes said the budget deal envisioned serving them at lower costs.

There are 635 people with developmental disabilities on a waiting list for residential services from the state Department of Developmental Services, including 110 who are considered “priority one” — their caregivers are 70 or older, and 99 whose caregivers are ages 60 to 69.

Keno gets dumped

A centralized electronic drawing game, whose results are broadcast on video screens in bars, restaurants and stores in the states where it is offered, keno has been on a strange political journey in Connecticut over the last 12 months.

Language allowing the Malloy administration and Connecticut Lottery Corp. to launch the game starting this year was quietly included in a budget measure adopted about 11 months ago.

No one claimed ownership of keno’s approval, and as state tax projections improved in January, Sharkey and Senate President Pro Tem Donald E. Williams Jr., D-Brooklyn, called for its repeal.

Malloy said he would sign such a measure, and said keno had only been legalized because the legislature included it in last year’s budget bill.

But sources said the administration had been fighting to keep keno alive this spring, and the $26 million per year it could yield for the state, as expectations for tax receipts started to plunge.

House Democrats applauded Thursday night when told in caucus that a tentative agreement on the budget does not rely on the expansion of legalized gambling.

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