The General Assembly inched toward fiscal gridlock Thursday as its budget panel narrowly passed a plan that would boost spending next fiscal year by $350 million, shift social and environmental programs into unrelated funds backed by industry fees and electric bills, and dramatically redistribute payments to hospitals.

The $19.28 billion Appropriations Committee proposal not only drew strong criticism from Gov. M. Jodi Rell and her fellow Republicans in the legislature, but also widened a rift between fiscal liberals and moderates within the Democratic majority. While liberals argued the budget preserves state government’s social and health care safety net while sparing municipal aid, moderate Democrats said the plan is doomed.

“I think at least the message is starting to resonate,” said Sen. Robert Duff, D-Norwalk, a member of the Appropriations Committee who voted against the bill. “People have got to get serious about reducing spending.”

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Sen. Toni Harp and Rep. John Geragosian, co-chairs of the Appropriations Committee, confer during budget debate Thursday (Jacqueline Rabe)

“This document will never see the light of day,” Rep. Craig A. Miner of Litchfield, ranking House Republican on the committee, said. “I’m not going to go along with this sham.”

The package would boost spending in 2010-11 by $345 million above the $18.64 billion approved for this fiscal year in September, and $373 million over the amount recommended by Rell in February. That’s despite projections of a $518.4 million deficit this fiscal year and $725.7 million for next. Looming beyond all of that is the mammoth, $3.88 billion shortfall the legislature’s Office of Fiscal Analysis is projected for 2011-12, the first budget the next governor must craft.

The measure, approved by the committee 29-25, features a controversial plan to boost Judicial Branch funding by reducing incarceration rates – starting just three months from now – and eliminating 390 prison guard positions.

Critics challenged committee claims that their plan would leverage $440 million in new federal aid, citing impending changes in federal grant rules that could quickly dissolve much of that bonus.

“This budget is out of balance, out of proportion – and out of touch with reality,” said Rell, who is not seeking re-election. “This budget has no real spending cuts, no agency consolidations or mergers and no reductions in the size and scope of state government. Virtually all of the budget cuts I proposed are restored – along with millions in new spending. All this while homeowners and employers in our state struggle with an economy that is barely limping along, continued job losses and a housing market that is still flooded with foreclosures. In these economic times, this is a breathtakingly inept proposal.”

But Sen. Toni Harp, D-New Haven, co-chairman of appropriations panel, said that while the plan doesn’t solve Connecticut’s fiscal crisis, it preserves what should be state government’s most important priorities. “The reality is this budget helps people and it maximizes federal revenue,” she said. “It is fair and it is compassionate.”

Democrats in both chambers have argued the governor’s favorite solution to budget deficits has been cuts to the state’s social services and health care safety net, and that her administration has been too lax in pursuing available federal funding.

budget WandL 3-26-10

Harp and others backing the committee plan argued that while they would spend $373 million more than Rell would next fiscal year, that extra spending would leverage $440 million in increased federal aid.

But most of that $440 million is tied to the federal Medicaid program, which normally reimburses Connecticut 50 cents on each $1 of state spending. Under the emergency federal stimulus program, Connecticut is receiving 61 cents for much of its Medicaid spending. But that inflated rate expires after next fiscal year.

Further complicating matters, federal rules require states to offer Medicaid-funded services as “entitlement” programs, meaning all citizens who meet program guidelines are entitled to the benefits, regardless of whether a state has budgeted sufficient funds to provide them.

So while the committee budget moves certain programs – such as those that provide health coverage to single adults without children – under the Medicaid umbrella, state funding no longer could be capped if the demand exceeds the level anticipated in the budget.

“This has the potential to exacerbate the 2012 problem,” Rell’s budget director, Office of Policy and Management Secretary Robert L. Genuario said, adding Connecticut’s new federal windfall could evaporate within a few years. “I’m worried what happens after next year.”

The committee budget turned to more than the federal government for additional funding.

In an unprecedented move, the panel recommended shifting more than $5.3 million in conservation, judicial and correction programs into the state’s Banking Fund, $21.8 million for school-based clinics and other health care programs into the Insurance Fund, and nearly $9 million in environmental protection programs into the Public Utility Control Fund.

These special accounts are within the overall state budget. But unlike the General Fund – which comprises the more than 90 percent of total annual spending and is largely supported through tax and fee receipts and federal grants – these special funds are tied to specific industries, and are regulated through specific assessments or fees related to them or the services they provide.

The Banks Fund is supported through fines and fees levied on financial institutions. The Insurance Fund is backed by an annual assessment borne entirely by in-state insurance companies. And the Public Utility Control Fund is supported through a surcharge built into residents’ and businesses’ monthly electric bills.

Increases in industry fees and assessments to support programs moved into these special accounts would be adopted in separate legislation.

“This is a hidden tax,” Sen. Robert Kane, R-Waterbury, said.

Rep. John Geragosian, D-New Britain, the other co-chairman of appropriations, quickly interjected “it’s an assessment, not a tax,” adding that “it is spending that is still subject to the scrutiny of this committee.”

“Whether you call it an assessment or a fee or a tax, somebody in the state of Connecticut is going to pay more,” Miner countered, adding that Democrats might be looking to avoid expanding the budget deficit by shifting costs, but eventually the impact would be felt by the public.

“It’s a tax on Connecticut’s insurance companies,” Robert A. Kehmna, president of the Insurance Association of Connecticut, said. “You are putting their products at a competitive disadvantage.”

The proposed shift would nearly double the Insurance Fund, from $26 million to more than $47 million.

“This is going to make auto insurers pay for school-based health clinics and workers’ compensation pay for AIDs programs,” Kehmna added. “Those may be all good programs, but they should be supported by the general fund, not a specific industry.”

The Rell administration and many Republicans on the Appropriations Committee also questioned a scheme to add more than $26 million beyond what Rell proposed for the Judicial Branch, including $8 million to reverse a controversial department cut this year and more than $11 million for additional staffing and expanded alternatives to incarceration programs.

To offset most of that increase, the committee reduced Department of Correction spending by $22 million next year, projecting that alternative rehabilitation services could keep as many as 4,000 non-violent offenders in community-based programs, and out of prisons.

The plan also assumes that the ranks of 5,200 unionized prison guards can be reduced by 390 through attrition rather than layoffs.

Sources said the plan hadn’t been discussed with the Judicial Branch, the legislature’s Judiciary Committee, or prison officials. And the spokesman for the state’s prison guard union said his organization didn’t know the proposal was coming, and has its own doubts.

“Our concerns about safety, staffing and security are longstanding, and we believe they will remain acute as this plays out,” Larry Dorman said. “You are going to have an effect on security.. And that is always on our mind given the historical shortages of staff.”

The administration also questioned whether Connecticut could be ready to serve additional offenders within the community starting as soon as July 1. “It doesn’t work,” Genuario said.

The committee budget avoided any deep cuts to municipal aid, a position that enjoys bipartisan legislative support this year.

But with moderate Democrats, particularly those in the Senate, pushing for more spending cuts, the majority party split over whether smaller items in the budget, such as nearly $1.8 million to retain special legislative panels that promote issues of interest to women, children and racial and ethnic minorities needed to be retained. Others complained about more than $4.1 million in funding proposed beyond the governor’s budget for grants to tourism attractions.

Senate Democrats are expected to adopt a measure tonight that would close out this fiscal year’s deficit by adopting cuts to many of the social service programs targeted for increases in the committee budget.

House Speaker Christopher G. Donovan, D-Meriden, who has been one of the legislature’s most vocal opponents of further cuts to state spending, particularly any involving social services, health care or town aid, issued no statement and was unavailable for interview afterward.

Senate President Pro Tem Donald E. Williams Jr., D-Brooklyn, who has been bumping heads with Donovan over the question of further spending cuts, also was unavailable for comment, though he issued a statement through an aide that called the committee budget simply “the beginning of the process.”

But one Democratic senator expressed private doubts that any consensus would be reached, forcing more borrowing to cover this year’s deficit, and leaving future shortfalls for the next governor and legislature to solve, adding, “we’re screwed.”

Keith has spent most of his 31 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut’s transportation and social services networks. He has been the state finances reporter at CT Mirror since it launched in 2010. Prior to joining CT Mirror Keith was State Capitol bureau chief for The Journal Inquirer of Manchester, a reporter for the Day of New London, and a former contributing writer to The New York Times. Keith is a graduate of and a former journalism instructor at the University of Connecticut.

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