The state Senate adopted a deficit reduction plan shortly before 5:20 a.m. Saturday that aims to close a $518 million gap in the current year budget, despite the promise of a veto by Gov. M. Jodi Rell.

Although Democratic leaders of the Senate said they would not be deterred by Rell’s threat, it was enough to prompt the House Democrats to cancel a vote on the plan Saturday afternoon, since the Senate failed to pass it by a veto-proof margin.

That would have required that all 24 Democrats in the Senate vote for the bill. But following a 4 1/2-hour debate, the measure passed 21-15 as three Democratic senators, Gayle Slossberg of Milford, Joan Hartley of Waterbury and Jonathan Harris of West Hartford, joined with 12 Republicans in opposing it.

Among other cuts, the plan would eliminate 21 deputy commissioners in Rell’s administration, saving $3.1 million annually. It also would cancel seniority bonuses and require another furlough day for non-union workers, cut back health care, social service and education programs and make other reductions worth nearly $115 million across this fiscal year and next combined.

Another $63 million assigned to various special funds and accounts would be reassigned to bolster the General Fund. Among those transfers are $10.4 million to be taken from the Special Transportation Fund, $6 million cut to the public financing program for state elections, and $3.5 million from the popular biomedical trust fund. It does not include Rell’s earlier proposal to reassign funds reserved for stem cell research.

But Rell, who is vacationing in Colorado, said in a statement released by her office that the plan doesn’t cut spending enough and counts on unreliable funding sources.

“It is woefully short on real spending cuts and burdensomely high on tax increases,” Rell said.

The plan also relies $76 million in new revenue by reversing a January 1 reduction in the tax on wealthy estates.

“The governor’s veto threat is unproductive and irresponsible,” said Senate President Pro Tem Donald E. Williams Jr., D-Brooklyn. “The governor is simply shielding multimillionaires at the expense of middle-class families and those who want to end this fiscal crisis.”

House Speaker  Christopher G. Donovan, D-Meriden, said that Rell’s priorities are misplaced.

“Her threat to veto this legislation is further proof that she would cut aid to cities and towns rather than delay tax breaks for wealthy estate owners,” Donovan said. “She’s putting those tax breaks for the wealthy ahead of solving the state’s budget problems.”

Adam Liegeot, a spokesman for the governor, said later Saturday the Democrats need to come back with a plan that has more cuts and fewer taxes. Then he offered Donovan a backhanded compliment for canceling the vote.

“The taxpayers of Connecticut should be grateful that the House of Representatives cancelled their Saturday vote,” Liegeot said. “The cancellation saved taxpayers money, time and unnecessary political theater.”

A second tax increase in the bill, a 5.5 percent rate on hospital gross revenues, is the linchpin of a Democratic plan to bring more than $165 million in additional federal aid into Connecticut.

All totaled, the Senate measure would wipe nearly $420 million in red ink off the budget. When combined with a recent $100 million reduction in state employee pension fund contributions and an $80 million increase in federal aid tied to prescription drug benefits, state government could eliminate this year’s shortfall entirely, and cut more than $73 million off the $725.7 million deficit projected for 2010-11, Senate Democrats said.

Technically, the spending cuts, tax increases and federal revenue growth included in the Democrats’ bill wouldn’t be able to cancel the entire current deficit before the fiscal year expires in just over three months. But most of those proposals would continue to cut costs or boost revenue after June 30.

So this bill effectively raids next year’s budget now by transferring into the current budget $263 million in emergency reserves originally dedicated to 2010-11. But that raid would be offset by a matching amount of new revenues and cost-savings the plan would create next fiscal year.

Rell had proposed a similar raid in her own deficit-mitigation plan offered earlier this month. That proposal featured cuts worth $202 million across this fiscal year and next, with controversial reductions aimed at social services, health care, education and job development, as well as a $45 million hit to municipal grants. The governor’s blueprint also reassigned $58 million earmarked for special funds.

The Senate overwhelmingly rejected Rell’s deficit mitigation plan hours before the vote on the Democratic measure. Democrats said they objected to Rell’s call for cuts of $45 million in town aid, $56 million in health care for poor families, $6 million from the Citizens’ Election Program and $5 million from the state’s $10 million annual commitment to stem cell research.

One common element in both plans was the establishment of a tax on hospital gross revenues and use of those funds as part of a complicated scheme to leverage more federal aid.

Rell proposed a 3.25 percent tax rate designed to raise nearly $130 million. Those funds would be redistributed back to hospitals in a slightly different manner, with facilities that treat the most uninsured and under-insured patients receiving a larger share. This back-and-forth arrangement would enable Connecticut to claim a $130 million expense under the federal Medicaid program and thereby qualify for about $65 million in reimbursement.

Democrats took the same idea and built upon it, proposing a 5.5 percent tax rate that would enable the state to raise and redistribute $207 million, and ultimately collect $103 million in extra federal reimbursement.

But Senate Minority Leader John P. McKinney, R-Fairfield, said Democrats need to cut far more in spending given the nearly $3.9 billion deficit projected for the 2011-12 fiscal year. “What happens in 2012?” he said. “Our revenues and state fall off a cliff.”

The Democrats’ plan uses other options besides the hospital tax to tap into more dollars from Washington.

By moving the medical benefits provided under General Assistance – the state’s welfare program for single adults without children – under the Medicaid umbrella, Democrats said Connecticut could receive another $50 million in federal reimbursement over the next 15 months.

But 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 moving certain programs into the Medicaid leverages more federal aid, state funding for General Assistance no longer could be capped if the demand exceeds the level anticipated in the budget.

Rell and the Democratic majority each pressed for political advantage.

“We must save and create efficiencies as we never have before,” Williams said in a statement issued after the all-night session, before the House cancellation. “This plan has cuts, tough choices, and consolidations. The Senate did its job and I look forward to final passage of the bill later today in the House – then putting it on the governor’s desk for her signature.”

Rell said that the cuts were insufficient, but she offered a slight note of optimism.

“As usual, the Democrats give short shrift to spending cuts and high priority to increasing taxes and other revenue – just at the time when Connecticut’s families and employers can least afford it. The Democrats’ meager spending cuts will do nothing to solve the long-term structural problems within our budget and the unaffordability of state government. It is time that our elected officials stood up and did what is right for the taxpayer,” Rell said.

“However, to the extent that the Democrat plan incorporates some of my spending cuts, I am encouraged – and would welcome the opportunity to work together on a mutually acceptable package.”

The deficit-mitigation plan adopted by the Senate was agreed to Friday afternoon after lengthy negotiations between House and Senate leaders. It represented an about-face for House Democrats, who as recently as Thursday had refused to consider cuts in social programs. Instead, Democrats on the Appropriations Committee voted to increase spending by more than $340 million over the level recommended by Rell earlier this year.

However, Williams warned that his caucus would act on its own deficit reduction plan if the House did not join efforts to reduce the budget deficit.

Williams and Donovan announced agreement on a plan early Friday afternoon.

“Yesterday, they were embarrassed,” said House Minority Leader Lawrence F. Cafero Jr.,R-Norwalk. “This is all public relations.”

Cafero said he was notified at 4 p.m. he needed to round up his members for a Saturday session.

“It’s reprehensible,” he said.

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Keith M. PhaneufState Budget Reporter

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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