Dan Malloy says it’s time for the gubernatorial candidates to have a grown-up conversation about the state’s budget crisis.

“I’ll say what every other politician is saying, that taxes need to be a last resort,” Malloy said. “But I think somebody’s got to be the big guy in the room, the big boy in the room, and say: ‘You know, this is a pretty desperate situation.'”

That means no more pretending a looming deficit equal to about one-fifth of all current spending can be solved solely with spending cuts. The same goes for talking about job growth – an important long-term solution to the crisis – as an immediate savior.

  • Facing the budget crisis: Third in a series


What it does mean, the former Stamford mayor said during an interview last week in his Hartford campaign headquarters, is an unpleasant-but-necessary mix of tax hikes, labor concessions, program cuts – and maybe even more borrowing.

Malloy estimates he could solve about one-third of the crisis by reducing spending from the level needed to maintain current services- a feat which, if achieved, would be the largest reduction in state history.

But Malloy, who is trailing Greenwich businessman Ned Lamont in the Democratic gubernatorial primary race according to one poll, also is wary of drastic cuts in big-ticket items that also are traditional Democratic priorities: public-sector labor, health care and social services.

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Dan Malloy talks about his budget plans (Keith Phaneuf)

“We live in an anti-tax society which is bipolar in the sense that it is a pro-service society,” he said, quickly adding people would accept a “grown-up discussion” about program cuts and tax hikes if they are part of a larger plan “to rapidly make Connecticut’s government more efficient.”

Having run one of the state’s largest cities for 14 years through 2009, Malloy said he understands the largest deficit in state history is the product of years of poor management decisions, and may not be corrected entirely in one four-year term, let alone a biennial state budget cycle.

Fond of calling the $3.4 billion deficit looming over state finances 12 months from now a “fiscal train wreck,” Malloy said the worst part is “the train wreck didn’t need to be nearly as bad as it’s going to end up being, if people had only told the truth, done the right thing, began the process of realigning our spending commitments with our willingness to tax commitments.”

Malloy said “outlandish” budget proposals from Republican Gov. M. Jodi Rell, who is not seeking re-election, and from the legislature’s Democratic majority – employing borrowing, using billions of dollars worth of one-time revenue sources to maintain ongoing spending, and deferring employee pension payments – all pushed their fiscal problems, plus hundreds of millions of dollars in interest, into the next term.

Reversing that trend will require a heavy dose of reality, something other candidates are slow to embrace, the former mayor said. For example, he called GOP gubernatorial contender Tom Foley’s statement that regaining the 100,000 jobs lost in the last recession would provide an extra $1.5 billion in added revenues “outrageous,” saying Connecticut would be lucky to regain one-quarter of those jobs before the next governor must deal with the deficit.

Since taxes are likely to enter the equation, Malloy does offer a few hints as to where he would look.

“You can’t look at income taxes in the state of Connecticut without recognizing that the middle class pays a substantially higher percentage of their total earnings to state and local government than do the wealthy.”

A 2008 study by the Institute of Taxation and Economic Policy found the top 1 percent of Connecticut households, those earning more than $1.36 million, pay about 4.9 percent of their annual earnings to state income and sales and municipal property taxes after federal income tax deductions are taken into account. By comparison, households earning between $75,000 and $302,000 pay between 8.5 and 9.6 percent.

But in terms of total taxes paid, about half of the state’s roughly $6.7 billion in annual income tax receipts comes from households that earn more than $500,000. And though most income is taxed at 5 percent, Connecticut did add a new 6.5 percent rate in 2009 for earnings above $500,000 for individuals and $1 million for couples.

Malloy said he begins with the presumption that the system still favors the wealthy, but added it’s important that any increases be tempered to ensure Connecticut remains competitive with key three neighboring states: New York, New Jersey and Massachusetts. The top rate rates in those states range from 8.97 percent to 12 percent. New York City also levies an income tax rate as high as 3.6 percent.

But even if Connecticut households’ income tax payments grew by 50 percent, that wouldn’t solve more than half of the state’s budget crisis, and likely would push the top income tax rates close to or beyond those in New York and New Jersey.

Malloy said the state’s largest businesses also could be asked to contribute more.

He pointed to a 2008 study by Ernst & Young, one of the four largest professional auditing firms in the world, that concluded Connecticut has one of the most favorable business tax climates in the nation, when state and local taxes levied are weighed as a percentage of gross state product.

“Does that give us some room” to consider business tax increases? Malloy said. “My presumption is it does.” But he was quick to add that while tax hikes on larger corporations would be considered, those on small businesses would be avoided at all costs.

But Connecticut Business and Industry Association Senior Vice President Joseph F. Brennan challenged Malloy’s assessment of the business climate, saying the Ernst and Young study weighs taxes against productivity, but doesn’t adequately assess the high cost outside of taxes that Connecticut businesses face.

“We have to be productive here because we’re a very high-cost state,” Brennan said.

Further complicating matters, the corporation tax represents less than 4 percent of the entire state revenue stream–a projected $663 million in the fiscal year that starts July 1.

Malloy said he also plans to revisit the more than $5.3 billion worth of exemptions, credits and other tax breaks on the state’s books, including more than $3 billion on its sales tax alone.

Maybe Connecticut still needs to exempt winter boat storage from the sales tax, Malloy said as an example, but maybe the break for boat repairs could go. The litmus test for many of the tax breaks not tied to basic needs, such as the sales tax exemption for groceries, is whether they protect or create new jobs, he said.

Despite the fiscal crisis, Malloy said he also hopes to reform the state’s tax system, mitigating the need for municipal property taxes to some extent by allowing cities and towns to share in a portion of state taxes, possibly sales, hotel or even utility. The latter, Malloy added, could be particularly helpful because it would reward regions that are Connecticut’s employment centers, since businesses typically use more energy than residences, and pay more in utility taxes.

Malloy didn’t rule out borrowing to balance his first budget, though he said he hoped to avoid it. He criticized Rell and the legislature for borrowing nearly $1 billion to balance the 2010-11 budget. “I can’t take anything off the table,” he said. “I won’t take anything off the table.”

Tax expenditures and regional tax-sharing aside, Malloy’s positions on the income and corporate tax structure are strongly aligned with those espoused in recent years both by the Democratic majority in the state legislature and by state employee unions.

A late May poll from Quinnipiac University found Lamont leading Malloy 41 percent to 27 percent, though 30 percent of Connecticut’s Democrats remain undecided.

Republican State Chairman Christopher Healy said Malloy’s reliance on the standard Connecticut Democratic Party playbook might help in a primary, but would come back to haunt Malloy in the general election.

“He is trying to say, ‘Well if we just better manage the bureaucracy, if we consolidate it and weed out these duplicative functions, and if the national buoyancy of the economy comes back, we’ll be fine,'” Healy said.

But the GOP chairman said voters and businesses don’t want tax hikes to preserve a government structure they believe to be bloated.

Malloy insists there definitely will be cuts in his administration, though he also concedes he wants to protect some of the largest segments of the state budget.

“It is not my intention to balance the budgets on the backs of those who are least among us,” he said.

And though he promises to shield no group entirely from cuts, Malloy has pledged to treat the state’s nursing homes, and its private, nonprofit social service network, as two of his top priorities,

Nursing home care is about one-third of a $3.9 billion state Medicaid budget that also funds health insurance for poor families and for single adults without children on state welfare. Medicaid-funded programs and nonprofit social services together represent more than $5 billion, or about one-quarter of the entire, $19.01 billion state budget for 2010-11.

The former mayor has said he plans to ask state employees to consider another round of concessions.

State workers’ salaries and benefits represent about 30 percent of the budget. Municipal grants, which largely support personnel costs for cities and towns represent another 20 percent.

But Malloy said that while he is prepared to consider most proposals, he largely is comfortable with the binding arbitration system, and would oppose any suspension of it. And while he said he favors more accountability in state government, he hasn’t developed a position on the state legislature’s practice of effectively approving state employee raises without voting on them. Current law requires the legislature to vote only if it wants to reject an arbitration award for workers, while those awards can be approved simply by taking no action.

The Connecticut Conference of Municipalities called for a suspension of binding arbitration says it’s time forthis year to help control municipal labor costs, particularly in the school systems.

CCM Executive Director James Finley said the coalition still supports a suspension, and other long-term changes to arbitration rules, including prohibiting arbiters from counting a town’s emergency reserves as part of its ability to pay raises.

“We just want to require arbitrators to have a better sense of what ‘ability to pay,’ from the municipal perspective, means,” Finley said, adding that without more flexibility, public schools likely will be forced to press for greater concessions than they have received in the past – or order more layoffs. Local school boards “don’t want to lose the less-experienced-but-more-energetic teachers. But when it comes to concessions or layoffs, the unions throw them under the bus.”

Malloy said his approach will be a departure from the practice of recent Republican governors in that he will work in cooperation with labor leaders, employing some of their suggestions for reducing costs, such as reducing a “top heavy” administration in most state agencies.

“You have departments where there’s a commissioner and then a deputy commissioner and then there’s a director and then there’s somebody else,” he said.

The Department of Economic and Community Development and two-quasi-public state development agencies likely could be merged into one entity, he added.

The concession deal Rell negotiated with labor in 2009 depended in part on deferring pension fund payments that only exacerbated the state’s budget crisis, Malloy said, adding both the governor and labor have made mistakes over the past year. The difference under his administration, he said, would be that labor would respond to a leader willing to make an honest assessment of the solutions needed to fix state government.

“I believe,” Malloy added, “when presented with real leadership the people of Connecticut will respond.”

This is one a series of stories on gubernatorial candidates’ plans to address Connecticut’s budget crisis. Other stories covered Republicans Oz Griebel and Tom Foley, Democrat Ned Lamont and Independent candidate Tom Marsh.

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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