Cromwell — Leaders of Connecticut’s small towns were left to read the fiscal tea leaves Wednesday as state leaders offered two starkly contrasting views of Connecticut’s finances.

While Gov. Dannel P. Malloy and his fellow Democrats leading the House and Senate declared fiscal stability and pledged to continue trying to bolster municipal budgets, GOP legislative leaders cited projected deficits, a bond rating downgrade and cash flow problems as evidence of another impending fiscal crisis.

“What a difference a year makes,” Malloy said to open a 16-minute address at Wednesday’s annual Connecticut Council of Small Towns meeting at the Cromwell Plaza Hotel and Conference Center.

“A year ago we were literally standing at a cliff, looking over that cliff and making a decision whether we would do what other states were doing,” Malloy said, adding that nearly all states except Connecticut attacked state budget deficits by ordering deep cuts to municipal aid and to social service programs, passing burdens onto property taxpayers and the poor. “We went a different way. Our economy is beginning to grow, and we are taking on other, systemic issues.”

The governor reminded municipal leaders that he inherited a budget with a built-in deficit that topped $3.6 billion in the 2011-12 fiscal year, a gap equal to nearly one-fifth of all spending. “We promised not to balance our budget on your backs and we didn’t,” he said, adding it probably was a “daunting fear” in many communities that town aid would be slashed.

The administration is committed to “maintaining a level of fiscal discipline that was not present in state government a short while ago,” Malloy said, adding that this, coupled with the tax increases and spending cuts ordered one year ago, now leave his administration poised to focus even more strongly on economic development.

Malloy said he plans to build on new programs that offer companies incentives to add jobs, and to move to or expand in Connecticut. “If we don’t get that pipeline going again, if we don’t rebuild our economy … then we are going to be far worse in the coming years.”

Connecticut was one of just three states, along with Michigan and Rhode Island, that created no net new jobs over the 22 years before his administration began in January 2011, Malloy said.

Besides promoting job growth, the administration also is working to dramatically reform Connecticut’s education system, the governor said, noting that 42 percent of 8th graders in the Hartford school system are not proficient at reading.

“If we are going to grow jobs, we have to have a work force prepared to take those jobs,” Malloy said.

Besides refocusing the educational agenda, Malloy said the current fiscal stability also is enabling him tofix the cash-starved state employee pension system. Though that means hundreds of millions of dollars in additional spending on pensions in the next few years, starting in the mid 2020s Connecticut will begin saving annually on pensions, with cumulative savings topping $5.8 billion by 2032.

“What would happen to state aid to municipalities” in two decades if the system isn’t fixed? Malloy asked. “What it would mean, in the out years … is you would have people trying to balance their budgets on your backs again.”

Shortly before Malloy’s address, Democratic legislative leaders offered a similarly optimistic outlook on the state budget.

“We did what we had to do to stabilize our state,” House Speaker Christopher G. Donovan, D-Meriden, said, adding that lawmakers remain determined not to balance state finances on the backs of cities and towns. “I think we want to keep that cooperation going.”

Senate President Pro Tem Donald E. Williams Jr., D-Brooklyn, predicted that state government would finish this fiscal year with either a small surplus or a small deficit, adding that legislators’ focus has moved on to doing more to stimulate the economy. “It’s time to do more to lift up our Connecticut businesses,” he said.

But Republican legislative leaders said the signs point to something considerably less rosy than Democrats would have town leaders believe.

“We were hopeful we would be able to come before you this year and say things are different,” said House Minority Leader Lawrence F. Cafero, R-Norwalk.

But Cafero said several recent developments have demonstrated that Connecticut’s fiscal outlook is at risk:

  • State Treasurer Denise L. Nappier reported that she had temporarily shifted funds in December from capital programs to cover operating expenses to cover a cash flow shortage. This is a legal procedure employed on past occasions at year’s end or on other occasions when bills exceed tax and other operating fund receipts.
  • The legislature’s nonpartisan Office of Fiscal Analysis recently has issued reports showing the current budget is $145 million in deficit, and arguing that the administration’s cost-savings projections tied to pension concessions granted to state employee unions last summer are far too large.
  • And Moody’s Investors Services, a leading Wall Street credit rating agency, downgradedConnecticut’s rating in January, citing a heavily loaded state credit card, huge debts in pension and retiree health care programs, and a depleted emergency reserve.

“What it means in short, folks, is we are not bringing in the money we thought we would bring in, we are not achieving the savings we thought we would achieve and we have not controlled spending the way we thought we would,” Cafero said.

“We’re still unstable. We’re still unsure. It was not supposed to be this way. We have to prepare for the worst,” he said.

Further complicating matters, the administration’s own numbers show its new budget proposal is in balance for just one year, noted Senate Minority Leader John P. McKinney, R-Fairfield. The plan is projected to fall $424 million in deficit, and to exceed the constitutional spending cap by $650 million in 2013-14.

“What I hope to accomplish over the next session is to communicate that we’re spending too much money,” McKinney said, adding that Malloy’s budget proposal would raise spending more than 8 percent in total over the next two fiscal years.

“It’s not easy” to discern where state finances our going,” said Bart Russell, director of the Connecticut Council of Small Towns.

“One the one hand, we are extremely pleased that the governor presented a budget for the second year in a row that towns can take to the bank and develop their budgets around,” Russell said, referring to the$20.7 billion state spending plan Malloy proposed two weeks ago for the fiscal year that starts July 1.

That plan not only spares the $2.9 billion municipal aid package from any major cuts, but also includes a $50 million increase in the Education Cost Sharing program, the single-largest municipal grant.

Malloy and the legislature approved a budget last spring that closed a historic budget deficit without cutting municipal aid. That package also gave towns nearly $50 million in new assistance by sharing state sales and other tax revenues.

Russell called for, and received, a round of applause from the audience for Malloy for his record on municipal aid. “For that, governor, I want to thank you,” he said.

But, during an interview Wednesday, Russell also noted that when COST’s oversight board met last week to develop an agenda for the coming year, “there was quite a bit of discussion about the future and even some fear about the future of some of the assumptions state policy makers are making about the economy.”

Municipal leaders from both sides of the aisle also said that while they believe state finances are better off than they were 12 months ago, they aren’t convinced everything is stable.

“It does look like things are starting to turn around,” said Sprague First Selectwoman Cathy Osten, a Democrat. “But does that mean we should stop being fiscally conservative? No.”

Osten said that despite the education cost-sharing increase proposed by Malloy, she has asked her local school board to reduce its budget request for 2012-13. Local education officials are seeking a 2.6 percent increase, but Osten said teachers have agreed to accept a wage freeze, and she now is trying to keep the school budget increase under 1 percent.

East Lyme First Selectman Paul Formica, a Republican, said that while he also appreciates the support Malloy and the legislature have shown for town aid, “we still need to control our spending. Just given the economic environment, it is clear that our residents don’t have an appetite for any tax increases.”

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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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