Malloy balances budget with borrowing, social-service cuts

Gov. Dannel P. Malloy proposed a $43.8 billion, two-year budget Wednesday that avoids major state tax increases, cuts health care and other benefits for the poor while relying on major new bonding to help close a $1.2 billion deficit.

The governor’s proposal is a mixed bag for cities and towns, bolstering spending for education and capital improvements, while cutting other grants that fund general government operations. Malloy also unveiled a property tax exemption that helps car owners at the expense of lost revenue to local governments.

And despite repeated pledges from Malloy that his proposal would comply with the constitutional spending cap, the governor now is seeking to rewrite cap rules that would exempt major new segments of the budget from spending limits.

The overall package would spend $21.48 billion in the fiscal year that begins July 1, and $22.32 billion in 2014-15, raising spending 9.7 percent over the next two years.

Despite criticizing his predecessors for relying too often on fiscal gimmicks to balance the books, Malloy also tapped several one-time revenue sources to prop up finances, including a new amnesty program for tax delinquents, another raid on the transportation program and an “energy auction” that would redirect about 800,000 households and businesses to a new electricity provider.

Malloy’s proposal does run up serious red ink in the near future. Based upon his administration’s own numbers, state finances would run $631 million in deficit, and $386 million over the spending cap in the 2015-16 fiscal year, the first after the coming biennium.

“In this budget, we have made lots of hard choices,” Malloy said.

But the Democratic governor drew a harsh critique from the top Republicans in the legislature, both of whom are weighing bids for governor themselves in 2014.

“Borrowing money, I think, is the wrong recipe for the state of Connecticut,” Senate Minority Leader John McKinney, R-Fairfield. “Overall we’re headed in the wrong direction.”

House Minority Leader Lawrence F. Cafero, R-Norwalk, said the governor’s plan to eliminate the property tax on motor vehicles — without replacing the tax revenues towns would lose — only will harm local budgets. “Municipalities are getting hurt badly here,” he said.

The governor’s proposal includes more than $200 million in cuts lawmakers made last December to help close a shortfall in the current budget.

Connecticut’s hospitals took the single-largest hit two months ago, losing $103 million in state aid to help them treat the uninsured and Medicaid patients.

The administration also wants to reduce aid to hospitals by another $146 million per year by 2014-15.

The new budget also would eliminate Medicaid coverage for thousands of poor parents with the expectation that they would get private coverage as part of federal health reform, eliminate the state-run Charter Oak Health Plan and slash payments to hospitals.

It would also take advantage of federal funds to increase Medicaid enrollment and raise rates paid to primary care providers who treat Medicaid patients, both of which are required by federal health reform.

And the governor proposed reducing the state’s new Earned Income Tax Credit from 30 percent of the federal EITC to 25 percent retroactive to Jan. 1.

The state credit, which began in 2011, distributed about $111 million to working poor families last spring. The governor’s proposal would reduce the tax benefit by roughly $18 million.

But Malloy, whose plan closes a $1.2 billion deficit projection in the fiscal year that begins July 1, tried to temper the fiscal pain with some relief.

“The families and the businesses of Connecticut have enough on their shoulders,” Malloy said. “This budget asks no more of them. In fact, I’m proposing we give them some much-deserved help.”

Much of that help is focused on education. Spending would rise $119 million above current levels next year and $215 million above the status quo by 2014-15.

The governor also is seeking to cut taxes at the municipal level in two ways:

• Restoring a sales tax exemption on the first $25 of clothing purchases. The state had offered a $50 exemption until 2011, when it was repealed to help close a budget deficit;
• And exempting the first $20,000 of assessed value — or the first $28,571 of a vehicle’s Blue Book market value — from property taxes. Municipalities raise a total of about $560 million per year from vehicle taxes, and Malloy’s budget included no estimate on how much of this total the exemption would save taxpayers.

But there also is new tax revenue being raised in the governor’s budget.

Besides the extra tax dollars that would be raised by scaling back the EITC, the plan would raise another $140 million by extending three temporary tax hikes.

A new tax on power plants and a surcharge on the corporation levy — both of which were set to expire next fiscal year — remain in play in the Malloy budget. The governor has said on several occasions he doesn’t consider these to be tax increases, and therefore they don’t violate his pledge to propose no new taxes.

A new cap on credits in the insurance premium tax also would be extended.

The Democratic governor’s proposal drew strong early criticism from Republican lawmakers regarding some controversial proposals to expand borrowing.

That plan includes delaying repayment of $1 billion Connecticut borrowed in 2009 under Gov. M. Jodi Rell to avoid further tax increases and spending cuts during the recession. Rell and legislators delayed the start of debt payments until the next term, saddling Malloy — who took office in January 2011 — with that problem.

Originally scheduled to be paid off in the 2015-16 fiscal year, the debt would be extended at least until 2018 in Malloy’s new budget.

The governor also has struggled with his GAAP initiative, and another $750 million would be raised through financing to kick-start that effort.

Unlike the modified cash basis system currently used, under GAAP, expenses must be promptly assigned to the year in which they are incurred. Similarly, revenues are counted in most situations in the year in which they were received.

If GAAP standards are used, state finances are $1.5 billion in the red, though Comptroller Kevin Lembo says that number will be down to $1.2 billion by the end of this fiscal year.

The legislature and Malloy had planned to whittle that number down over the next 15 years with annual payments of between $80 million and $100 million.

Instead, the governor wants to borrow $750 million. This will reduce the annual payment the state must make to a more-manageable $30 million. But it also would mean another $186 million in interest charges.

The state’s chief business lobby said Wednesday that the administration and legislature need to focus more on cutting spending and less on borrowing and raising new revenue from taxpayers.
“We’re disappointed that we’re going to see the extension of taxes that were going to be sunset,” said Joth Rathegeber, CEO of the Connecticut Business and Industry Association. “We’ve got to get people back to work.”