Negotiators for Gov. Dannel P. Malloy and the legislature’s Democratic majority concluded negotiations Friday evening on the brink of a deal for the next two-year state budget, sources said.

The framework for a final agreement, which is contingent on a few spending reductions still to be identified by the administration, includes a scaled-back version of a controversial tax on electricity generators. It also would dip into this year’s budget surplus.

A last-minute legislative proposal to bump cigarette taxes by 95 cents per pack was rejected.

Sources also confirmed that the budget framework would not require changes to the constitutional spending cap, relying instead on an alternate interpretation of Medicaid expenses.

Perhaps the biggest compromise reached in the budget talks this week involves amending the governor’s bid to extend a tax on electricity generators. Worth about $70 million per year and scheduled to end July 1, the tax would continue through mid-2015 under the governor’s plan.

But sources said the understanding reached Friday would extend the tax only through mid-2014, and reduce the annual levy to about $30 million.

Southeastern Connecticut lawmakers have fought against extending the tax on power plants.

That region includes the two nuclear power plants on Millstone Point in Waterford owned by Dominion Resources of Richmond, Va., which pays more than half of the $70 million raised annually by the tax on generators.

Local legislators have noted that Millstone employs more than 1,300 of their constituents, and that Dominion has tried to sell or close other plants in the Northeast when its profitability has been harmed.

Malloy, who took a political risk by agreeing to $1.5 billion in tax increases to close the mammoth-sized deficit he inherited two years ago, has said repeatedly he won’t raise taxes in this budget.

But besides extending the generator tax, the tentative budget framework also would:

  • Preserve an expiring corporation tax surcharge and a cap on insurance premium tax credits for businesses;
  • Reduce the state’s Earned Income Tax Credit for working poor families from 30 percent to 25 percent of the federal EITC;
  • And implement a major increase in the wholesale tax on gasoline and other fuels July 1, following a schedule adopted in 2005.

Another compromise between Malloy and his fellow Democrats in legislative leadership involves the $212 million surplus the administration is projecting for the current operating budget. Coupled with nearly $90 million in the emergency reserve — commonly known as the rainy day fund — that left about $300 million in one-time funds that could be used to help balance the next budget.

Citing sluggish state revenue growth, the governor had insisted last month that any reserves and surplus had to remain in the bank.

But sources said budget negotiators tentatively agreed to use more than $200 million of these funds to support the next budget.

Sources also said the final budget deal would not include the governor’s proposal to eliminate minimum bottle pricing for alcoholic beverages, or a plan to offer a $500 incentive payment to customers willing to connect to nearby natural gas supply lines.

Both the Malloy and the Legislature’s Appropriations Committee proposed $43.8 billion budgets earlier this year for the coming biennium.

Those plans, which largely preserved municipal aid and met surging demand for social services for the poor, both relied on more than $750 million in borrowing to bolster the state’s cash position, as well as refinancing of a $1 billion operating debt from 2009.

And both were thrown out of balance in late April when state analysts downgraded revenue projections for the next two fiscal years combined by nearly $500 million.

New savings estimates for state employee and retiree health care costs covered about $220 million of that problem, leaving negotiators for the administration and Legislature to decide how to fill the rest of the gap.

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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