The Connecticut House voted at sunrise Sunday to adopt a $37.6 billion, two-year budget that preserves municipal aid and meets a rising demand for social services, while relying on one-time revenues and the exemption of an unprecedented $6 billion from the spending cap.

The Democrat-controlled House began debate minutes after midnight and passed the budget 95-48 in a vote along party lines at 5:15 a.m. Final passage in the Senate is expected Monday, two days before the legislature’s adjournment deadline of midnight Wednesday.

The budget expands the education reform initiatives adopted last year while launching a major science and technology expansion plan at the University of Connecticut. It calls for expenditures of $18.6 billion in the fiscal year beginning July 1 and $19 billion the next.

If not for a dramatic new interpretation of how Medicaid spending is counted, the bottom line next fiscal year would fall just shy of $21.5 billion, representing a 6 percent hike in the state’s operating budget. In 2014-15, the total spending would be $22.5 billion, up another 4.6 percent. Over two years, the new budget would spend $44 billion, based on the current method for reporting Medicaid spending.

The two-year plan includes a raid on the transportation fund, shifting its resources to general-fund expenditures, just as motorists prepare for one of the largest gasoline tax hikes in history. It also refinances operating debt from the last recession, spends over $220 million from the current year’s surplus and launches a new Keno lottery game.

Gov. Dannel P. Malloy and leaders of the legislature’s Democratic majority insist it includes no new taxes, but it extends expiring business levies and reduces a tax credit for the working poor, while offering new tax breaks on clothing and boats.

The new budget also delays a key element of one of Malloy’s biggest initiatives from the 2010 campaign: fully converting state finances to Generally Accepted Accounting Principles would be postponed until after the governor’s first term.

The 2014 election, when Malloy and the legislature stand for re-election, influenced the drafting of the budget and how it was framed Sunday by the Democrats trying to retain control and the Republicans hoping to unseat them.

“I think the story we wrote in this budget is a story of priorities,” said House Majority Leader Joe Aresimowicz, D-Berlin, who added that majority Democrats made tough choices in difficult fiscal times. “The story I tell is a positive story. … We’re doing it. We’re stepping up.”

The budget features “historic investments in education,” the majority leader said, adding he believes it avoids state tax hikes and helps communities as well. “How about maintaining municipal aid? We’re doing that.”

Malloy thanked House members in a written statement afterward for funding important priorities in education and economic development, while meeting the state’s obligations to save for workers’ pensions.

“Of course, no budget is perfect and this budget required many tough cuts, many tough choices and hard compromises,” the governor wrote. “We still have a long way to go.  But this budget shows that we’ve got our priorities straight, and we are determined to keep Connecticut moving forward.”

But with a reliance on one-shot revenues, the Republican minority said the Democrats only deferred confronting a structural shortfall.

“What we are doing today is we are prolonging the agony,” said Rep. Vincent J. Candelora, R-North Branford. “We are going to come back here two years from now much worse off than we are today.”

Finance panel clears path for spending cap change

The Finance, Revenue and Bonding Committee, which adopted a revenue schedule for the new budget late Saturday in a vote along party lines, defended a change that shifts more than $6.3 billion in Medicaid spending over the next two years off the books.

“We have been criticized in the past for not pursuing federal dollars,” said Rep. Patricia Widlitz, D-Guilford, co-chairwoman of the Finance committee, adding that the cap has been an obstacle in that effort.

Widlitz noted Connecticut was the only state in the nation last year not to budget its Medicaid dollars in the “net appropriation” fashion adopted Sunday. That was confirmed in a report by the National Association of State Budget Officers. 

“The cap was not designed as a barrier to keep us from getting money from Washington,” said Rep. Toni Walker, D-New Haven, co-chairwoman of the Appropriations Committee.

A federal program offered in cooperation with states, Medicaid helps pay for health care for the poor and disabled, including nursing home care for much of the elderly population. States pay most costs up front, and then receive reimbursement to cover a portion or all of the expense of various services.

Connecticut has long reported the full cost of Medicaid as a state expenditure.

Next fiscal year, that cost amounts to about $5.3 billion. To offset that, the state expects about $3 billion in federal aid.

Rather than post the first number as a state cost, and the second as revenue, the new budget simply subtracts those federal dollars from the state’s $5.3 billion cost, and records the difference as a “net appropriation” of $2.3 million next year. 

The true cost to the state remains the same with either approach. But with net appropriation, more than $2.9 billion in spending comes off the state’s books next year, and another $3.4 billion follows in 2014-15.

And when it comes to a constitutional cap that counts budget appropriations, less overall spending on Medicaid leaves more room under the cap to spend somewhere else.

Without this new approach, the budget exceeds cap limits in both years.

Under the constitutional amendment, lawmakers can modify the cap’s calculation method. But that requires a three-fifth’s vote in both legislative chambers: 91 votes in the 151-seat House and 22 in the 36-member Senate.

Democrats, who hold 98 seats in the House and 22 in the Senate, conceded weeks ago they were struggling to hit 22 votes in the Senate, where they have no margin for error.

The majority party originally had considered using the “net appropriation” method to budget for one segment of Medicaid that provides health coverage to poor adults without minor children. This would have shifted about $1.58 billion out from under the cap and off the budget over the next two years.

But sources said this wouldn’t have provided enough room under the cap for the budget adopted Sunday in the House, forcing Democrats to use net appropriations for all Medicaid spending.

Republicans said that either version of shifting Medicaid dollars required a super-majority vote. And because that standard wasn’t adhered to, they said, the new budget is unconstitutional.

“The story that this budget tells is uncomfortable for many of us,” said House Minority Leader Lawrence F. Cafero, R-Norwalk. “In order to be written, we had to ignore the Constitution. … When it finally gets filed, it gets filed in the fiction section.”

Building on investments in education

The new budget takes several steps to expand the education reform initiatives enacted last year, including:

  • $27.5 million for the Commissioner’s Network, a state intervention program that assists Connecticut’s lowest-achieving schools. The program allows the Department of Education commissioner to designate as many as 25 schools for assistance.
  • $20 million to help school districts fund teacher evaluations that rely on student performance when considering tenure awards and teacher dismissals. These new evaluations began this school year in 16 pilot districts, which collectively have 5,000 teachers. Over the next two school years all 50,000 public school teachers in the state will need to be evaluated under this new system.
  • $14.6 million to launch the Common Core State Standards in Connecticut, a national initiative to expand students’ exposure to nonfiction reading materials and to prepare them to take standardized tests on computers.

“We support critical initiatives,” said Rep. Andy Fleischmann, the co-chairman of the Education Committee.

The budget maintains current state aid levels for both public and non-public school transportation. Local advocates balked at proposals both from Malloy and from the Appropriations Committee to cut these grants.

UConn’s operating grant of $205 million was cut $2.6 million in 2013-14, but the state’s flagship university would receive a $27 million boost in 2014-15 funding to add faculty and other staff as part of its “Next Generation” initiative, which was passed Saturday by the Senate.

That plan to expand science and technology programs is expected to receive more than $1.5 billion in state financing over the next 10 years. The Next Generation bill pays to build and rennovate facilities at UConn to accommodate a 30-percent increase in enrollment.

The budget also boosts funding for the Board of Regents’ system. Its four Connecticut State Universities, a dozen community colleges and an online state college will receive an extra $12.4 million next fiscal year and $14.7 million in 2014-15. Most of those increases will fund mandatory pay increases for unionized employees at the schools.

Cities and towns spared from cuts

The new budget largely preserves the state’s $3 billion per year aid package to cities and towns.

Nearly two-thirds of all municipal aid is funneled through the Education Cost Sharing program, the principal grant to local school districts, and that jumps by 2 percent over the next two years. Total ECS funding grows by $50.8 million next year and by another $50.8 million in 2014-15.

“We have held our municipalities harmless,” said Widlitz.

Lawmakers and the administration ended a revenue-sharing program that gave municipalities a $90 million-per-year share of state sales and real estate conveyance tax revenues.

But that was largely supplanted with an extra $30 million in annual road repair assistance and an additional $56 million per year for other local capital improvements.

Cities and towns had stood to lose more than $600 million per year in local property tax revenues under the governor’s February budget plan, which would have eliminated the local tax on motor vehicles starting in 2014-15.

Legislators balked at taking that step now, arguing communities needed more time to prepare for the fiscal hit.

A task force launched by House Speaker J. Brendan Sharkey, D-Hamden, recommended a program to phase in repeal of the car tax.

But while Hartford would begin to see vehicle taxes drop in 2016, no other community would experience tax relief before 2018.

Either that phase-out plan, or one similar to it, is expected to be included in budget policy implementation bill likely to be adopted before the 2013 General Assembly adjourns at midnight Wednesday.

The budget does call for municipal aid to be cut by $10 million in the second year of the budget. Sharkey’s task force, which already has unveiled several proposals to cut costs at the local level, is expected to release a blueprint before the 2014-15 fiscal year to show how communities can save enough money to absorb that $10 million cut in state assistance.

No New Taxes?

Though the governor has insisted since February that this budget would contain “no new taxes,” there are several changes that will affect taxpayers’ wallets in the new budget.

A controversial $2.50 per megawatt hour tax on power plants was supposed to end July 1, and Malloy sought a two-year extension.

But after strong opposition from lawmakers in southeastern Connecticut, the home of two nuclear power plants operated at Millstone Point by Dominion Resources, the extension was limited to three months.

That extension, through Sept. 30, would raise another $17.5 million.

Other taxes originally set to expire that would continue in the new budget include:

  • A 20 percent surcharge on the corporation tax, raising an extra $44 million next year and $74 million in 2014-15.
  • A cap on an insurance premium credit for businesses, raising an extra $27 million in each of the next two years.

Connecticut’s working poor would lose $21 million next fiscal year as the the state Earned Income Tax Credit shrinks by one-sixth, from 30 percent of the federal EITC to 25 percent. The credit would be partially restored, to 27.5 percent of the federal EITC, in 2014.

Hospitals have been paying $350 million in year through a provider tax since July 2011. But the state had been reimbursing hospitals for all of those dollars, using the tax as a mechanism to qualify for more federal health care assistance.

This new budget reduces aid to hospitals by more than $500 million in total over the next two fiscal years, including about $400 million cut from the grants used to reimburse hospitals for the provider tax they pay.

The Malloy administration says the hospitals would make back those lost funds due to broader coverage and surging demand for Medicaid services. But to do so, hospitals will have to treat thousands more poor patients.

The new budget imposes a two-year moratorium on the state’s film production tax credit program, saving the state $6 million in total over that period.

There also are some tax cuts.

The new budget restores the sales tax exemption on clothing items costing less than $50, but not until July 2014. That will cost the state $11.5 million in the second year of the budget.

It eliminates the 7 percent luxury tax on boat purchases, replacing it with the regular sales tax rate of 6.35 percent. And it also exempts boats from the sales tax if they are going to be docked in Connecticut for less than 60 days each year.

“It’s kind of hard to speak in glowing terms about any tax package,” Widlitz said, adding she was proud that lawmakers worked to carve out some tax relief in tough fiscal times.

Gambling on Keno

After passing on proposals in 2009 and 2010 to add Keno, an electronic game of chance that some other states allow in bars, restaurants and other venues, lawmakers turned to the game shortly after revenue projections tumbled again as budget talks began.

The Indian tribes that run the two casinos in Connecticut’s southeastern corner have exclusive rights to certain games, and assert that includes Keno.

And though state lottery officials say Keno is a type of lottery game, the new budget authorizes the administration to award the Mashantucket Pequot and Mohegan tribes 12.5 percent each of the state’s Keno proceeds.

Nonpartisan legislative analysts estimate this arrangement would leave the state with just under $31 million in total Keno revenues over the next two years.

GAAP: Generally Accepted Accounting Principles

The new budget postpones an element of the state’s conversion to GAAP beyond Malloy’s current term –- and into the 2015-16 fiscal year.

It marks the second significant delay of a process Malloy insisted as a candidate back in 2010 would begin right away.

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

If GAAP standards are used, state finances are deep in the red. Fiscal analysts estimate that differential at $1.2 billion. And because of inflation, that number can grow over time.

Malloy promised to sign an executive order on his first day requiring agencies to report in compliance with GAAP standards. But the order he signed only ordered his budget office to study the matter.

The first budget he signed postponed that reporting requirement to mid-2013. An early draft of the budget would have further delayed the reporting, but the final version still has the mid-2013 deadline.

Similarly, the governor’s first budget delayed annual payments to amortize that GAAP differential until the 2013-14 fiscal year, and the next budget pushes that task back until 2015-16. But while the amortization plan starting in July 2013 would have taken 15 years, the one now set to begin in July 2015 would take 13 years.

The new budget does designate $40 million from a recent legal settlement with the tobacco industry to be reserved. But that is designed only to cover inflationary growth in the GAAP differential.

Malloy has said repeatedly since last winter that the next budget would be GAAP compliant, and while talking with reporters about a tentative budget deal the governor said, “The budget will be in balance and will be GAAP-compliant.”

In the written statement released early Sunday, he said, “Last but certainly not least, this budget is fully balanced under Generally Accepted Accounting Principles.”

Raids, Refinancing and Amnesty for Tax Delinquents

After approving more than $1.5 billion in tax hikes two years ago to close a historic budget deficit, Malloy and his fellow Democrats turned to a wide array of fund raids and one-shot revenue sources to prop up ongoing spending in the new budget.

One of the largest raids used to support the next budget involves one of the largest fuel tax hikes in history, set to arrive on July 1, based on a statute adopted in 2005.

Based on the wholesale price of gasoline at New Haven harbor on Friday — $2.98 cents per gallon according to the Connecticut Energy Marketers Association -– that tax would add 3.8 cents to the price immediately.

Nonpartisan legislative analysts estimate it would raise $60 million at the pumps next fiscal year.

And while most of those funds technically are assigned to the transportation fund, the new budget then shifts $91 million from that fund into non-transportation programs next fiscal year.

Further complicating matters, that shift leaves the transportation fund with $104 million less than the funding it would need to maintain current services in 2013-14, and $84 million less in 2014-15.

Other raids from specialized funds and one-shot revenues used to cover operating costs in the new budget include:

  • $25 million over two years from the banking fund.
  • $12 million over two years from the tobacco and health trust fund.
  • $35.4 million over two years from energy efficiency programs.
  • $35 million from a quasi-public trash authority
  • $10 million from a stem cell research fund, although that account is expected to be replenished with borrowed funds.
  • $1 million next year from the state’s probate courts.
  • And all of the current year’s $221 million projecting budget surplus.

The new budget also refinances the $1 billion operating debt state government bonded in 2009.

It cancels $392 million in payments due over the next two years, pushing them back until after the 2014 state elections -– when they come due along with $45 million in new interest.

And the budget offers a tax amnesty program, waiving penalties for tax delinquents designed this fall designed to raise $25 million. It would be the third amnesty program the state has offered since 2002 and the fifth since 1990.

For the record: An earlier version of this article failed to note that language postponing the GAAP reporting requirement until mid-2015 had been removed from the final version of the bill adopted by the House.

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