Updated at 2:02 p.m.
Gov. Dannel P. Malloy proposed a $19 billion budget Thursday that offers tax breaks for middle-income households, consumers and towns while limiting spending growth to just under 3 percent.
The plan for the fiscal year that begins July 1 would double the emergency budget reserve, but also effectively spend more than $200 million in projected surpluses to provide those tax breaks. The proposal would expand the built-in deficit after the election by more than $50 million, pushing it to $1 billion.
Taking advantage of recent growth in tax receipts, the governor also proposed new funding for prekindergarten programs, supportive housing for people with mental illness and rental subsidies for low-income seniors.
The administration not only kept its word to preserve existing levels of municipal aid, but also recommended an $8 million increase in a grant that reimburses communities for lost revenues tied to property-tax-exempt colleges and hospitals.
And after a year when legislators, economists and construction trade unions began to focus on backlogged financing for transportation projects, the governor recommended more than 100 new engineering and other positions at the Department of Transportation to accelerate work.
“Our work hasn’t been easy,” Malloy, who inherited a record-setting budget deficit when he took office three years ago, said in his budget address. “No person – and certainly no government – is perfect. Lords knows I’m not. All of our progress has come with setbacks along the way. But together we’ve proven that positive change, while hard, is possible, that progress is possible.”
The latest Malloy plan basically maintains the $19 billion bottom line from the original 2014-15 budget that legislators enacted last spring. The governor’s proposed adjustments fall a razor-thin $8 million under the constitutional spending cap.
“We think this is a sustainable budget plan,” Office of Policy and Management Secretary Benjamin Barnes, Malloy’s budget chief, said during a midmorning briefing in the Legislative Office Building.
More than $200 million in re-election year tax breaks
Malloy outlined most of the tax cuts in this new plan over the past two weeks.
The largest involves $155 million in one-time relief for taxpayers in the form of a rebate of sales and gasoline tax revenues. A proposed rebate of $50 would be available to individuals who earn less than $200,000 per year, and a rebate of $100 would go to couples making less than $400,000.
The budget also includes a two-stage break on state income taxes for retired teachers.
Malloy’s proposal specifically would exempt 25 percent of retired teachers’ pensions from state income taxes retroactive to Jan. 1.
That exemption would climb to 50 percent in January 2015. The annual cost to the state of this once it is fully implemented would be $23.7 million per year.
The governor’s second-largest tax reduction proposal would restore the sales tax exemption on over-the-counter medications, a change that would cost the state about $17 million annually.
Other tax breaks Malloy is proposing include:
- A $9 million annual savings for cities and towns by exempting them from a tax on insurance premiums;
- Extending an expiring tax credit for new business investors worth $3 million per year;
- Forfeiting $200,000 in state park fee revenues by allowing a two-day “fee holiday” this summer.
The governor also would dedicate $250 million of this fiscal year’s projected surplus for the emergency reserve, commonly known as the Rainy Day Fund. Coupled with the $271 million already in the fund, the reserve would hold about $520 million, equal to about 3 percent of annual operating costs.
Malloy would use another $100 million from this year’s surplus to make a one-time supplemental payment into the cash-starved pension fund for state employees.
Barnes noted that if future spending growth is limited to about 2.7 percent – the increase in the governor’s latest proposal – that should help keep state finances out of the red. With this approach, “we will have balanced budgets or small surpluses in the out-years. … The state of Connecticut can do that going forward.”
But many advocates for social services, health care and education have argued that spending in these areas has not grown sufficiently for years to keep pace with growing demand or inflation and cannot continue with modest increases.
Nonpartisan legislative analysts say that based on current spending and revenue trends, and considering inflation and economic growth, a deficit of about $940 million has been built into the 2015-16 fiscal year.
Still, the governor’s proposed tax cuts for teachers, consumers, businesses and municipalities would add more than $50 million in recurring costs to state finances. That cost would push the post-election deficit back to about $1 billion.
Cities and towns are protected
The governor’s budget maintained a consistent theme when it came to municipal aid: spare town aid from cuts.
Malloy inherited an Education-Cost-Sharing grant program propped up with more than $270 million in expiring federal aid when he became governor in January 2011. He not only replaced those vanishing dollars, but added another $140 million to the $2 billion ECS program. And his new plan maintains the $40 million increase built into the original budget for 2014-15 that lawmakers enacted last spring.
During Malloy’s tenure, cities and towns have seen their ECS grant increase by $142 million, a 7 percent increase over four years.
The new plan also recommends an $8 million increase in the grant program that reimburses cities and towns for some of their lost revenues tied to property-tax-exempt colleges and hospitals.
The governor also proposed giving municipalities a two-year reprieve from the periodic property revaluation process – a procedure that often leads to municipal property tax hikes for residential taxpayers as updated values are assigned to commercial, residential and industrial property.
“Overall, we were very pleased with the governor’s proposed budget,” said Elizabeth Gara, director of the Connecticut Council of Small Towns.
But the Connecticut Conference of Municipalities said the governor and legislature still need to work to free communities from “costly unfunded state mandates,” including a requirement that towns post legal notices in newspapers. CCM has proposed waiving that requirement as long as towns post notices on their websites.
Bridgeport Mayor Bill Finch, a Democrat, welcomed the governor’s budget.
“Not having to fill in for state cuts is a great relief,” he said.
“I think we are headed in the right direction of supporting cities in this state,” echoed David Martin, also a mayor.
Ramping up transportation projects
The governor’s proposal to add about 100 engineers, planners and other technical staff to the Department of Transportation earned endorsements from key labor and business lobbies.
The administration faced criticism earlier this year when records showed that more than $6 billion in financing for capital projects had been approved at the state level — but not yet secured on Wall Street or spent on projects.
Labor unions have argued that state agencies overseeing construction projects, particularly the DOT, are badly understaffed and unable to launch projects quickly.
Despite four increases in state fuel taxes between 2005 and 2008, and a fifth this past July, the number of DOT employees is down 8.8 percent since the tax hikes began.
A mid-September report from the University of Connecticut estimated the state could create up to 28,000 new jobs over two years just by whittling that bonding backlog in half.
“Those (DOT) positions are huge,” said Lori Pelletier, president of the Connecticut AFL-CIO. “The idea that an investment in 100 jobs could help create 28,000 — I’ll take that investment any day of the week.”
John Rathgeber, president of the Connecticut Business & Industry Association, said a lack of infrastructure investment has been a longstanding concern of Connecticut companies. He also praised Malloy for expanding the Rainy Day Fund and paying more into the pension system, but added that more must be done to reduce the post-election deficit.
Uncertainty about the state’s future finances “remains the biggest drag on private investment in this state,” he said.
Spending cap leaves little wiggle room
Though the governor’s plan would use big chunks of the projected surpluses to finance tax breaks and other new initiatives, it leaves little room to accommodate other plans for the fiscal reserve.
According to Barnes, the new budget falls just $8 million under the constitutional spending cap in 2014-15 — and that’s only if lawmakers accept Malloy’s proposal to exempt his $100 million supplemental pension payment from the cap system.
In other words, if lawmakers want to spend more of the surplus than the governor has proposed, they either will have to cut spending somewhere else, or vote to legally exceed the cap.
Malloy has resisted the latter option throughout his term, and Barnes said Thursday that nothing has changed.
“We left $8.1 million underneath the spending cap, which seems eminently flexible to me,” Barnes said. “We think that we can live within the spending cap without any trouble,” he said.
Senate President Donald E. Williams Jr. said he isn’t worried that Democratic lawmakers will clash with Malloy over the cap. Though the state’s financial outlook has improved, it’s clear that Connecticut isn’t enjoying the record-setting string of budget surpluses that occurred in decades past, he said.
“I believe folks understand the difference from where we are now and from the 1990s,” Williams said.
Holding Medicaid rates and pursuing universal Pre-K
Malloy’s proposal would use state funding to continue recently increased payment rates to primary care doctors who see Medicaid patients. The increase, required by the federal health law, is currently funded by the federal government, but that money will expire at the end of 2014.
State officials say the increased rates have helped persuade more doctors to treat Medicaid patients, something that’s long been a challenge. The federal funding would be available for the first half of the next fiscal year, and continuing it after that would cost $15 million, Barnes said. After that, the state would face a cost of $36 million per year.
The proposal would also expand programs that allow people with significant disabilities or medical conditions to receive care at home, rather than in institutions. Malloy would allow the Katie Beckett waiver to serve 100 more children with severe medical needs. The program currently serves 100 people and has a long waiting list. Similarly, the proposal would double the size of the Connecticut Home Care Program for Adults with Disabilities, which now serves 50 people with degenerative neurological conditions.
Barnes said the administration thinks these programs keep people off Medicaid by allowing them to stay out of nursing homes, where they would likely spend down their income and assets to the point where they qualify for the public coverage.
The governor also proposed universal access to preschool for low-income families, increasing the amount the state sends municipalities to cover education by $41 million — a 2 percent jump — and $10 million for schools to enhance their security systems in the wake of the shootings at Sandy Hook Elementary School.
The budget also will invest millions to renovate the buildings at the state’s largest public college and university system.