Malloy pays price now for protecting municipalities in 2011

Jacqueline Rabe Thomas :: The CT Mirror

Gov. Dannel P. Malloy

A campaign promise by Gov. Dannel P. Malloy to preserve municipal aid was incorporated into his first budget in 2011, sparing many local leaders from imposing steep tax increases and deep budget cuts. But it’s cost him politically as he seeks re-election.

Malloy’s refusal to slash local aid as did the governors in New York and New Jersey is one of the major factors now contributing to a significant political liability: A projected deficit of $1.4 billion next year, despite his administration’s first-year tax increase of $1.5 billion.

A smaller-but-similar move to bolster the pension fund exacerbated the governor’s troubles.

So did Malloy bite off more than he could chew? Or was he caught in a no-win situation, having to raise state taxes, or force communities to inflict the pain?

“I don’t think the average person on the ground even knows what happened, or what could have happened” said Sen. Beth Bye, a West Hartford Democrat and ally of the governor. “No one could even envision a $1 billion property tax hike on cities and towns. But [reporters] don’t write about taxes that never happened.”

Bye was referring to a controversial pledge Malloy made during the 2010 campaign: to balance the budget without cutting aid to cities and towns.

That was easier said than done.

Gov. M. Jodi Rell and the 2010 legislature had propped up nearly 10 percent of all municipal aid with temporary dollars – and no plan to replace them. About $270 million in emergency federal stimulus money disappeared from the town aid program as Malloy crafted his first budget.

And while Malloy signed $1.5 billion in new state taxes into law, he also filled all of the gaps in the municipal aid system and secured modest increases.

Over four years, Malloy and the legislature poured an extra $1.42 billion in state funds into municipal grants – not counting aid that was borrowed, or court mandated as part of school desegregation efforts.

The Connecticut Coalition of Municipalities said that local service cutbacks, school closings and municipal employee layoffs already had been a reality throughout the last recession. Had communities lost another $1 billion in state aid over the last four years, “There also would have been a slew of employee layoffs and more drastic cuts at the local level,” said Ron Thomas, CCM’s director of public policy.

“I don’t think anyone can argue that the decisions Gov. Malloy made prevented a large scale local property tax shift,” Malloy spokesman Andrew Doba said. “Fiscal responsibility means making sure the people who count on you know they can count on you.”

Meanwhile, Malloy’s neighbors, Govs. Chris Christie of New Jersey and Andrew Cuomo of New York, proposed budgets that avoided state tax hikes, yet slashed deeply into town aid, forcing tax hikes at the local level.

A report last month from the Center on Budget and Policy Priorities showed Malloy took a different path than most governors when it came to state aid for education. Connecticut is one of just six states whose per-pupil education spending has grown by more than 2.5 percent since 2008. Connecticut’s 7.5 percent growth is topped only by North Dakota.

If Connecticut’s choices were to impose more than $1 billion in tax hikes at the state or at the municipal level, the latter would have been far worse, according to University of Connecticut economist Fred Carstensen, who insists not all tax hikes are created equal.

“The property tax is stunningly unequal,” Carstensen said. And higher local taxes in the cities would have forced the poor and small businesses to shoulder a much larger share of the burden of balancing the state budget.

Reforming the pension system

Malloy also went a different direction from Cuomo and Christie when it came to state employees’ pensions. While neighboring governors deferred payments, Malloy launched a long-range program to reverse two decades of pension under-funding. That led to an extra $255 million in contributions over the past three years above what otherwise would have been required.

And while Republican legislators have slammed Malloy for the state tax hikes, they backed both his town aid and pension fixes.

Still, had Malloy simply left the pension and town aid systems as he found them but kept all other budget choices the same, the 2015-16 deficit would drop significantly, from nearly $1.4 billion to $820 million.

More importantly, instead of having just $330 million in the budget reserve, he would have $2 billion – enough to cover the deficit for more than two years.

Sen. Robert Kane of Watertown, ranking GOP senator on the Appropriations Committee, said that “For everything Gov. Malloy has done right, he has done three things wrong.”

Besides the state tax hikes, the Democratic governor also has used the state’s credit card at record-setting levels, including hundreds of millions of dollars to hide operating deficits until after the election, Kane said.

Criticism from the left and the right

But Malloy’s critics argue towns could have been shielded and the state’s finances made more stable at the same time.

Former state Rep. Jonathan Pelto, a Mansfield Democrat and one of the governor’s most vocal critics, said the huge deficit Malloy has left behind still threatens the future of town aid and public-sector pensions.

Pelto, who last week launched an independent bid for governor, said had Malloy not rejected calls for a more progressive income tax, Connecticut could have municipal aid and pension fixes and a balanced budget.

“Gov. Malloy’s decision to coddle the rich by raising the tax rate on the middle class but refusing to raise the rate for the wealthy is the primary reason the state is facing this deficit,” he said.

Malloy did raise the top marginal rate on the state income tax from 6.5 to 6.7 percent, and also approved a provision ensuring the wealthiest households pay the top rate on most of their income.

But he rejected a bid from Better Choices, a coalition of public-sector unions and social service advocacy groups, who pushed for a top rate of more than 10 percent.

“While I do believe in a progressive income tax,” Malloy said in his 2011 budget address, “I do not believe that we should punish success, or wealth.”

Danbury Mayor Mark Boughton, who is running for governor as a Republican, said Malloy and his fellow Democrats in the legislature’s majority haven’t done enough to scale back state spending, or to force more efficiencies at the local level.

“The conversation that has to happen, about what kind of government do we have, what kind can we afford? That still hasn’t happened,” Boughton said. “We just seen some nibbling around the edges.”