Malloy may run afoul of his pledges whether taxing or cutting

Governor Dannel P. Malloy faces plenty of critics who argue he can’t balance the next state budget without breaking his campaign pledge not to raise taxes.

But Malloy will be equally hard-pressed to close next year’s $1.3 billion-to-$1.4 billion deficit with spending cuts, given the many pledges and fiscal principles he has espoused since taking office four years ago.

And if the Democratic governor can’t raise new revenue or impose deep cuts without taking political heat, Republican lawmakers fear he will use fiscal gimmicks to postpone – and inflate – Connecticut’s budget woes for another two years.

“There’s not going to be a deficit,” was the governor’s campaign mantra. In fact, Malloy said once inflationary adjustments and statutorily required municipal aid increases are removed from the budget – as they often are – the shortfall would be smaller.

It is – but a sizeable problem still remains. According to the governor’s budget staff, the remaining gap stands at just under $1.1 billion, which budget director Benjamin Barnes said will pose many difficult challenges.

“State government will live within its means, and we will not raise taxes,” he said last week, while announcing about $55 million in emergency cuts to help balance the current state budget. “As difficult as some of these reductions are to make now, there are more, even tougher choices as we look ahead to next fiscal year.”

And while Barnes said social services – which are a huge portion of the overall $19 billion state budget – will unavoidably face some cuts, the administration will work to minimize them and maintain the governor’s longstanding pledge that, “We’re not going to shred the safety net.”

But an analysis of what’s left in the budget shows Malloy will not have an easy time finding places to cut – in large part because of his own statements and pledges.

Paying interest on interest … on interest?

When it comes to the state’s operating expenses, Malloy vowed on the 2010 campaign trail that “we’re not going to put it on the credit card” to balance the books.

But the governor, who deviated from that principle two years into his first term, could chop hundreds of millions of dollars off next year’s deficit by doing so again. Having already incurred interest charges to defer some expenses until after the election, Malloy now would have to propose that the state – in some cases — effectively pay interest, on interest, on interest.

The governor convinced legislators in 2013 to refinance a hefty portion of state debt. Almost $400 million in debt payments — principal and interest — owed this year and last were removed from the budget. Those payments start again, with interest, next year.

And when Malloy and lawmakers borrowed another $560 million two years ago to bolster the state’s cash flow, they also borrowed an extra $77 million to support general budget operations – and to cover the first two years of debt payments on the original $560 million loan.

The first annual payment on all of that debt, about $58 million, also comes due in 2015-16.

Barnes would not rule out further refinancing. But he also said that the state secured favorable interest rates with the 2013 borrowing, particularly when compared against inflation.

Municipal Aid

Grants to cities and towns comprise one of the largest components of the $19 billion overall budget, about $3 billion in total.

Unfortunately for the governor, it would be impossible to cut funds in this area without appearing to break from arguably his single-biggest budgetary principle: Shielding communities from state budget deficits.

Malloy repeatedly noted with pride during the last campaign that he not only spared towns when he tackled a record-setting $3.7 billion state deficit in 2011, he also modestly increased local aid during his first four years in office.

The governor renewed his pledge again this fall, saying, “I won’t balance the budget on the backs of cities and towns.”

But just in case Malloy forgot his pledge, the Connecticut Conference of Municipalities issued a not-so-subtle reminder in a recent advertisement acknowledging the governor’s re-election win this month.

“Congratulations on your re-election Governor Malloy,” the ad states. “And thanks for your commitment in the campaign: To protect municipal aid in the next state budget.”

Transportation and Tolls

The governor could chisel $153 million off of the next budget deficit by asking the legislature to repeal a promised subsidy for the transportation program.

Malloy, who criticized his predecessors during the 2010 for repeated raids on transportation, took some heat during the first term for doing the same – albeit in smaller numbers.

But Malloy adamantly insisted over the last year that there would be no more reversals of pledged transportation funding.

“There were gigantic raids on the transportation fund” before his administration, Malloy said during an appearance last February on WNPR’s “Where We Live.” “Did we end all of that at once? No. Will we end it by next year? The answer is yes.”

Tolls could provide the governor with significant new revenue. And while he didn’t rule tolls out in the last campaign, he was careful not to embrace them.

The governor, who often said that, “I’m not proposing tolls,” did note he would consider them if there’s a “doomsday” scenario in which federal transportation aid to states drops dramatically.

Cutting Hospitals = Giving $ back to Washington

If the governor follows a pattern he began in 2013, he could chop nearly $35 million off of the deficit. But it would mean imposing a much deeper cut on Connecticut hospitals, which already have been under the budget knife for several years.

And to do so, Malloy also would have to effectively send $80 million in federal assistance back to Washington next year – another practice he chastised past administrations for doing.

It all stems from a new hospital tax the governor and legislature began in the 2011-12 fiscal year to leverage more federal aid.

Connecticut first collected $350 million from the hospitals as a tax, then immediately sent $400 million back to the industry as Medicaid payments.

Why the back-and-forth exercise?

It enabled Connecticut, as many states do, to take advantage of federal Medicaid rules, claim the full $400 million payment as a state Medicaid expenditure, and claim 50 percent reimbursement from Washington, or $200 million.

Both hospitals and the state came out ahead – for one year.

Over the next three years, Malloy and lawmakers steadily reduced the Medicaid payments to hospitals, whittling the $400 million payment in 2011-12 down to just $114 million this year.

But that also meant Connecticut’s take from Washington dropped over the same period – despite rising Medicaid reimbursement rates. The state would have collected an extra $330 million in federal money over the past three years had it not scaled back this arrangement with hospitals.

So if the governor’s new budget cuts the final $114 million the state shares with hospitals, Connecticut will lose another $80 million from Washington, leaving the budget with a net gain of just $34 million.

Cuts to hospitals have “resulted in job loss, reduced staff salaries and benefits, a reduction in some services, and postponed investments in technology and infrastructure,” the Connecticut Hospital Association wrote in a statement. “We stand ready to work with the governor to find ways to phase out the hospital tax while keeping the state’s economy strong and growing into the future.”

Public colleges and universities

When faced with a $3.7 billion state budget deficit in 2011, the governor and legislature reduced annual operating grants for public colleges and universities for two years in a row.

By 2013, the block grants were down more than $33 million from 2011 levels. The University of Connecticut and the Board of Regents for Higher Education – which oversees the regional state university system and the community colleges –  both responded with steep tuition and fee hikes.

UConn’s charges are following a schedule that will have tuition and fees 30 percent above 2011 levels by next year. The state university system’s charges this year are 16 percent above 2011 levels, while the community colleges are 13 percent higher.

The governor never promised on the campaign trail that he wouldn’t seek more cuts here.

But he did decry the rising loan debt Connecticut’s students are facing and pledged to offer a new state income tax credit worth $20 million to mitigate that burden.

Given higher education officials’ warnings that more cuts in state aid would translate into further tuition and fee hikes, reductions in this area could be seen as the governor giving with one hand while taking with the other.