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Gov. Dannel P. Malloy presenting his budget.

The $40 billion two-year budget proposed Wednesday by Gov. Dannel P. Malloy closes a major deficit at little cost to the middle-class, while cutting social services, adding to the tax burden on business and making a small down payment on an ambitious 30-year plan to overhaul transportation.

His plan would boost tax receipts by about $900 million, mostly by altering tax laws on businesses, and offer a small of measure of middle-class tax relief by cutting the 6.35 percent sales tax to 6.20 percent in November and 5.95 percent in two years.

The administration preserves municipal aid and avoids layoffs as it closes a projected two-year deficit of at least $2.5 billion, but a central feature of a “second-chance society” initiative to reintegrate inmates into society ignited a rare dispute between the executive and judicial branches.

The two-year budget would spend $19.7 billion in the 2015-16 fiscal year and $20.3 billion in 2016-17. Spending would increase by about 3 percent in each of the two fiscal years.

The administration plan closes huge projected deficits in each year. The legislature’s nonpartisan Office of Fiscal Analysis pegged those shortfalls at $1.3 billion in the 2015-16 and $1.4 billion in the second year.

“The budget I present to you is filled with tough choices,” Malloy told legislators in a midday speech.

Business groups, public-sector labor unions, non-profit social-service providers, environmentalists, hospitals and others all found fault with the proposal, foreshadowing a long and likely contentious review by the General Assembly.

“Cuts always generate debate and concern,” said Senate Majority Leader Bob Duff, D-Norwalk. “We’re not the only state where this is happening. Other states are just like Connecticut.”

Rep. Stephen D. Dargan, D-West Haven, one of the longer-serving members of the legislature, was among those who reacted warily to the governor’s proposal.

“Today is opening day,” Dargan said. “It’s a long season.”

Social services, health care face deep cuts

Malloy’s proposal calls for many cuts to health care and social services.

It would cut an estimated 34,000 parents off Medicaid coverage and eliminates close to $20 million in state funds for mental health and substance abuse treatment.

Most health care providers who treat Medicaid patients would see a reduction in their payment rates, and hospitals would lose millions of dollars in funding.

Some seniors who receive state-funded home care services would have to pay more than twice as much toward the cost of care. Older state residents who don’t require a nursing home would no longer be eligible to apply for the home care program.

A program that funds services for children and adolescents with developmental disabilities and significant behavioral health needs would see a 60 percent drop in its state funding.

The state would drop plans to coordinate care for the costliest Medicaid clients, and some of them would be required to pay more for their medication.

Mixed reviews from labor

Malloy kept his campaign pledge not to impose layoffs or to seek concessions from state employee unions. The new budget also continues an effort Malloy began in 2012 to ramp up contributions to the cash-starved state employee pension fund.

But the budget does impose “aggressive” hiring restrictions, Malloy’s budget chief, Office of Policy and Management Secretary Benjamin Barnes, said.

The governor’s budget drew mixed reviews from labor.

Lori J. Pelletier, who heads the Connecticut AFL-CIO, praised Malloy on several points, including maintaining his pension fix, preserving municipal aid and proposing a major transportation investment and a sales tax cut.

The governor’s budget director, Ben Barnes, and chief of staff, Mark Ojakian, answering questions after the budget speech.

“This will help ensure that no teachers, firefighters, police officers and other municipal workers are laid off,” Pelletier said.

But the Better Choices Coalition, a coalition of state employee unions and social services advocacy groups, urged the legislature to reject Malloy’s proposed cuts to social services and health care programs. The coalition also said lawmakers should “ask more from those who can and should pay their fair share” – an argument frequently used by this group in the past to advocate for higher income tax rates on wealthy households.

 Executive, judicial branches collide

The governor’s budget would close one unnamed state prison and redirect a portion of the savings to his “second-chance society” plan, an initiative to reduce recidivism and assist youth at risk of becoming offenders.

But the administration sparked a sharp response from Chief Justice Chase T. Rogers when it also proposed removing adult probation supervision, offender re-entry and alternatives-to-incarceration programs from the Judicial Branch, involving about 1,500 employees.

CT Judicial Branch

Connecticut Supreme Court Chief Justice Chase T. Rogers

Barnes said these court-run programs “overlap” with similar programs run by the departments of Correction and Children and Families, and recommended they be merged and streamlined into an Executive Branch function.

“Our concern is that we have seen no evidence substantiating how this proposal will result in greater efficiencies or better outcomes in the criminal justice system, the juvenile justice system or the family court system,” Rogers wrote. “Additionally, we do not agree that the proposal will result in budgetary savings.”

William Carbone, who was the executive director of the Judicial Branch’s well-regarded court support division for 15 years before recently retiring, said he cannot fathom the move.

“I do not agree with it at all,” he said. “It’s not broke. Why is he trying to fix it? It’s a very difficult proposal to defend.”

Sarah Eagan, the state’s child advocate, also doesn’t understand why the administration would want to move these important functions to the Department of Children and Families, an agency with which she already has “serious concerns” about the job they are doing.

“The Office of the Child Advocate has been raising significant concerns about DCF, and until those problems are resolved, our concerns remain,” she said.

The governor’s criminal justice advisor, Michael Lawlor, and commissioner of children and families, Joette Katz, both declined to comment on the proposal.

Barnes, the governor’s budget chief, said the shift is to cut down on “significant overlap. We don’t have unlimited resources.” He also said providing services for children who break the law should be an executive branch function, not a judicial one.

The change would cut state funding for these programs by $20 million a year, an 8 percent reduction.

The governor’s fellow Democrats in legislative leadership also were cautious when asked about removing these programs from the court system.

“The Judicial Department is doing a very good job with the programs they are running,” said House Speaker J. Brendan Sharkey. “If it is working well, we should support it.”

Senate President Pro Tem Martin M. Looney, D-New Haven, said the reorganization would get close scrutiny from legislators, especially since the Court Support Services Division that now oversees the programs has a stellar reputation.

“In terms of focus, in terms of organization, that’s going to be the major piece, because obviously it involves a significant shift of a number of services from one branch of government, Judicial, to the Executive Branch,” Looney said.

Malloy again shields cities and towns

Despite the challenges of closing major deficits in the new two-year budget, Malloy continued his record of shielding local aid from the budget knife.

The governor, who inherited a $3.7 billion shortfall when he took office in 2011, spared municipal aid in his first term and modestly increased it over four years.

The governor’s new budget preserves the nearly $3.2 billion aid package in each of the next two fiscal years, though it does impose a few new mandates on cities and towns.

“As a former mayor, the governor understands that by saying ‘no’ to municipal cuts, he is saying ‘yes’ to property taxpayers,” the Connecticut Conference of Municipalities wrote in a statement about Malloy, who was Stamford’s mayor from 1995 through 2009.

All communities would be required offer full-day kindergarten, though all but six districts either offer it already, or have approved plans to begin providing it.

The governor’s proposal also would require communities to assume the full cost of the resident state trooper program, which many small and mid-sized towns rely on to provide municipal protection. The state currently covers about 30 percent of the cost.

The Connecticut Council of Small Towns praised Malloy for preserving municipal grants. “The proposed budget recognizes that town budgets are already stretched thin,” COST Executive Director Betsy Gara wrote.

But Gara added that “small towns will take a big hit” with the resident trooper proposal.

Leaving the Rainy Day Fund untouched

The governor’s plan does not tap the state’s $519 million emergency reserve. Barnes said there’s a chance those funds might be needed to keep this year’s budget out of the red.

“We are relying on significant revenue in the months of April” to help balance the books, he said, referring to the traditional rush of income tax payments received after the April 15 filing deadline. “I don’t believe that is a bad estimate. I have a lot of confidence in it. However, that is a lot of money that hasn’t materialized for us yet.”

This year’s state budget already is modestly in deficit. Comptroller Kevin P. Lembo projects a shortfall of $89 million while the legislature’s nonpartisan Office of Fiscal Analysis estimates a $182.3 million deficit.

The Democratic governor earned praise from one of his harshest GOP critics, Senate Minority Leader Len Fasano of North Haven, for an initiative to curb state labor costs.

The current budget requires agencies to save a total of $10 million by restricting new hires. The governor’s new budget sets an annual target of $35 million, which Barnes said could force departments to leave another 300 to 400 posts vacant.

“I think that’s a good policy issue,” Fasano said.

State parks take a hit

The budget for state parks lost about 25 percent of its operating funds under the governor’s plan, a proposal expected to affect seasonal employment.

Department of Energy and Environmental Protection spokesman Dennis Schain said it was too soon to determine whether the cuts would result in closings, reduced services or curtailed hours at some parks.

Eric Hammerling, the executive director of the Connecticut Forest and Park Association said the cuts could eliminate two-thirds of the seasonal staff and he wanted a better explanation from the governor’s office.

“I’m really unhappy,” he said.

Hammerling pointed out that an economic review by the University of Connecticut showed that parks act as economic drivers and last year the legislature’s Program Review and Investigations Committee recommended funding increases for parks.

“I think we’re risking killing the goose that laid the golden egg,” Hammerling said. “These reports made it clear that if we don’t invest in and maintain our state parks, we risk losing the benefits they provide to the public.”

 Arielle Levin Becker, Jacqueline Rabe Thomas and Jan Ellen Spiegel contributed to this report.