Market jitters prompt Malloy to make $103M in emergency cuts

Responding to a weak stock market, Gov. Dannel P. Malloy ordered $103 million in emergency cuts Friday, including a major hit in Medicaid payments that ultimately will cost hospitals about $190 million in state and federal funds.

Benjamin Barnes, the governor’s budget chief, said lower-than-expected income tax receipts and the drop in the Standard & Poor’s 500 stock index for the first nine months of 2015 prompted the reductions just three months into the state’s fiscal year.

The administration also announced that Connecticut must go forward with at least $15 million of a previously approved $20 million reduction in this year’s non-education aid to cities and towns.

Those cuts, Barnes said, would come from a program that reimburses communities for a portion of the funds they lose because state properties, colleges and hospitals are exempt from local taxation. But the budget chief also said those reductions were modified somewhat to lessen cuts to poorer communities.

The impact would range from a loss of $14 in tiny Sherman on the New York border to $882,694 in Greenwich. The cuts were calculated based on a per-capita formula that reflected a variety of factors, including wealth.

Other losses are $474,411 in Bridgeport and $399,405 in Hartford, two cities whose mayors lost Democratic mayoral primaries on Wednesday. As is the practice of the Office of Policy and Management, Barnes said, the announcement was timed in part to avoid influencing local elections.

[A town-by-town list of cuts in state aid]

[An agency-by-agency list of cuts in state aid]

The larger factor was that the state makes its payments in lieu of taxes to municipalities in one lump sum by the end of September, he said.

Barnes anticipated an outcry.

“We need to ensure that spending matches the revenue we take in, and we’re always working to plan ahead,” Barnes said. “While not everyone will be pleased with these decisions, this is the right thing to do to keep our state budget balanced.”

House Speaker J. Brendan Sharkey, D-Hamden, was quick to object to the actions of the Democratic administration.

“I’m disappointed and certainly opposed to what appear to be cuts targeting some of the very areas we sought to protect in the budget,” Sharkey said. “Under our budget agreement, the bipartisan MORE Commission was charged with identifying additional municipal savings, and they haven’t been given the opportunity to do so yet.”

Sharkey noted that the legislature already had restored hospital funding that Malloy attempted to cut in the previous legislative session. He predicted an impact on healthcare services.

“Though the governor has the authority to make these cuts at this time, the legislature will continue to monitor the status of the budget, and look to mitigate these cuts next session,” Sharkey said.

Senate Minority Leader Len Fasano, R-North Haven, said the move reflected a lack of strategic vision.

“When is Connecticut’s Democrat leadership going to step up and do the right thing?  This is already a disaster, and we are only three months into the budget year,” he said. “What does Gov. Malloy expect to do every month – make painful cuts to social services, to children’s programs and to hospitals?  He calls that a strategy?”

But the move was quickly applauded by Rep. Melissa H. Ziobron of East Haddam, the ranking House Republican on the Appropriations Committee. In a Facebook post, she said, “I am glad the Gov is taking this action (cutting the budget) now, as it is the prudent thing to do.”

The emergency spending cuts come a day after Malloy outlined the latest in a string of upbeat labor reports showing steady jobs growth and a drop in the unemployment rate to 5.3 percent. But Malloy had acknowledged  broader fiscal concerns Thursday when asked what economic indicators gave him pause.

“What concerns me the most is the international situation, and the volatility in the stock market,” Malloy said. “That’s what keeps me up at night.”

At issue is the state’s chief revenue source, the personal income tax, and particularly receipts tied to capital gains, dividends and other investment income.

These sources, which represent about 40 percent of the $9.8 billion in income tax receipts Connecticut is projected to receive this year, appear to be falling short of expectations, Barnes told reporters at a morning briefing.

The budget anticipates 7.1 percent growth in the 2015-16 fiscal year. But the administration now has downgraded that to 4.4 percent, and might need to reduce it further, Barnes said.

The budget chief pointed to the S&P 500, a stock market index based on 500 of the largest companies on the New York Stock Exchange or the NASDAQ market.

The stock market, as measured on the S&P 500, peaked on May 21 and has fallen 6.4 percent since. During periods of stock market corrections, many investors sell stocks at a capital loss – to avoid taking a bigger hit should stocks plunge further. Those capital losses can be claimed to reduce income taxes that must be paid to the state and to the federal government.

Even if the market recovered all value lost before the end of the calendar year, Connecticut would be hard pressed to achieve a 7.1 percent increase in investment-related income tax receipts, Barnes said.

The spending cuts, which will come from agencies’ budget allotments in the second quarter of the fiscal year — which starts Oct. 1 — largely target health care, social services and higher education.

State law gives the governor limited authority to order rescissions or unilaterally reduce spending in many areas of the budget, allowing line item reductions of 5 percent or less. In theory, this reduces the chances of any one department, program or other budget initiative from absorbing a deep cut. But because of the manner in which Connecticut budgets for Medicaid, as well as discretion built into one funding source for hospitals, the state’s acute care facilities take a big hit under the governor’s plan.

The rescissions include a $63.8 million cut to Medicaid programs within the Department of Social Services. And while that cut represents a small fraction in a multi-billion-dollar line item, that account actually funds numerous initiatives.

The governor’s cut to this line item, though, all will be taken from two hospital initiatives, according to the legislature’s nonpartisan Office of Fiscal Analysis: supplemental Medicaid payments to hospitals and a pool of payments for small hospitals. Under state law, Barnes said, these payments can be canceled, and this cut eliminates payments for the second, third and fourth quarters of the fiscal year.

More importantly, it also will trigger a loss of approximately $128 million in matching federal dollars. These funds, though outside of the state budget, also would otherwise be transferred to hospitals. Counting both federal and state funding, the cut to hospitals amounts to $192 million, according to the legislature’s nonpartisan Office of Fiscal Analysis.

The cuts prompted an angry response from the Connecticut Hospital Association. “We are outraged that the governor would slash Medicaid funding that is desperately needed to care for the most vulnerable people in our state,” Jennifer Jackson, the association’s chief executive officer, wrote in a statement. “With nearly one in five Connecticut residents on Medicaid, withdrawing even more funding from the state’s obligation is outrageous. It puts a tremendous additional strain on healthcare providers, who already provide services with reimbursement that is nowhere near the actual cost of delivering that care.”

Jackson said the association is “urging legislators to intervene and protect their constituents and communities.  Sweeping cuts to this vital program will hurt patients and their communities, and further cripple our state’s economy.”

The rescissions also cut $4.7 million in grants for mental health and substance abuse treatment, areas that already faced an $8.5 million cut compared to last year’s funding. Funding for those grants was the subject of significant debate during the budget process.  The Malloy administration initially proposed cutting $25 million from the grant funding, but legislators, who sought a smaller cut, ultimately agreed to the $8.5 million cut.

Similarly, the rescissions cut close to $5 million in services for people with developmental disabilities. The budget Malloy proposed in February included deep cuts to the Department of Developmental Services, but legislators reduced the size of many of those cuts in the spending plan adopted in June.

The Connecticut Community Providers Association, which represents nonprofit social service providers, called Malloy’s plan “a devastating blow to thousands of individuals and families receiving vital community-based services.”

“The need for community services has not changed since spring, when hundreds of clients, family and providers came to the Capitol and asked lawmakers to reject massive cuts in funding, and supported the need to increase taxes,” said Jeffrey Walter, the group’s interim chief executive. “In its final budget vote in June, the legislature and the governor recognized the need for community services, and passed a budget that limited cuts and increased taxes. The rescissions announced today will undo many of those gains.”

Malloy has employed emergency cuts before, including during the last fiscal year, when state finances ultimately finished with a small deficit of about $70 million. But this latest round of cuts marks the earliest the governor has ever used his rescissionary authority in any fiscal year.

Arielle Levin Becker contributed to this story.