Bill closing deficit, cutting business taxes heads to Malloy
The House of Representatives gave final legislative approval to a bill Tuesday night that closes the current budget deficit, mitigates bigger problems in the future, offers modest tax relief to businesses and restores a portion of funds cut this fall from hospitals and social services.
The Democrat-controlled chamber voted 75-65, largely along party lines, to send to Gov. Dannel P. Malloy a deficit-mitigation bill that also explores the closure of Southbury Training School and other facilities for the developmentally disabled.
The Democrat-controlled Senate approved the measure 20-15 earlier Tuesday in another vote largely along party lines.
“I’m here to say Connecticut is a great place to live and our quality of life ranks higher than just about any state out there,” said House Majority Leader Joe Aresimowicz, D-Berlin. “… I think it was a good bargain.”
“We are adapting to the new normal, to the new economy,” Senate Majority Leader Bob Duff, D-Norwalk, said, noting that the legislature’s latest belt-tightening effort comes just six months after its last one.
The biennial budget adopted last June approved spending hundreds of millions of dollars below the level needed to maintain current services, Duff said.
“This is a significant response to our current fiscal situation,” added Senate President Pro Tem Martin M. Looney, D-New Haven, saying it not only balances finances in the short-term but begins to look at major policy changes that could save funds in the future.
But Republican legislators charged the plan relies too heavily on fiscal “gimmickry,” using more than $130 million from specialized accounts and various one-time sources to support ongoing program expenses in the general fund.
“I don’t think the high taxes, the high spending, the high borrowing is working,” House Minority Leader Themis Klarides, R-Derby, said, adding that Connecticut continues to lose population because its business climate remains poor. “… Here’s where we are now,” she said. “The people in this state do not trust us.”
The Democratic governor issued a statement afterward saying “the legislation passed tonight is not perfect, but it helps make progress for the State of Connecticut this fiscal year and beyond.”
The governor said it makes important changes to the tax code and does provide some savings in future years.
“We no doubt have more to do in the General Assembly session ahead,” he added. “But this is a positive step to improve the state’s business climate and deliver long-term predictability that will allow our families and businesses to thrive. Together as a state, we must remain focused on the long-run, and the legislation passed today will help ensure that revenues align with spending to help us achieve that end.”
According to nonpartisan analysts, this fiscal year’s general fund is $252 million in deficit, a relatively small shortfall equal to about 1.3 percent.
The plan identifies about $350 million in savings for this year’s general fund — enough not only to restore balance to the budget, but also to fund several other initiatives.
Restoring funding for hospitals, social services
Most of the additional savings is being used to restore funds for hospitals and social services that faced emergency cuts in September ordered by Malloy in response to weaker-than-anticipated income tax receipts.
Hospitals, which lost about $63 million in the September cuts, got $30 million back in the bill.
Because the funding generates federal matching funds, the impact to hospitals is greater; Malloy’s cut represented a $192 million hit to hospitals, while the restored funding reduces the cut to about $92 million.
State officials were still revising their projections of how each hospital would fare late Tuesday afternoon, but one document that circulated among lawmakers indicated that most hospitals would receive about half the money they lost under Malloy’s cut, while six small hospitals – Bristol, Milford, Day-Kimball in Putnam, Griffin in Derby, Charlotte Hungerford in Torrington and Johnson Memorial in Stafford – would receive more.
The deal also calls for the state to pay hospitals about $16 million in overdue payments. The Malloy administration indicated earlier this year that it might withhold the money because of budget concerns. That money also generates additional federal funding.
And while the deal also restores funds for many social services, some advocates for social services expressed concern that they could still be facing additional cuts later in the year. That’s because the budget plan also counts on the Malloy administration to find $110 million in additional savings across most segments of the budget that haven’t yet been specified. This includes $93 million from the Executive Branch, $2 million from the Legislative Branch and $15 million from the Judicial Branch.
“The public needs to know that we are carefully controlling state spending while balancing the often conflicting demands of maintaining social services and municipal aid while also providing corporate incentives and state loans to small businesses,” said Sen. Beth Bye, D-West Hartford, co-chair of the Appropriations Committee.
The deal would restore more than $4.5 million in grant funding Malloy cut from mental health and substance abuse treatment providers in September. Those grants were already funded at $8.5 million less than in the previous fiscal year, and providers warned that additional cuts would be devastating to the treatment system.
The deal reached by Malloy and legislators did not include any cuts to mental health treatment grants, and cut substance abuse treatment grants by $222,679 each year of the two-year budget.
Advocates for mental health programs stood outside the House chamber Tuesday, including Jennifer J. Gross, executive director of the Eastern Regional Mental Health Board. She held a sign, directed at lawmakers, that said, “Keep up the good work!” Like other advocates, she said she was relieved the money was restored but still wary of future cuts.
“I think we’ve got a systemic problem that needs to be addressed and right now; we’re in crisis mode,” she said. “Right now we’ve got a safety net that’s already running way below what it needs.”
Modest relief for businesses
The bill also enables lawmakers to approve a package of business tax cuts that — while relatively small in numbers — is designed to have a big impact.
Technically, the tax changes have a net annual cost to the state of only about $1.5 million per year once all are fully implemented in 2017.
But the plan includes modifications the business community sought to a controversial “unitary” reporting system imposed on the corporation tax back in June.
The plan also eases some restrictions lawmakers placed in June on the net operating losses companies can claim as a deduction against corporation taxes owed.
Other tax changes in the bill include:
- Elimination of certain sales tax exemptions for energy conservation and weatherization products.
- Extension of a business apprenticeship tax credit.
- And the broadening of a fuel tax exemption for propane.
Despite the current deficit, legislators and Malloy said they wanted to find some modest tax relief for corporations to demonstrate their commitment to fostering a positive business climate.
Rep. Jeffrey Berger, D-Waterbury, co-chair of the Finance, Revenue and Bonding Committee, called it “a very pro-business, pro-corporation package.
Charges of fiscal ‘gimmickry’
While the legislature’s nonpartisan Office of Fiscal Analysis says Tuesday’s bill would balance the current fiscal year, it is tracking much larger problems down the road.
Before the Senate vote, OFA was projecting deficits of $552 million in 2016-17 finances, and a $1.72 billion gap in 2017-18.
And while the new plan found savings worth $350 million this fiscal year, that same plan shaves only about $210 million off of the shortfalls for the next two fiscal years.
That’s because about $135 million in general fund savings this fiscal year would come by diverting or raiding other specialized funds. In other words, the plan finds temporary resources to pay for annually recurring expenses — for now.
Just over $35 million in revenues owed to the Special Transportation Fund would be diverted, which probably would force officials to draw down the fund’s reserve. Nonpartisan analysts already have warned that the transportation fund — despite being targeted in June to receive an annual share of general fund sales tax receipts — is on pace to fall into deficit by the 2018-19 fiscal year.
Democrats also would defer a $70.4 million deposit owed to a special new revenue-sharing program designed to help cities and towns control property tax hikes.
Lawmakers and Malloy promised in the new budget to share sales tax receipts with communities as well — but most of that new funding wouldn’t be delivered until next fiscal year.
Still, Connecticut is supposed to start preparing for that program now by reserving more than $100 million this fiscal year, to be paid out in 2016-17.
Advocates for cities and towns already have been questioning whether communities are likely to see much or any of that money, given the growing state deficits looming in future years. And that was before any proposals to reduce saving for the program were introduced.
Other fund diversions used to supplement the new deficit-mitigation plan include:
- $22.1 million from reserve accounts from public colleges and universities.
- $2 million from a biomedical research fund.
- $2 million from a program to fit school buses with seat belts.
- And nearly $3.7 million from four miscellaneous accounts.
Rep. Melissa Ziobron of East Haddam, the ranking GOP representative on the Appropriations Committee, decried the fund sweeps. “We just can’t seem to keep our fingers to ourselves,” she said. “… This is not long-term structural change.”
Every year it’s the same old song,” Sen. Robert Kane of Watertown, ranking GOP senator on the Appropriations Committee, said, arguing Connecticut has relied on two major tax hikes in the past five years — while too often not making tough choices on cutting spending.
“Hello, we’re still in deficit, it’s not working,” Kane said, adding that Democratic lawmakers must reject “one-time gimmickry. That’s not the way to fix this problem.”
“There isn’t going to be a future for the state of Connecticut if we don’t get this right,” said Sen. L. Scott Frantz of Greenwich, ranking Republican senator on the tax-writing, Finance, Revenue and Bonding Committee.
Democrats also blocked Republican efforts to require state legislators to vote on all state employee contracts. Under the current system, legislators can approve contracts by default — simply by not voting to reject them.
“Where’s the courage?” Senate Minority Leader Len Fasano said. “We should be involved.”
Fasano added that “All this (bill) says is ‘the status quo is the status quo.’”
House Speaker J. Brendan Sharkey, D-Hamden, noted afterward that GOP lawmakers ended the bipartisan budget talks. Republicans had argued Democrats didn’t go far enough to control costs in the long-term.
“Although we agreed on many items in the bill Democrats passed today, Republicans walked away because they were unwilling to compromise and insisted on trying to shut down our government until they got their way,” Sharkey said. “As a result, Republicans voted against restoring hospital funding and tax changes to encourage [General Electric] and other Connecticut businesses to grow here. After demanding to be given the opportunity to help lead, Republicans showed they were not up to the challenge.”
Exploring the closure of Southbury Training School
But Democrats countered that the plan also makes many tough choices.
Besides placing significant pressure on the Malloy administration to find savings, it cuts $10 million from overtime.
The measure creates a special commission to study the constitutional spending cap and find ways to make it an enforceable, effective limit on budgets.
Other provisions of the bill called for studies of changes that could potentially save money.
The bill calls for state officials to develop a report on a plan to close Southbury Training School and the five other institutions, known as regional centers, operated by the state Department of Developmental Services. Families of people with developmental disabilities have been calling for the state to close the six facilities, which served 468 people as of June.
More than 2,100 people with intellectual or developmental disabilities have been seeking residential services – such as a spot in a group home – but have not received them because of a lack of funding. Supporters of closing the institutions say doing so would free up hundreds of millions of dollars that could provide community-based services for far more people.
Leslie Simoes, executive director of The Arc of Connecticut, which has been calling for the closure of the state-run institutions, said she was grateful for the sign that policymakers have been listening to advocates, and said the provision was a meaningful step toward closing the facilities. But she said another study is not necessary.
“We’ve had study upon study,” she said.
And Simoes said the bill was missing a critical provision that would ensure that any savings achieved from closing state-run facilities would remain with DDS so more people with intellectual or developmental disabilities could receive services.
The report would have to be submitted to legislators by Dec. 31, 2016.
The deal also calls for the state’s budget director and correction commissioner to issue a request for options for providing medical services to inmates, which are budgeted to cost $91.7 million this fiscal year. The state currently contracts with UConn Health for the services. Republican legislators have called for several years for the state to put the contract for the service to bid, arguing it could save the state money. The budget deal also calls for cutting $3 million from the inmate medical services line item this and next fiscal year.
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