Budget plan offers painful cuts but remains out of balance

Updated at 5:18 p.m.

The legislature’s Appropriations Committee adopted a new $19.9 billion budget plan Wednesday that Democratic leaders insisted restores fairness to a fiscal system that has cut too heavily from social services, health care and education – even though the overall plan is out of balance.

Rep. Toni Walker of New Haven and Sen. Beth Bye of West Hartford, co-chairs of the Democrat-controlled panel, also set the stage for two major battles expected at the Capitol after the November state elections: the prospect of further tax hikes and a redistribution of municipal aid from wealthy communities to poorer ones.

The plan sparked a critical and an unusual response from Gov. Dannel P. Malloy. The Democratic governor announced he would submit a revised budget proposal of his own next week. The administration was dealt a blow when the committee recommended siphoning more than $100 million away from Democratic governor’s transportation initiative.

Meanwhile, leaders of the Republican minorities in the House and Senate blasted the plan for 2016-17, noting it would be about $340 million out of balance based on the last revenue forecast from nonpartisan analysts.

The Democrat-controlled Appropriations Committee voted 33-24 to approve the plan in a vote along party lines.

“This is a responsible budget that addresses the financial needs of the state right now,” Walker said. “We face a budget of tough choices and the recognition that this budget impacts everyone. Everyone shares the pain.”

“Make no doubt about it, there is pain in this budget,” Bye said. “There are items that people did not want to cut.”

The proposal matches the $19.9 billion spending level Malloy proposed for 2016-17 back on Feb. 3.

But three weeks after the governor issued his proposal, the legislature’s nonpartisan Office of Fiscal Analysis lowered revenue estimates for the fiscal year that begins in July by $339 million.

“It is just a failure to lead,” House Minority Leader Themis Klarides, R-Derby, said of the deficit in the committee plan. “I don’t get it.”

Still, Walker and Bye said their plan imposes deeper cuts than any other budget in recent state history.

It reduces spending about $570 million below that in a preliminary 2016-17 budget adopted last June. And that preliminary plan already funded programs $888 million below the level needed to maintain current services.

That’s a cumulative reduction of about $1.46 billion.

That’s even more painful than in May 2011, when Malloy and legislators closed one of the largest deficits in state history. Their solution, which also included tax increases, fixed General Fund spending at $1.36 billion below the current-services level.

Hospital funding: Technical change could have big implications

In a technical change that could have a significant impact on the governor’s ability to unilaterally cut funding to hospitals, the committee also called for creating separate line items for $54.2 million in supplemental payments that go to hospitals and community health centers.

Why does that matter? The governor has the authority to cut up to 5 percent of certain line items in the budget, and those supplemental payments are currently included in the nearly $2.5 billion Medicaid line item – allowing Malloy to cut more than $123 million without legislative approval. If the hospital and health center supplemental funding were listed separately as line items – $53.5 million for hospitals and $775,000 for community health centers – the amount Malloy could cut without legislative approval would drop to $2.7 million for hospitals and $38,750 for health centers.

Bye said the change was intended to maintain more legislative control over those items, and said that when multiple line items were consolidated into one Medicaid account several years ago, there were some unanticipated negative consequences.

“We realized, I think, over the past year that combining those lines was a mistake,” she said.

Like the governor, the committee called for carrying forward a $30 million cut in state funding hospitals receive to repay a portion of the tax they pay to the state – redistributing the tax money allows the state to collect federal matching funds – and cutting $1 million from a pool for small, independent hospitals.

Hospitals, social service programs and funding for public colleges and universities have been cut repeatedly over the past few years, particularly when the budget had to be adjusted to deal with a mid-year deficit.

The majority of those mid-year cuts fell on those segments of the budget because they largely are not fixed by contract.

Social services cuts are eased

The committee’s proposal would cut less from social service agencies than Malloy’s plan, although many areas would still face reductions. While advocates said they were pleased that the committee’s cuts fell less heavily on social services, they said they’re also worried about what would happen when lawmakers try to close the rest of the deficit – and if revenues continue to erode as tax returns come in.

“It’s like this little breath in between, and then we’re holding our breath again,” said Daniela Giordano, public policy director for the National Alliance on Mental Illness.

Jeffrey Walter, interim CEO of the Connecticut Community Nonprofit Alliance, which represents private social service providers, said the proposal was what providers had been hoping for, and reversed many of the deepest cuts in the governor’s budget.

But the committee’s proposal represents “the high water mark,” and there’s probably a bigger fiscal problem still to be addressed, said Heather Gates, president and CEO of Community Health Resources, which provides mental health and substance abuse treatment.

“We remain very, very concerned about how this is going to play out,” she said.

The committee called for cutting less from the Department of Mental Health and Addiction Services than Malloy proposed. While Malloy assigned the agency $34.5 million in unspecified savings, the committee cut $26.1 million from specific parts of the agency budget.

As it has in the past, the committee significantly reduced a proposal by Malloy to slash grants for mental health and substance abuse treatment providers. Malloy called for a $15.8 million cut, while the committee called for a $2.4 million cut. The committee also maintained funding – cut by Malloy – for regional action councils, which are involved in advocacy and prevention activities, and regional mental health boards that get clients and community members involved in monitoring mental health services provided by the state.

While Malloy called for cutting $31.8 million from the Department of Developmental Services as part of an across-the-board reduction, the committee called for a $23.4 million cut that would come from a series of line items in the department’s budget, including $11.5 million from the line that covers salaries.

That cut also includes a $7.7 million reduction to employment opportunities and day services for people with intellectual or developmental disabilities, a particular concern for advocates. They worry that the cut could mean that those graduating from high school won’t receive funding to participate in day programs or receive supports that could help them work. Advocates say that could lead families to have to pay for services on their own or give up their own jobs to stay home with their young adult children.

“It feels that the graduates have been targeted,” said Leslie Simoes, executive director of The Arc Connecticut.

The committee’s plan echoes Malloy’s call to privatize 30 state-run group homes. Chris McNaboe, CEO of Horizons, a nonprofit based in South Windham that provides residential services, educational and employment supports, and other services to about 1,600 people with intellectual and developmental disabilities, applauded the change and said the private sector could take on more responsibility for serving people in the community. But she said it’s unclear whether the funding that would be allocated for the private providers would be adequate.

But the proposal also includes some new cuts.

The committee called for eliminating the Legislative Commission on Aging, which does research and policy work on issues involving seniors, including expanding the ability for people to receive care at home rather than in nursing homes. The proposal calls for transferring the commission’s responsibilities to the state Department on Aging, but eliminates all four positions in the commission and would not add any positions to the aging department.

Julia Evans Starr, the commission’s executive director, said the commission has a “completely different function” than the Department on Aging, which she said doesn’t have the capacity to assume additional responsibilities. The commission has led or staffed a variety of initiatives and studies at the request of the legislature in recent years, including those dealing with home care, Alzheimer’s disease and dementia, livable communities, aging in place and grandparents’ visitation rights.

“Given Connecticut’s profoundly aging demographic, now is not the time to eliminate efforts to prepare our state for its impact nor to cease such efforts to help older adults and their family members,” she said.

Some program funds restored

The committee proposal would restore a benefit the state had provided until this year to poor seniors and people with disabilities who are covered by both Medicare and Medicaid. Unlike people covered solely by Medicaid, whose prescription medications are fully covered, those in both programs must pay a certain amount out of pocket for drug costs. In the past, those clients were required to pay up to $15 per month in co-pays for medication, and the state would pay any co-pay costs above that level. The current-year budget eliminated that benefit, which advocates said targeted some of the poorest and sickest state residents, including many with serious mental illness. Restoring the benefit would cost $90,000 in the upcoming fiscal year.

The current-year budget reduced the amount of money the state will pay for burial expenses for the poor from $1,800 to $1,400, a move the Malloy administration proposed based on the premise that the state had been paying more than other states. The governor this year proposed scaling it back to $1,000, but many legislators expressed concern that doing so could hurt funeral homes. The committee’s proposal would split the difference and reduce the payment to $1,200, saving $527,450.

Other changes in the proposal include:

• Moving nearly $3.3 million in spending from the Department of Public Health to the state’s insurance fund, which is paid for by assessments on insurance carriers and typically get passed on to customers. The proposal would make the insurance fund responsible for the cost of programs for children with special health care needs, childhood lead poisoning, children’s health initiatives and genetic disease programs.
• Cutting cash assistance by 1 percent for seniors, people who are blind or have disabilities, poor families and those receiving state-administered general assistance. The move would save $2.15 million.

The committee reversed or reduced many other health and social service cuts Malloy proposed, including:

• The governor’s proposal to scale back orthodontia coverage for youth in Medicaid to raise the level of misalignment that would qualify for coverage, a $3.2 million savings. The committee would maintain the existing coverage criteria.
• A cut to the statewide respite program, which helps caregivers of people with Alzheimer’s. The governor called for reducing its funding by $130,830, while the committee would cut it by $30,830.
• Cutting funds for independent living centers, which provide peer counseling, skills training and case management to people with disabilities. Malloy called for eliminating their state funds, while the committee would reduce them by 25 percent.
• Reducing grants for community health centers and school-based health centers. Malloy proposed cutting funding both receive from the state Department of Public Health, but the committee would not make those cuts.

‘No sacred cows.’ Transportation not spared

Both Walker and Bye said the programs that serve Connecticut’s most needy, such as mental health treatment, have been cut severely, and this new plan draws a line in the sand: If more cuts must happen, all aspects of state spending must share.

Malloy, who is seeking legislative support for an initiative to expand transportation spending dramatically over the next 30 years – and got a downpayment last June to cover the first five – insists transportation must be shielded from the budget crisis.

The governor specifically is pushing for a constitutional amendment or “lockbox” to ensure all revenues earmarked for transportation are used for that purpose.

But while the Appropriations Committee plan doesn’t take any resources out of the Special Transportation Fund, it does shift some cost burdens into that account — expenses that normally are assigned to the General Fund. These include: about $30 million in school transportation grants to municipal school districts; and about $7.7 million in personnel costs tied to the Department of Emergency Services and Public Protection.

“There are no sacred cows in this budget,” Bye said. “There couldn’t be.”

Walker added that the committee plan still keeps overall resources for the Special Transportation Fund at $1.54 billion in 2016-17, about $110 million more than the fund receives this fiscal year — but about $89 million less than the level Malloy sought.

It just won’t grow as fast as the governor would like, and must use its resources to assist some other programs.

“We’re not cutting,” Walker said. “We’re just making things a little more equal because other agencies are suffering right now.”

Getting the 2017 tax debate started early?

Since before the legislative session began in early February, Democrats and Republicans alike have insisted that tax increases would not be considered this year, even with major deficits projected for coming years.

The two-year budget Malloy and the Democratic majority approved last June not only increased taxes about $1.3 billion over the biennium, but also canceled close to $500 million in previously approved tax cuts.

This reversal triggered a wave of public criticism by Connecticut’s business community and General Electric in particular.

State officials became more wary of tax hikes in January when GE announced it was moving its corporate headquarters to Boston. The governor declared Connecticut had entered a “new economic reality” and challenged lawmakers to balance the next two fiscal years without tax increases.

Unfortunately, nonpartisan analysts now say the preliminary budget for 2016-17 — which was adopted last June — is more than $900 million out of balance, and a deficit topping $2 billion is built into 2017-18, the first new fiscal year after the November elections.

Legislators and the governor have struggled with increasing budget deficits since 2014. Debt costs — particularly tied to unfunded pension and other retirement benefit programs — continue to grow rapidly while anticipated growth in state income tax receipts has vanished.

Several Democratic legislators have said privately that this crisis can’t be resolved without more revenue.

And while neither Bye nor Walker specifically asked for tax increases Wednesday, they didn’t shy away from the revenue problem.

Connecticut’s fiscal woes “haven’t been about increasing state spending,” Bye said. “It’s been about declining revenues.”

“With this budget we’re hoping we’re going to bring that all to a point,” Walker said.

But the Finance, Revenue and Bonding Committee, which has jurisdiction over tax bills, isn’t expected to adopt any tax-increase measures this session.

Bye said she hopes projected revenues will increase when analysts review the matter again in late April.

Connecticut does have enough money in its emergency reserve, commonly known as the rainy day fund, to cover the shortfall in the Appropriations Committee’s plan. The fund currently holds $406 million.

But at least some of those dollars might be needed to balance the budget for the current fiscal year before it ends on June 30. Although the budget is projected to be in balance right now, analysts will reassess income tax projections about two weeks after the April 18 income tax filing deadline.

Malloy argued the committee plan returns to the fiscal mistakes of the past.

“The Governor proposed in February a new way of budgeting — a plan with fewer line items, a plan that reflects the true cost of agency expenditures, a plan that doesn’t spend more than we have, and a plan premised on accountability instead of spending on autopilot,” Malloy spokesman Devon Puglia said. “Next week, we will put out a new budget that tackles the entire scope of the … problem identified by nonpartisan budget staff. It’s imperative that we rise to the challenge — together — and change how we budget to reflect our new economic reality. The future of our state economy depends on it.”

GOP insists committee plan is a ‘failure’

Klarides and Senate Minority Leader Len Fasano R-North Haven, both charged the Appropriations Committee with abdicating its responsibility.

“They simply failed to do their job,” Fasano said. “You have to start the process with a legitimate budget, and that did not happen.”

Klarides noted that Connecticut has struggled for five years with spending plans that rely on overly optimistic assumptions about tax revenues. And now, to begin with a proposal built on red ink, is irresponsible, she said.

But Walker and Bye insisted there are GOP fingerprints on this plan.

The Appropriations Committee relies on a network of subcommittees to assemble various sections of the budget, and legislators from both parties participate in their workshops.

“We talked with all of the members on our committee, and when I say all of them I mean all of them,” Walker said.

“We have a very bipartisan process, and Democrats and Republicans were in the room together,” Bye said, adding that leaders heard from many Republicans urging, “Please don’t cut this or that.”

But the ranking GOP legislators on the Appropriations Committee, Rep. Melissa Ziobron of East Haddam and Sen. Rob Kane of Watertown, said Democratic leaders “cherry-picked” a few Republican cost-saving ideas, but the overall plan is a Democratic package.

Fasano added that Republicans have called repeatedly since last April for tighter controls on overtime and an overhaul of worker health and retirement benefits to lower all agencies’ spending. Democrats resisted that call until this past session, and unions remain opposed to granting concessions after approving givebacks in 2009 and 2011.

Education cuts scaled back; wealthy towns would sacrifice

Though the committee reduced education funding in several areas, it didn’t go as deeply as Malloy sought — particularly in districts with high concentrations of poverty — and targeted some rich communities to sacrifice in a new way.

The panel would reduce the Education Cost Sharing grant, the major grant to municipal school districts, by $41.6 million compared with the original 2016-17 budget adopted last June.

But $26.4 million of that would come from eliminating a controversial “hold harmless” provision that traditionally has benefited wealthier communities.

During past ECS adjustments, lawmakers ensured that no district took a cut as their enrollment demographics shifted and property values increased. As a result several communities now receive more than double what they would otherwise receive under the ECS formula.

Another $15.2 million would be saved by reducing ECS grants to all districts, but wealthier communities would be cut at a higher rate than poorer ones. Additionally, every town would be ensured funding equal to at least 55 percent of what the ECS formula recommends.

A second grant that assists poor communities, the Priority School Districts Grant, would not be reduced under the committee plan. The governor wanted to reduce it by $2.6 million.

The grant that helps districts pay for special education when the costs far exceed their average per-student cost would not be cut by $8 million as the governor recommended.

Two key non-education grants to cities and towns, which reimburse them for a portion of property tax revenues they lose because colleges, hospitals and state-owned properties are tax-exempt, were reduced by a total of $26 million from the original 2016-17 budget.

Charter schools still would see their funding increase in 2016-17 over the current fiscal year to accommodate enrollment increases, including those tied to the opening of two new charter schools. But the Appropriations Committee recommended $1.7 million less than Malloy proposed, which would slow enrollment growth somewhat for charter schools.

Regional magnet schools – which are primarily located in the Hartford, New Haven and Bridgeport regions – would be cut by $9.3 million from current funding levels, a smaller cut than the $18.7 million the governor proposed. It is unclear how these savings would be achieved, but the state’s education commissioner told the Appropriations Committee last month that cuts could be absorbed by reducing the state’s per pupil grant payment for magnet school students.

The state-run vocational technical high schools would still see increased funding next school year, but would get $5.1 million less than the previously adopted budget had provided, a 3 percent cut.

Higher ed takes a hit

The committee effectively largely matched the cuts Malloy proposed for the state’s public colleges and universities.

For example, UConn’s funding would be reduced next fiscal year by $15 million under the committee plan, and the UConn Health Center would lose $6.4 million.

The Board of Regents for Higher Education, which oversees the four regional state universities, 12 the community colleges and the online Charter Oak College, would lose $19 million in 2016-17.

College officials have said the governor’s proposed funding levels would leave them with sizeable shortfalls — $18 milllion for the regents and $30 million for UConn.

Plan relies on layoff savings

Walker and Bye insisted their plan does not specifically call for state employee layoffs. “That is between the governor and the unions,” Walker said. But the committee did build major labor savings into the mix.

The committee budget reduces departmental and agency salary accounts by about $239 million next fiscal year.

It also reduces the reserve account for worker raises by about $63 million.

The state typically averages about 1,200 to 1,400 worker retirements per year. But the savings in the committee plan assume a savings equal to 3,000 to 4,000 jobs.

Malloy has said “thousands” of state employee positions must be eliminated by various means to keep the 2016-17 budget in balance. And the governor has said a “very substantial number” of state employees will receive layoff notices later this month.

The committee budget also would require elected and appointed officials – including judges, agency commissioners and deputy commissioners, and legislators – to pay 20 percent more in health insurance premiums, saving nearly $1 million.