Gov. Dannel P. Malloy challenged fellow Democrats in the legislature Tuesday to help balance the budget by giving up a big portion of their biggest political initiative: a $245 million sales-tax sharing plan with cities and towns.
House Speaker J. Brendan Sharkey, D-Hamden, quickly and colorfully rejected the governor’s demand with a reference to the most famous one-word retort in U.S. military history: “I guess my only comment would be to quote General McAuliffe.”
When the Germans demanded the surrender of his surrounded troops during the Battle of the Bulge in 1944, U.S. Brig. General Anthony McAuliffe replied, “Nuts.”
With three weeks and one day until the constitutional adjournment deadline of midnight May 4, the governor and legislature now are publicly at odds over how to erase a projected deficit of $930 million in the second year of the biennial budget, which begins July 1.
Malloy warned legislators not to go home May 4 unless they accept his revisions or craft their own to balance the budget, pledging to call them back in special session the next day if they fail.
In a plan drafted in response to an unbalanced proposal recently adopted by the Appropriations Committee, Malloy also proposed more than $100 million in further reductions aimed largely at social services and education to compensate for shrinking income tax receipts.
In addition, his plan orders unprecedented reductions in education aid to cities and towns while cutting more deeply into funding for Connecticut’s hospitals.
Malloy, who was re-elected in 2014 to a second four-year term, is pitting his spending priorities against those of the legislature, whose 151 House and 36 Senate seats are up for election this fall.
“If we are to do what’s right for the state, if we are to put Connecticut on a better path for the long-term, then we need to make tough but necessary decisions now to adapt to our new economic reality,” Malloy said. “That’s what this budget does.”
Plan draws mixed reactions
“As we enter into the final days of the legislative session we are focused on reaching an agreement that will do what is necessary to balance the budget, but won’t balance it at the expense of cities, towns and property taxpayers,” said Adam Joseph, spokesman for the Senate Democratic Caucus.
The GOP minority leaders, Sen. Len Fasano of North Haven and Rep. Themis Klarides of Derby, offered measured praise.
“We thank the governor for recognizing the full scope of the state’s sizable deficit, however the path to attain long-term fiscal stability is not through layoffs and budget cuts alone,” they said in a joint statement. “They address the effect, but they do not alleviate the cause. We need to focus on rethinking policies to ensure our state lives within its means moving forward. We need to budget for generations, not elections.”
The plan drew compliments from the state’s largest business association and criticism from its largest labor organization.
The Connecticut Business and Industry Association praised Malloy for addressing a deficit that legislators from neither party resolved, and for doing so without proposing tax increases.
“What the governor is trying to do is get us where we need to go,” CBIA President Joseph F. Brennan said, adding that the state’s economy cannot bear state tax increases right now. “I just don’t see any other direction for the state to go to.”
But Lori Pelletier, head of the Connecticut AFL-CIO, said cuts in municipal aid and in social services, coupled with ongoing layoffs of state employees, only will harm working families and those most in need.
“I think that it is wrong,” Pelletier said, questioning why Connecticut cannot provide all of the promised sales tax receipts to help cities and towns, yet provides billions of dollars in sales tax breaks annually. Though much of that savings involves exemptions for groceries, medications, gasoline and other essentials, the state also provides numerous exemptions for business services.
“The budget adjustments issued by the governor today target the most at-risk and fragile citizens in Connecticut with spending cuts that would dismantle the system of community providers and leave thousands of individuals with nowhere to turn,” said Jeffrey Walter, interim CEO of the CT Community Nonprofit Alliance.
Malloy defended his insistence that the state continue to reserve a portion of the sales tax for long-term transportation improvements that he says are vital to the economy.
“As somebody who is trying to get companies to expand and/or move to our state, transportation is one of the biggest, if not the biggest, complaint about Connecticut from folks that we’re talking to in the greater tri-state area,” Malloy said. “I’m saying that if we don’t build a transportation system and undo the damage we’ve done in the past, we’re not going to grow our economy.”
Revenue-sharing plan controversial from the start
The revenue-sharing program has been controversial since Democratic legislators and Malloy established it last June, despite their insistence that it was a “historic and transformative” step to reduce municipalities’ reliance on regressive property taxes.
Connecticut’s 6.35 percent sales tax is the budget’s second-largest source of revenue, worth about $4.2 billion this fiscal year.
The plan pledges to share a portion of sales tax receipts with communities for three purposes:
- To freeze property tax rates on motor vehicles at 32 mills. Communities that tax above that rate would receive sales tax dollars to make up the difference.
- To bolster the state grant that offsets a portion of the local taxes communities lose because state properties, private colleges and hospitals are tax-exempt.
- And to provide general municipal aid.
In exchange, the legislature also established a new municipal spending cap that would reduce a community’s share of the sales tax receipts if local expenditures grow too quickly.
Municipal leaders, though wary of the cap, also were slow to embrace the revenue-sharing plan given the state budget’s precarious position.
Nearly all of the promised funding wouldn’t be delivered to communities until after the November 2016 state elections — when legislators and Malloy must solve a budget deficit many times greater than the promised sales tax relief.
Communities are supposed to receive an estimated $245 million next fiscal year.
But not only are nonpartisan analysts projecting a $930 million deficit in 2016-17, they say the hole tops $2 billion in 2017-18 — the first new budget after the November elections.
“Get rid of that (sales tax) money, get rid of the (municipal spending) cap, and just leave us alone,” Ridgefield First Selectman Rudy Marconi, a Democrat, said during a municipal lobbying event at the Capitol on March 1.
“We’re already sending a message to every single department — including education — in the city,” Torrington Mayor Elinor Carbone, a Republican, said at the same time. “We can’t continue to rely on state aid.”
Several Republican legislators called the plan an election year ploy by Democrats that amounted to fiscal bait-and-switch. Revenues the state could not afford to share would be dangled now, and then reneged upon after the election.
How the governor realigns the sales tax dollars
Several things change under the governor’s plan.
First off, none of the sales tax funds would be diverted outside of the state budget any longer. That’s more of a technical change.
Secondly, communities would receive $144 million to help freeze car taxes and bolster other municipal aid, not the promised $245 million.
Lastly, the governor effectively would nullify about another $53.4 million of the sales-tax-sharing plan by reducing another form of local aid, the Education Cost Sharing grant.
Malloy would shield the state’s 30 lowest-performing school districts from this ECS cut. The 28 most affluent districts would lose all funding while others would lose a portion.
“The proposal creates a more equitable distribution of education cost sharing, ECS grants,” the governor explained to reporters.
Under the proposal Darien, Madison and New Canaan would each lose $1.5 million, Fairfield $3.5 million, Greenwich $3.4 million, and Westport and Ridgefield $2 million each.
But the Connecticut Conference of Municipalities charged the governor with “gutting” the legislature’s revenue-sharing plan.
“The proposal will result in tax hikes and service cuts for residential and business property taxpayers,” the conference wrote in a statement. “CCM calls on the General Assembly to reject these deep cuts in state aid – proposed so late in the legislative session after many communities have approved their local budgets.”
State funding for numerous after-school programs in the state’s lowest-achieving districts would be eliminated to save nearly $7 million. An additional $9 million in funding to increase enrollment in charter schools throughout the state would be scaled back by $2 million.
The governor did not recommend further cutting the Department of Children and Families or funding for the state’s public colleges.
Legislative panel had cut Malloy’s big initiative
Malloy’s proposal comes one week after the Democrat-controlled Appropriations Committee did something very similar.
The committee plan preserved the revenue-sharing for communities while cutting deeply into the governor’s top priority: transportation.
Malloy secured a portion of sales tax receipts last year to cover the first five years of what he hopes will be a 30-year investment in highway, bridge, rail and other transportation infrastructure.
But the legislative panel not only recommended $89 million less than Malloy sought for transportation in 2016-17, but also wants to shift about $38 million in expenses normally covered in the General Fund — such as school transportation grants and emergency services personnel costs — into the Special Transportation Fund.
All totaled this was a $127 million hit to the governor’s top priority, effectively eliminating all new funding plus an additional $31 million.
Malloy says economic conditions forced his hand
Malloy said he had no choice but to offer his cuts given the state’s fiscal challenges.
“We have an obligation as elected officials to tackle the full scope of our challenge,” the governor said. “That means we must align our spending with the revenue we actually have, not the revenue we wish we had. Our expectations need to change – we cannot afford to fund everything we always have.”
The income tax — which typically funds about half of the annual budget — will raise almost $9.5 billion next fiscal year, according to the legislature’s nonpartisan Office of Fiscal Analysis. That’s $350 million less than was assumed when Malloy proposed his budget back on Feb. 3, and $878 million below what he and legislators were counting on when they adopted a preliminary 2016-17 budget back in June.
That preliminary budget is now about $930 million out of balance, while both the governor’s February plan and an Appropriations Committee budget submitted last week are about $340 million in the red.
More cuts from hospitals, social services
Malloy’s proposal would cut nearly $50 million in supplemental payments to hospitals, which repay a portion of the $566.1 million they pay the state in taxes. Those supplemental payments generate federal matching dollars, so the impact to hospitals would closer to a $150 million loss of federal and state payments. Malloy has targeted hospital supplemental funding in the past, including as part of midyear emergency cuts last fall, but legislators have generally sought to maintain the funds.
The governor’s plan would maintain a separate pool of funds for small, independent hospitals.
“Once again, Governor Malloy is proposing that the hospitals of Connecticut, which serve millions of residents every year, bear a disproportionately large share of the budget reductions,” said Jennifer Jackson, CEO of the Connecticut Hospital Association. “Let’s be clear: this is a tax increase of $150 million on hospitals – and it would be the governor’s third increase to the hospital tax in a year.”
Malloy also proposed scaling back Medicaid eligibility for parents of minor children, deepening a cut made last year as part of the two-year budget. The administration has said that parents losing Medicaid coverage could instead buy private insurance through the state’s health insurance exchange, at rates deeply subsidized by the federal government. But critics have warned that many parents would instead end up uninsured, rather than paying even heavily discounted rates for coverage.
The current two-year budget moved the Medicaid income limit for parents from 201 percent of the poverty level to 155 percent – for a family of three, that translates to a drop from $40,521 per year to $30,240. Malloy’s proposal would move the limit to 138 percent of the poverty level, or $27,820 for a family of three. In his budget proposal Tuesday, the administration noted that Connecticut is the only state that covers parents with incomes above 138 percent of the poverty level. Malloy’s plan would not affect eligibility levels for pregnant women.
The cut would save $900,000 in the upcoming fiscal year, but far more in the future: $19.3 million in the 2018 fiscal year and $21 million in 2019.
So far, most of the more than 18,000 people affected by the eligibility cut made last year haven’t actually lost their Medicaid coverage because federal rules grant most people 12 months of additional coverage. But of the 645 who lost Medicaid coverage, 171 were enrolled in health plans through the exchange as of February.
Other cuts include:
- Closing the Department of Social Services’ Torrington regional office, saving approximately $2.4 million. Malloy proposed a similar cut last year, but legislators rejected it.
- Eliminating $775,000 in funding for community health centers. The funding is used to generate federal matching funds, so the cut to health centers would actually be larger.
- Reducing the amount of money nursing home residents can keep each month from $60 to $50. Most nursing home residents have their care paid for by Medicaid, and any income they receive is used to help cover the costs, with the exception of a small allowance they can use to pay for personal needs such as clothing, haircuts or gifts. Reducing that allowance by $10 per month would save the state $1.1 million. Legislators rejected a similar proposal last year.
- Cutting Medicaid payment rates for children’s dental services by 10 percent, saving $5.3 million. The rates were increased as part of a settlement to a lawsuit in 2008, and studies have found that the increased rates, combined with changes to the program, helped lead to a dramatic increase in the number of dentists who treated children with Medicaid. The rates have not been increased since 2008.