At first glance, Gov. Dannel P. Malloy and legislative leaders are battling over how to balance the next state budget, which begins July 1.
But just below the surface is a delicate balancing act.
On one hand is a potential fiscal nightmare, deficits that — depending on choices made in the coming days or weeks — could be three times the size of the shortfall causing so much angst right now.
On the other is a political quandary. Democratic legislators, already nervous after approving a big tax hike last June, are trying to survive the upcoming state elections. They hope to defer some tough budget choices until after November, much as Malloy did before he won re-election two years ago.
“We’re always, always facing re-election in government,” Malloy told reporters Friday night when he announced budget talks had reached an impasse. “At some point we’re responsible for getting the work of the people done regardless of the convenience to ourselves.”
“Every budget negotiated involves some level of compromise to get the votes necessary to pass,” House Speaker J. Brendan Sharkey, D-Hamden, countered on Saturday. “And in a negotiation, you accommodate different perspectives.
Deficit problem could triple if nothing is done now
As the person responsible for managing Connecticut’s budget on a day-to-day basis, Malloy’s perspective offers a bird’s-eye-view of a very daunting problem.
Both his budget staff and the legislature’s nonpartisan Office of Fiscal Analysis say state finances, unless adjusted, will run nearly $1 billion in deficit, or about 5 percent, in the fiscal year that begins July 1.
Connecticut already closed last year in the red and has a $256 million shortfall in the current year that should eat up most of its very modest emergency reserve.
But that’s not the worst of it.
Thanks to surging costs and what the governor descried as “paltry expected growth” in revenues, analysts are projecting a deficit topping $2.2 billion, or more than 11 percent of the budget, 14 months from now. That’s the budget Malloy and legislators must craft starting in January.
Legislators from both parties argue that the cuts imposed or recommended to date for hospitals, social services, municipal aid and higher education are too much to bear.
But if lawmakers go home without closing the $1 billion hole in 2016-17 finances, they could come back in January still having to fix most of that mess, even if the governor orders some emergency cuts — plus deal with the $2.2 billion gap in 2017-18.
And that combined problem in the neighborhood of $3 billion could get worse still if revenue projections are downgraded again when analysts test them in November and January.
“I’m trying to lead them to understand that this is not a short-term problem, that this is a long-term problem,” the governor said. “At some point these problems build onto themselves.”
And the governor’s isn’t the only one who sees it that way.
The state’s chief business lobby, the Connecticut Business and Industry Association, stepped up the pressure last week with a series of public statements urging officials to pull back spending even more.
“All year, we have consistently called for long-term spending reforms – reforms that will stabilize the state’s finances and generate the confidence needed to attract and retain businesses and create jobs,” CBIA President and CEO Joseph F. Brennan said. “It’s now time to take the best ideas from all three proposals and pass a state budget that embraces those reforms.”
Leaders of the Republican minorities in the House and Senate have said neither the governor nor Democratic legislators have gone far enough to curb state spending.
But Senate Minority Leader Len Fasano, R-North Haven, said that Malloy understands something that his fellow Democrats in the legislature do not: That every dollar saved now through a permanent spending cut reduces the post-election nightmare twofold.
“There is no vision about how to get rid of these (larger) deficits,” said Fasano, who added that, “I am convinced in my mind, without a doubt, that this governor gets it.”
For example, one proposal Democratic legislators have made is to reduce Department of Social Services spending on consulting and other contractual services by $10.4 million next fiscal year. That not only reduces the shortfall in 2016-17, but scales back the larger deficit in 2017-18 by the same amount.
A second proposal is to sell property from the West Hartford branch of the University of Connecticut and use the anticipated proceeds, $12.6 million, to help prop up next year’s budget. But those proceeds only can be used once, and offer no relief in 2017-18.
“You can one-time the budget, but you can’t do it to the extreme in these circumstances,” Malloy said.
The governor only would say that there are “hundreds of millions of dollars in spending” that he cannot support because they are backed with fund sweeps and other one-time resources.
Sources close to the negotiations said Malloy wants legislators to replace more than $200 million in temporary solutions with permanent cuts in a budget expected to spend about $19.7 billion next fiscal year. Sources say the governor also has agreed to accept reductions to the biggest initiative of his second term, a major transportation investment, to help get to a bottom line.
And though all sides insist they won’t consider tax hikes this year, Fasano says the Democratic legislators’ refusal to consider more permanent cuts tips their hand: They only are delaying talk of tax increases until after the November elections.
Budget gimmicks used to help Malloy’s re-election
But Democratic legislators counter that the governor did not always insist on addressing the fiscal future head-on, and that he employed more than a few questionable maneuvers to accommodate his re-election effort two years ago.
Malloy inherited the largest deficit — in terms of dollars — in state history when he came into office in January 2011, having to close a $3.7 billion shortfall in his first year. This represented a gap of more than 18 percent in annual operating expenses.
The governor took considerable heat for a “shared sacrifice” plan that included:
- More than $1.8 billion in annual tax hikes;
- A major state employee concession plan just two years after the previous round of givebacks;
- And other cuts that set General Fund spending $1.2 billion below the level needed to maintain current services.
As Malloy prepared in 2013 and 2014 to seek re-election, neither Connecticut’s economy, nor the state’s tax receipts, had rebounded as much as the governor and others had hoped they would.
Still, the governor made campaign statements like, “We really don’t have a deficit,” and frequently proclaimed that he’d kept annual spending growth under 3 percent in his first term. But that happened only after he and Democratic legislators shifted hundreds of millions of dollars in annual expenses into the next term — maneuvers that contributed to the deficits projected for next fiscal year and for 2017-18.
- Refinancing temporarily saved Connecticut almost $200 million in debt payments in each of the last two years of Malloy’s first term. That nearly $400 million expense, plus about $45 million in interest, is being repaid between 2016 and 2018.
- Workers agreed in the 2011 concessions deal to forfeit 3 percent of pay to defray retirement health care costs, but the state’s required annual match — more than $110 million — was deferred until July 2017.
- When Connecticut borrowed more than $500 million to fix cash flow problems in 2013, it borrowed an extra $39 million to cover the payments on that big loan for the last two years of Malloy’s first term.
And to reduce the budget line item for debt service in Malloy’s second term, the state is slated to use more than $160 million in borrowed funds — both this fiscal year and next — to make payments on other borrowing.
State Treasurer Denise L. Nappier cautioned against this approach, warning it could harm the state’s reputation among Wall Street investors.
About one week ago, Malloy proposed an updated budget for 2016-17 that cut deeply into the initiative Democratic legislators plan to campaign on: a sales tax revenue-sharing plan with cities and towns.
“I think we are willing to do the cuts,” House Majority Leader Joe Aresimowiz, D-Berlin, said last week, adding that the one-time budget fixes are being used to salvage vital programs. “We’re just not willing to do the cuts in the areas he is. We’re looking to protect social services. We’re looking to have layoffs and other things be minimal, and the governor seems as though he is not willing to do that right now.”
“We are absolutely still ready to talk,” Sen. Beth Bye, D-West Hartford, co-chair of the Appropriations Committee, said Saturday. “We’ve said we will go over the budget line by line.”
Sharkey said, “There are real and substantial cuts in the Democratic budget that will roll over” and reduce the 2017-18 deficit — albeit not as much as the governor, who is not up for re-election this fall, would like.
But if budget negotiation “comes from a one-sided perspective only,” Sharkey added, “that’s not a real negotiation.”