Malloy, CT lawmakers to begin closing $5B in red ink

When Gov. Dannel P. Malloy and legislative leaders return Monday to the Capitol, they will begin a daunting task.

The challenge involves closing the largest state budget gap since the last recession — one that has grown enough over the last two weeks to leave all previous plans massively out of balance.

Between now and Friday, three new budget plans are expected to be submitted, and either a tentative union concessions deal will be struck or the governor will take another step toward ordering more than 1,000 new layoffs.

There are sharp philosophical differences between Democrats and Republicans, between the Executive and Legislative branches — and even between some political allies.

And, just to make things interesting, the players in this budget drama still can’t agree on whether to conduct their budget talks privately or in a televised meeting open to the public.

Meanwhile, legislators and the governor now have less than eight weeks until the new fiscal year begins. And while the regular legislative session ends June 7, the real deadline comes 23 days later — after which Malloy must attempt to run the state on the previous fiscal year’s spending and revenue plan.

Two-year budget gap hits $5 billion

“I think to get the job done, a whole lot of people are going to have to own it,” Malloy said. “I’m prepared to work with folks, but this is going to require compromise on everyone’s part.”

“I think it is within the realm of possibility” to reach agreement on a new budget by June 30, said Senate President Pro Tem Martin M. Looney, D-New Haven. “I’d say it is reasonably likely.”

But it’s after June 30 when the numbers — if a deal hasn’t been reached — don’t come close to adding up.

Largely because of eroding state income tax receipts, fiscal analysts warned last week that Connecticut can expect $1.5 billion less revenue in the next two-year state budget than originally anticipated.

The legislature’s nonpartisan analysts and Malloy’s budget office both say that finances, unless adjusted, will run $2.2 billion to $2.3 billion in deficit next fiscal year, and $2.7 billion to $2.8 billion the year after that.

Those potential gaps, 12 percent and nearly 14 percent, respectively, are the largest since the 18 percent hole Malloy faced during his first year in office in 2011. The same is true for the combined biennial shortfall of roughly $5 billion.

Everyone’s first draft is way out of balance

Both the governor’s budget for the next two years, submitted in early February, and a biennial GOP plan offered last week — but based on the Jan. 17 revenue forecast Malloy also used — now are $1.5 billion out of balance.

The Democratic chairs of the Appropriations Committee released a two-year spending plan to the news media, but their committee never voted on it. That plan would have required about $690 million in new supporting revenue over two years — based on the rosier, Jan. 17 schedule.

But the Finance Committee, on which Democrats hold a one-vote edge, recommended a small net tax cut, rather than a revenue package to support the spending plan.

Based on the latest revenue erosion, that spending plan would require almost $2.2 billion in new revenue over the coming biennium.

And each plan has its supporters and critics:

• Governor Malloy’s budget.

Insisting that Connecticut’s solution to the deficit “cannot be revenue-driven,” Malloy proposed net tax hikes worth about $200 million per year.

The governor largely avoiding raising rates with the exception of a 45-cents-per-pack add to the cigarette tax. He also proposed eliminating a $200 property tax credit within the income tax for the middle class and reducing a credit for the working poor.

“I think there is a recognition that this is not about raising taxes. It’s about finding a way to live within the means that we have,” Malloy said. “That’s not to say there shouldn’t be tax adjustments, there should be.”

Perhaps the most controversial portion of the governor’s budget involved another revenue plan, though, to raise more than $400 million annually from cities and towns. This would be their contribution to cover one-third of the teachers’ pension fund payment — a line item expected to skyrocket more than 500 percent over the next 15 years to compensate for decades of under-funding by past governors and legislatures.

This was left out of the GOP budget and the spending plan from the Democratic chairs of the Appropriations Committee.

Both also avoided the governor’s proposal to subject the real property of nonprofit hospitals to municipal taxation.

Malloy insists it must remain part of negotiations, but it continues to raise strong objections from municipal leaders and from teachers’ unions.

• The Republicans’ Budget

“Nobody’s budget is perfect now, but I felt we made a very good start with ours,” House Minority Leader Themis Klarides, R-Derby, said, adding that Republicans showed with difficult spending cuts that tax hikes didn’t have to be the solution — at least before the deficit grew much worse.

Senate Republican President Pro Tem Len Fasano of North Haven said the GOP plan also showed Connecticut can stabilize a transportation fund headed for insolvency — but it could not also support all of the new construction Malloy wants. (The Democratic spending plan drained that fund’s reserves.)

“We have to have a stable transportation fund that is self-sustaining,” Fasano said. “That is a keystone to success.”

Republicans, who adopted Malloy’s aggressive goal of achieving union concessions worth $1.57 billion over two years, were criticized for setting more labor savings targets outside of the concessions arena.

The GOP plan trimmed tens of millions of dollars from the agency salary account line items Malloy sought, while also calling for $36.5 million in annual savings by clamping down on hiring and overtime.

Traditionally savings from these areas already are counted toward the concessions savings target. It’s not clear if the governor would have enough additional options at his disposal to achieve these further labor savings.

Looney said this approach amounts to counting the same savings twice and said Democrats fear “that any additional plan from Republicans will postulate an even larger number” than can realistically be achieved.

But Klarides and Fasano said “concessions” should reflect sacrifices made by workers, and that Republicans expect departments and agencies to reduce clerical and legal staff, privatize services when it is cost-effective, and reduce reliance on overtime.

“We have to change things up and do things we haven’t normally done,” Klarides said. “Some people aren’t going to like it. But you can’t just stick your head in the sand.”

• The Appropriations Committee Spending Plan

Both Looney and House Speaker Joe Aresimowicz, D-Berlin, said the plan, despite the fact that it wasn’t adopted, showed funding could be cut well below the level needed to maintain current services and still defend core Democratic priorities, such as health care, social services, education and municipal aid.

“Does that mean now, with the new revenue numbers, all of these are going to stay where they are now? I don’t know,” Aresimowicz said.

The Democratic spending plan and the governor’s budget also came close to providing the $40 million in additional state funding Hartford Mayor Luke Bronin said the capital city needs next fiscal year to stave off insolvency.

The GOP plan provided just over $7 million, though Fasano and Klarides said they remain open to discussing additional funding.

But Republicans said the Democratic spending plan lacks credibility across the board because it is incomplete.

“It’s time for them to ante up a budget like the governor did, like the Republicans did,” Fasano said. “I think that they’re obligated to do that, and I think they have to do that sooner than later. You can’t have negotiations until the ideas are on the table.”

Looney and Aresimowicz said Democrats are developing a balanced plan that addresses both spending and revenues based on the latest trends.

Taxes remain the political hot button

All sides concede the issue that probably will prove the most challenging to resolve involves taxes.

There are a myriad of views on this longtime hot-button issue, even some disagreement within both parties.

Fasano said he is willing to consider a modest amount of tax increases, provided they come from changes to credits and exemptions, and not from increasing tax rates.

Given the huge potential deficits facing state finances, “I don’t think you can do it all on the spending side,” the Senate GOP leader said.

But Klarides said, for now, she won’t ask taxpayers for more, whether it’s by raising rates or reducing credits and exemptions.

House Republicans “feel that is what has gotten us into this mess to begin with,” she said. “It is not something I am open to at this point.”

While Aresimowicz said last week that he couldn’t rule out an income tax increase, fellow Democrat and House Majority Leader Matt Ritter said he wouldn’t consider one — unless trends showing massive erosion of anticipated receipts from this tax were somehow to improve.

The speaker said he understands and that he and Ritter aren’t that far apart.

“If Matt feels strongly, I want him to discuss it freely,” Aresimowicz said. “… I feel very similar about the income tax. I would say it is the tax (increase) of last resort.”