Gov. Dannel P. Malloy unveils his revised two-year budget proposal. Kyle Constable /
Gov. Dannel P. Malloy signing the executive order under which he is running state government in the absence of an approved budget. Keith M. Phaneuf /

As Connecticut begins its second month without a state budget next week, the cost to cities and towns will take a big leap, topping $100 million.

And while Gov. Dannel P. Malloy’s administration warned the toll on municipalities gets much worse in September and October, the governor and his fellow Democrats in the legislature are nearing gridlock, weighing higher sales taxes against reductions in local aid.

The administration confirmed Thursday that, absent a budget, it will not release the $78 million in sales tax receipts due Tuesday to communities as part of a revenue-sharing program enacted two years ago.

The budget standoff already cost municipalities $30 million in road repair grants in July. And if it continues until Sept. 30, property tax relief grants that sent $182 million to cities and towns last fall also would be withheld.

Malloy, who is seeking significant cuts to local aid to minimize tax hikes, said legislators can’t accept that the days are over when every town could expect to receive at least the same amount of aid it had the previous year.

“There really is not another answer, unless what we’re going to do, I suppose, is perpetually raise taxes to support local government in the manner in which we have supported it before,” the governor said. “ … And that’s not an equation that works any more.”

State finances, unless adjusted, are projected to run as much as $2.3 billion, or 12 percent, in deficit this fiscal year, and $2.8 billion or 14 percent in the red in 2018-19.

Further complicating matters, Malloy wants to redistribute the smaller pot of municipal aid to help Connecticut’s poorest school districts. A Hartford Superior Court judge ruled last September that Connecticut’s distribution of education funding is irrational and unconstitutional, failing to meet the needs of students from its most impoverished districts. The ruling is on appeal to the state Supreme Court.

House Speaker Joe Aresimowicz, D-Berlin, and Senate President Pro Tem Martin M. Looney, D-New Haven, both agree with Malloy that poor communities need more, and that some redistribution is necessary.

But the governor doesn’t want to use taxes as the chief means to redistribute wealth, such as raising income taxes on wealthy households and channeling the revenues into poor school districts.

House Speaker Joe Aresimowicz, D-Berlin mark pazniokas / file photo

And the Democratic leaders said if funds for poor school districts must be found by cutting grants to 80 percent of cities and towns — and by trimming social programs for the poor — the odds of getting that budget through the legislature are slim.

“We all need to come to the table without lines in the sand, without “revenues are off the table,” Aresimowicz said.

And while the speaker would not disclose the amount of municipal aid cuts administration officials have proposed in budget talks, he said he doesn’t believe the House would adopt a budget based on that level.

“That would be a very difficult sell,” Looney said. “We have to find a way to get to a final budget, and it will require all people to move off of their final positions.”

Malloy and legislative leaders all expressed concern for cities and towns, but none of them backed down over the prospect of stalled local aid during the budget standoff.

“When there is no money being sent, less money will look a lot better,” the governor said.

“Bad things happened on July 1,” Aresimowicz said. “More bad things will happen on Aug. 1, on Sept. 1, and Oct. 1 until we come to the point where we all are willing to compromise.”

“Certainly these (stalled grants) are shockwaves, and the farther along with without a budget, the worse it will get,” Looney said.

Municipal advocates said the budget impasse’s effect on communities will become much more noticeable very soon.

Most communities conservatively assumed reductions in state aid when they adopted local budgets last spring, said Elizabeth Gara, executive director of the Connecticut Council of Small Towns. But that’s not the same as grant payments being withheld entirely.

“Some towns already have begun investigating the option of  sending out supplemental tax bills” later this year, she said, adding that many communities included written warnings of that possibility when the regular July bills were sent.

In addition, school districts traditionally resolve teacher hiring, transportation contracts and class sizes in August. “These kinds of decisions have to be made now,” she said.

Senate President Pro Tem Martin M. Looney Keith M. Phaneuf / file photo

The Malloy administration also warned that the first quarterly payment of the Education Cost Sharing grant could be reduced if no budget exists in October. Last year the October ECS payments totaled $472.8 million. The administration did not say how much they might be cut.

Legislators were warned months ago that the city of Hartford is at risk of bankruptcy, and Joe DeLong, executive director of the Connecticut Conference of Municipalities, said withholding grants — and straining local cash flow — is a recipe for disaster for a city staring at Chapter 9.

“To me, that’s kind of the trigger point for more catastrophic circumstances,” he said.

Democrats hold a slim 79-72 edge in the House. And while the Senate is deadlocked 18-18, Lt. Gov. Nancy Wyman, a Democrat, holds the tie-breaking vote.

House Democratic leadership favors raising the sales tax from 6.35 to 6.99 percent, and adding surcharges to restaurant and hotel transactions, to mitigate local aid cuts.

But both Aresimowicz and Looney acknowledge some moderates in their respective caucuses are wary of tax hikes.

Senate Republican leader Len Fasano of North Haven, said Thursday “municipalities should not be hurt by virtue of our missteps,” and again urged Democrats to call a vote on a Senate GOP plan that imposes minimal tax hikes and largely cuts only previously approved increases in local aid. “We should at least get a budget in place, then we can tinker with it and modify it,” he said.

But Fasano’s budget relies on a controversial plan to cut labor costs more than $1.9 billion over the coming biennium by legislating changes to labor rules and benefits for future workers.

Aresimowicz, Malloy and Looney all have questioned whether Fasano’s plan would survive a court challenge by state employee unions.

“I’m not willing to run his budget with those flawed assumptions,” the speaker said.

Keith has spent most of his 31 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut’s transportation and social services networks. He has been the state finances reporter at CT Mirror since it launched in 2010. Prior to joining CT Mirror Keith was State Capitol bureau chief for The Journal Inquirer of Manchester, a reporter for the Day of New London, and a former contributing writer to The New York Times. Keith is a graduate of and a former journalism instructor at the University of Connecticut.

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