Malloy vetoes budget, seeks ‘honest dialogue’

Gov. Dannel P. Malloy delivered Thursday on his vow to veto the Republican budget unexpectedly passed with a handful of Democratic votes, calling it a gimmick-laden measure that would consign Hartford to bankruptcy, devastate public higher education, invite certain lawsuits from state employees and add to Connecticut’s pension liabilities.

“In sum, this budget is unbalanced, unsustainable and unwise,” Malloy wrote in his message.

The veto came as the state was wrapping its 13th week without a budget, continuing an impasse that Malloy says could continue indefinitely if not resolved in the next two weeks. It was released on a day when Malloy resumed bipartisan negotiations with legislative leaders at the State Capitol and Republicans staged public events seeking support for a long-shot veto override attempt.

An override requires a two-thirds vote: 101 votes in the House and 24 in the Senate. Republicans would have to coax 29 Democrats in the House and six in the Senate to cross the aisle and override the Democratic governor’s veto. Only five Democrats in the House and three in the Senate voted for the GOP plan.

Pressure on Malloy and legislators is expected to intensify in October when the state fails to distribute education aid to most of Connecticut’s municipalities. Without a budget, Malloy says, there is no valid formula for distributing aid, other than the minimum required to meet the constitutional responsibility of providing a free and public education.

In his veto message, the Democratic governor made many of the the same criticisms he has offered frequently of the two-year plan including:

• Legally risky cuts to state employee pension contributions;
• Insufficient aid to keep the City of Hartford out of bankruptcy;
• Deep cuts to public colleges and universities;
• And huge savings the administration would have to achieve after the budget was in force.

“This budget adopts changes to the state’s pension plans that are both financially and legally unsound,” Malloy wrote. “Prior administrations and legislatures have over decades consistently and dangerously underfunded the state’s pension obligations, amassing an unfunded debt obligation that has increasingly stymied our ability to make the key investments necessary to strengthen and grow our economy:  education, transportation and economic diversification.”

This would mark a return to those policies, he wrote.

Senate Republican leader Len Fasano of North Haven said vetoing the GOP budget opens the state to its own list of dire consequences as Malloy unilaterally makes fiscal choices as he governs by executive order.

“Gov. Malloy’s veto has now put Connecticut in chaos,” Fasano said. “By vetoing this budget, the governor’s draconian executive order will remain in effect and create destruction for low- and middle-income families. His executive order cuts core social services, slashes municipal aid, and zeros out funding for public education – a constitutional requirement.”

Republican legislative leaders long have argued their plan is Connecticut’s best hope of averting the much deeper cuts Malloy must impose in the absence of any adopted spending plan.

“There are widespread implications of vetoing this budget and allowing the executive order to remain in effect that no one has a full understanding of yet. For example, the governor’s actions today threaten federal funding for programs such as women’s crisis centers. Lawmakers can correct this by overriding the governor’s veto,” said Fasano, pivoting to a pitch for a veto override. “But first they are going to have to make a decision. Are they going to vote the party line? Or are they going to vote to protect their towns, cities, students and core services?”

The Republican budget incorporates savings from the concessions deal unions and Malloy struck earlier this year, as does a compromise plan reached by the governor and Democratic leaders.

But while that concessions deal also locks the state employees’ benefits package into place through 2027, Republicans said Connecticut can save even more money now by limiting the pension benefits offered after that date.

Malloy said in his veto message the GOP savings are based on nothing more than hopes and wishes for what might be negotiated a decade from now.

“This budget grabs ‘savings’ today on the false promise of change a decade from now, a promise that cannot be made because no legislature can unilaterally bind a future legislature,” Malloy wrote. “It eliminates $144 million in pension contributions this fiscal year, $177.8 million next year, and hundreds of millions of dollars in the years to come, solely by seeking to limit the state’s authority to enter into future agreements over pension benefits.

“Disguised as ‘structural reform,’ these changes echo poor decisions of Connecticut’s past, when the state failed to make full payments on our existing commitments.”

Many Democratic legislators and union leaders also have questioned whether the state can make these changes unilaterally or whether that would violate collective bargaining rules.

Malloy said the GOP plan also adds to the unfunded liability in the teacher’s retirement system, whose costs are now borne by the state.

“In a similar gimmick, this budget diverts teachers’ pension contributions to the general fund while at the same time offering no solution to reform funding for the teachers’ pension system, potentially leaving future taxpayers at the precipice of a fiscal cliff that could reach as high as $6 billion,” Malloy wrote. “The diversion of the teachers’ retirement contributions from the teachers’ retirement fund creates significant potential tax consequences for the employees and jeopardizes the tax status of the entire retirement fund.”

The GOP plan would increase teacher contributions, without depositing them in the pension fund. Union leaders say that amounts to a new tax on teachers.

Pension liabilities loom large in Connecticut’s fiscal problems.

Analysts say state finances, unless adjusted, would run $1.6 billion in deficit this fiscal year and $1.9 billion in the red in 2018-19. Much of that shortfall is driven by surging retirement benefit and other debt costs fixed by contract, and also by declining income tax receipts.

Malloy has said much of the reductions he would have to  make to keep spending in line with revenues would fall upon municipal aid and social service programs for the poor and disabled.

The Republican plan does preserve more aid to municipalities than would a Democratic alternative. In his budget message, the governor said that is illusory.

“In the area of town aid, this budget spins a false narrative about how much funding municipalities would gain. While proponents of this bill claim that it increases funding to municipalities, it achieves this purported increase only by understating 2017 town aid totals by more than $60 million, failing to account for state reimbursements to municipalities under the car tax cap,” Malloy said. “In reality, when town aid totals are compared to the actual numbers and all line items are added up, municipalities that need help the most will not get it. Hartford, for example, would lose $6.8 million at a time when its financial future is in peril, almost certainly forcing it into bankruptcy.”

The $40.68 billion, two-year budget crafted by the GOP effectively holds the line in spending. On paper, general fund spending would increase 3.5 percent in the first year and another 0.6 percent in the second, despite surging retirement benefit and debt costs fixed by contract.

But like the last budget recommended by Malloy and Democratic legislative leaders, the GOP budget’s growth also is inflated by a major new tax increase on hospitals, which also calls for the state to return all of those funds and more to the industry. This is done to capture hundreds of millions in new federal aid as both the state and the hospital come out ahead.

Malloy said that Medicaid revenue was in jeopardy.

“I cannot overstate the urgency of the need for all parties to come together to negotiate a realistic, responsible budget that addresses our state’s fiscal issues, distributes education aid equitably, and balances without the use of illusory gimmicks,” he wrote. “And I must note that failure to reach a deal soon could risk federal approval for $343.9 million in increased provider tax revenue and $366.5 million in federal Medicaid reimbursement, which are critical to balancing the budget and increasing reimbursements to providers.

“I remain committed to engaging in honest dialogue with legislative leaders to reach an agreement that achieves these goals.”

The Republican budget also would have established strong caps on appropriations and borrowing, while sparing communities from major cuts in state aid and from the governor’s proposal to shift $280 million in teacher pension costs onto local budgets.

Both the GOP budget as well as the Democratic plan have been criticized as being unsustainable.

The legislature’s nonpartisan Office of Fiscal Analysis says the GOP-crafted plan would balance the state’s books this fiscal year and next — wiping out the $3.5 billion potential deficit in the process.

But that same plan, unless adjusted, would run $3.31 billion in the red between 2019 and 2021.

And the alternative budget developed by Malloy and Democratic legislative leadership would fare even worse, with a potential shortfall of $3.58 billion.

In other words, when Connecticut’s next governor arrives at the Capitol in January 2019, that person and the General Assembly effectively would face the same challenge that has confounded Malloy and legislators for the past eight months. And that’s after taking into account the wide array of spending cuts and tax hikes both sides have built into their latest budget plans.

That’s in part because Connecticut still must deal with surging debt and retirement benefit costs — much of which stem from more than seven decades of insufficient savings. This problem is projected to plague state finances through the mid-2030s.