Gov. Dannel P. Malloy’s administration clarified its position Thursday on a new taxing arrangement with Connecticut’s hospital industry — removing a key stumbling block to a new state budget in the process.

The administration said it remains open to the tax changes —  which would leverage major new federal aid for Connecticut and its hospitals — even though an industry lawsuit against the state remains unresolved.

But much of this relief would expire after June 30, 2019, and the governor’s office indicated it still believes the lawsuit should be settled before any long-term tax changes are enacted.

“The administration has been very forthcoming that the hospital tax proposal which was included in both parties’ budget proposals in September, remains on the table as an important part of a balanced budget for the biennium,” Malloy spokeswoman Kelly Donnelly said.

But just eight days ago, legislators — who were still gridlocked on the overall state budget — met with the governor to discuss adopting the hospital tax changes as a separate bill.

At that time the governor said he didn’t want the tax changes enacted unless the Connecticut Hospital Association settled the lawsuit it filed in 2015 contesting the hospital provider tax.

“Accessing hundreds of millions of dollars per year in (federal) funds and not settling the overall disagreement would be malpractice,” the governor told Capitol reporters on Sept. 27. “And I don’t intend to do that.”

“No one should assume that I’m going to do things that wouldn’t be comprehensive in nature,” the governor added.

The provider tax has been a source of friction between the state and its hospitals since 2012 — one year after the tax was enacted — when the state began reducing supplemental payments back to hospitals.

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But the CHA, which noted Malloy didn’t try to block legislators from voting Sept. 15 on a budget proposal that included the taxing arrangement, continues to insist the two matters are not linked.

“The current hospital agreement with the administration addressing the hospital tax and payments for the 2018-2019 biennium is separate and distinct from the hospital litigation,” association CEO Jennifer Jackson said on Sept. 27 in response to the governor’s comments.

The association said Thursday only that it remains in negotiations with the Malloy administration.

At issue is a plan that would help draw $365 million in new annual federal aid into Connecticut for the state and its hospitals to share.

To get those federal dollars, Connecticut’s annual tax on hospitals would rise from $556 million to $900 million.

The state would redistribute and return that entire $344 million increase to the industry, along with an additional $326 million.

But Connecticut also would benefit because these payments would trigger a $365 million increase in federal Medicaid reimbursement to the state.

The state would finish $137 million in the black. Democratic and Republican-crafted budget proposals both rely on this revenue gain.

This arrangement also needs approval from the U.S. Centers for Medicare and Medicaid Services, and the Malloy administration says Connecticut’s application must be completed by mid-October.

Connecticut now has gone nearly 14 weeks into the new fiscal year without an approved budget.

Analysts say state finances, unless adjusted, will run $1.6 billion in deficit this fiscal year — a gap of about 8 percent compared with last year’s General Fund — because of surging retirement benefit and debt costs and declining income tax receipts.

Malloy, who has been forced to manage state finances by executive order, has imposed deep cuts on municipal aid and social services because many of these expenses are not fixed by contract.

Further complicating matters, the governor has said if a budget deal isn’t reached by Oct. 13, the chances of anything getting done before Nov. 1 are slim because of scheduling conflicts among legislators.

That raises another problem because Hartford Mayor Luke Bronin has warned the capital city is on pace to face insolvency by early November.

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.

Jake was Data Editor at CT Mirror. He is a former managing editor of The Ridgefield Press, a Hersam Acorn newspaper. He worked for the community newspaper chain as a reporter and editor for five years before joining the Mirror staff. He studied professional writing at Western Connecticut State University and is a graduate student in software engineering at Harvard Extension School.

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