After 117-day marathon, Senate passes bipartisan budget

A newly united Senate took a major step early Thursday toward ending Connecticut’s nearly 17-week budget impasse, overwhelmingly adopting a $41.3 billion, two-year plan that closes huge deficits without raising income or sales tax rates, imposes modest cuts on local aid, and provides emergency assistance to keep Hartford out of bankruptcy.

By a veto-proof margin of 33 to 3, the Senate approved the budget after a collegial and self-congratulary three-hour debate that ended with hugs, fist bumps and hand shakes just before 2 a.m. Seventeen of 18 Democrats and 16 of 18 Republicans voted to send the bill to the House, which is scheduled to debate it later Thursday.

The surprisingly strong vote, coupled with the expectation of a similarly strong margin in the House, set the stage for a decision by Malloy to accept the compromise or risk a veto override that could color his last year in office.

He declined to speculate Wednesday morning on whether he would sign or veto a budget he had not seen. A copy was not provided to his office until mid-afternoon.

The budget relies on tax and fee hikes worth roughly $500 million per year for the biennium. It also would raid more $175 million from energy conservation funds — which largely are supported by surcharges on consumers’ utility bills — and would offer Connecticut’s seventh amnesty program for tax delinquents since 1990.

The bipartisan deal cuts deeply into operating funds for the University of Connecticut — but not as severely as a Republican-crafted budget would have one month ago.

But it does not rely on shifting a portion of skyrocketing teacher pension contributions onto cities and towns.

And it authorizes $80 million in borrowing across four years to assist homeowners dealing with crumbling concrete foundations.

“There really is, I think, a sense of extraordinarily significant achievement in what we’ve been able to reach together,” Senate President Pro Tem Martin M. Looney, D-New Haven, said of the past three weeks of bipartisan negotiations that produced the latest budget deal. “There is so much in this bill that points us int he right direction.”

“There is something in this budget for many people to dislike,” said Senate Majority Leader Bob Duff, D-Norwalk. But “we can go back to our constituents and say ‘we listened. … And we continue to fund the areas we believe are right, are just, and continue to make the state a better state.”

Senate Republican leader Len Fasano of North Haven praised lawmakers from both parties for setting aside partisan differences and saying, “Connecticut comes first. What is important is there was courage to bring the budget to life.”

Republicans Joe Markley of Southington and Len Suzio of Meriden voted against the budget. Sen. Gary Winfield of New Haven cast the lone dissenting Democratic vote.

The new budget would direct Malloy to achieve $1.96 billion in savings after the two-year plan is in force, much of it coming from state-employee concessions he already negotiated with unions. And while those targets, collectively are $114 million larger than the already aggressive goals Malloy proposed, they also are $142 million less than savings goals Republican legislators wanted to set.

In the first year, the plan would boost General Fund spending by $875 million, or 4.9 percent, over appropriations from the last fiscal year. But that growth is deceptive, because nearly $190 million of that involves extra payments to hospitals that would be more than offset by tax hikes on the industry and increased federal Medicaid payments.

Ignoring the new hospital spending, growth is 3.8 percent, and much of that is driven by surging retirement benefit and other debt costs, which are largely fixed by contract.

Spending growth in the second year of the new budget would be just under 1 percent.

Trying to keep major tax rates flat

After ordering major tax increases in 2011 and 2015, legislators recognized it would be difficult to avoid revenue increases this year given huge projected deficits.

Analysts say state finances, unless adjusted, will run $1.6 billion in deficit this fiscal year and $1.9 billion in the red in 2018-19.

Those projected shortfalls would have approached $2.3 billion and $2.8 billion, but a union concessions deal approved over the summer by Malloy, state employees and the legislature will cut projected labor costs by $700 million this fiscal year and by $857 million in 2018-19.

Most workers face a three-year wage freeze and three furlough days, along with higher health care costs, higher pension contributions and new limits on retirement benefits.

Still, lawmakers struggled to avoid raising new revenue entirely and not to gut aid to cities and towns.

A GOP-crafted budget that narrowly passed the legislature in mid-September ran into a veto from Malloy, in part because it tried to shield towns by instead cutting labor costs beyond the limits set in the concessions deal.

Republicans tried to reduce worker pension benefits starting July 1, 2027 — right after the existing benefits contract expires — and to take some of the savings now in the form of reducing pension contributions.

Malloy and his fellow Democrats in legislative leadership said that never would hold up in court, and union leadership vowed to sue on grounds it violated collective bargaining. The GOP ultimately relented and pulled the plan from the latest bipartisan budget.

But the new plan does rely on revenue from tax and fee hikes worth $494 million this fiscal year and $535 million in 2018-19.

Hospital tax goes up, income tax credits shrink

The hospital tax hike, about $344 per year, is the largest. But the state would return all of those funds to the industry — plus more — to leverage hundreds of millions in new federal Medicaid reimbursements.

The whole arrangement would leave the state $137 million ahead in each of the two fiscal years.

If the hospital tax hike is not counted, the overall tax and fee increase is $150 million in the first year and $201 million in the second.

And while lawmakers steered clear of income tax rates, they still cost middle income and working poor households $90.3 million per year by reducing tax credits.

Other tax and fee increases in the plan include:

• A 45-cents per pack increase in the cigarette tax and a related increase on levies for snuff and other tobacco products.
• $10 million to be raised in 2018-19 by reducing tax credits to be identified later by the legislature.
• Restoration of an earlier proposal to tax fantasy sports betting, beginning in the 2018-19 fiscal year.
• A 25-cent fee hike on Ridesharing services
• And a new $10 increase on motor vehicle registration fees to support state parks and other recreational sites in a program titled “Passport to Parks.”

The new budget also reduces some taxes. These cuts include:

• Phasing new federal estate tax exemption levels into the Connecticut estate tax starting in 2018-19.
• Increasing the state income tax exemption for Social Security earnings and creating a new one for certain annuity and pension earnings in the second year of the budget.
• Lowering insurance premium tax rates, which would cost the state $11 million in the first year and $24 million in the second.

Lawmakers also canceled previously approved tax cuts, primarily focused on businesses, worth $33 million per year.

Teachers lose tax break, pay more into pensions

But one of those canceled tax cuts involves retired school teachers, who had received tax cuts in each of the past two years.

Malloy and lawmakers exempted 10 percent of retired teachers’ pensions from the state income tax starting with returns filed in the spring of 2016, and increased it to 25 percent this past April. That exemption was scheduled to grow to 50 percent next spring, but the new budget suspends that change.

Present-day teachers also take a hit in the new budget. Their annual contributions to their pension fund grow from 6 to 7 percent of their salaries starting in January – a $775 yearly increase for the the average teacher and school administrator.

The state will use those increased payments, $18 million this fiscal year and $38 million in 2018-19, to reduce the state’s contribution to the pension fund by matching amounts.

Spending, borrowing and other reforms

Because of the tight margins in the legislature since last November’s elections — which saw Republicans gain seats in both chambers — many GOP policy changes dismissed in past sessions were incorporated into the new budget.

The new budget sets stronger spending and bonding caps.

Legislators also would have to vote on all state employee contracts moving forward. Currently most contracts are ratified through a default process that occurs if no vote to reject a contract is taken within 30 days of its being filed with the legislature.

It also includes a proposal from Sen. John Fonfara, D-Hartford, that requires the state to save more for its pension and other liabilities at times when state revenues are exceeding expectations by high levels.

And at the municipal level, the budget revises the prevailing wage and binding arbitration systems. Towns would have more flexibility to launch more publicly financed capital projects without having to pay union-level construction wages. And arbiters have more options when ruling on wage and other contract issues involving municipalities and their employees.

“It was profound,” Fasano said. “We talked about issues that I don’t think we’ve ever talked about in this building. … This is different legislature than we’ve had in the past.”

“This bill is not perfect and will not fix all of Connecticut’s problems,” said Sen. Paul Formica, R-East Lyme, the Senate GOP chair of the Appropriations Committee. “It will however, chart a course that’s new — a course of structural change.”

Sen. Gayle Slossberg of Milford, one of three moderate Democrats who broke ranks with her party last month and insisted on fewer tax hikes and more controls on long-term spending, said she believes bipartisan talks produced a better budget.

“There are some people who said this could not be done,” she said. “And Im really happy to be here today to say that is not the case.”

Slossberg has frequently pressed for a long-term strategy to address massively unfunded retirement benefit programs projected to put pressure on the overall budget for the next 15 years.

The Milford lawmaker called the caps, municipal mandate relief and other policy changes in the new budget “a first step. Our fiscal challenges are huge and they are not going to be solved in one budget cycle or two. But we have to take a step in that direction.”

Sweeping energy funds and other programs

Raising taxes and fees wasn’t the only way lawmakers tapped new resources.

The budget would draw $87.5 million per year from three energy conservation programs:

• $63.5 million from the Connecticut Energy Efficiency Fund.
• $14 million from the Green Bank
• $10 million from Connecticut’s part of the Regional Greenhouse Gas Initiative, a nine-state coalition.

The first two of those funds get the bulk of their resources from surcharges on monthly utility bills.

Malloy and clean energy advocates particularly have balked at the Green Bank raid because it leverages an estimated $8 to $10 in private investments from every $1 utility customers pay into the program.

Connecticut also would offer its seventh amnesty program to tax delinquents since 1990. This one is designed to raise $60 million in the current fiscal year and $25 million in 2018-19.

It was not immediately clear what interest or other penalty charges might be reduced or waived to encourage delinquents to pay their back taxes.

The two-year budget also taps a number of other one-time sources and off-budget accounts.

Other sweeps in the new budget include:

• $20.4 million from the state’s banking fund. This fund uses assessments, fines and fees paid by depository institutions to support regulatory and other functions of the Department of Banking.
• $10.3 million from various correctional system and probation accounts.
• $10 million from the community investment act account, which supports open space, farmland preservation, historic preservation and affordable housing.
• $4 million from a program to increase installation of seat belts on school buses.

The new budget draws $6 million per year from the Tobacco Health Trust Fund. Another $1.4 million would be taken from the state’s public financing for state elections.

Education aid spared from deep cuts

The budget would cut the Education Cost Sharing Grant — the primary state grant that cities and towns receive to help run their schools — by by $31.4 million this fiscal year, a 1.6 percent cut. However, next year, that money is almost entirely restored and distributed using an updated formula that more heavily favors the state’s lowest-performing school districts.

“This not only provides our children with a good education, this budget protects local property taxpayers,” said Sen. Cathy Osten, D-Sprague, Senate Democratic chair of the Appropriations Committee.

With more than three-quarters of overall state municipal aid currently going to the (ECS) grant, it should be no surprise that it took the brunt of municipal aid cuts this year. Various non-education grants will be cut next year to make up for restoring ECS funding in 2019.

The way the state funds education has faced increased scrutiny in the year since a Superior Court judge ruled it irrational and unconstitutional. In the wake of that ruline, Gov. Dannel P. Malloy called for a massive redistribution of existing state funding to benefit the most impoverished districts.

The state’s 30 lowest-performing districts and three other communities would be shielded from any cuts this year, and each of the remaining 136 towns are cut by 5 percent. In dollars, this means Enfield, Stratford, Wallingford, West Hartford and Southington stand to lose the most with their cuts ranging from $1 million to $1.4 million.

In the following fiscal year, however, $30.9 million in ECS funding would be restored and a new formula used to direct more of that money to towns that have higher concentrations of students from low-income families and less ability to raise enough local tax money to pay for their public schools.

Of the $30.9 million in restored funding, just over half — $16.3 million — would go to the state’s 30 lowest-performing school districts and the remainder will be distributed to other communities. Currently 66 percent of overall ECS aid goes to these low-performing districts, and under this new plan, that will rise to 69 percent by fiscal 2019, but that’s largely because of the cuts the other districts will incur this fiscal year.

When the first-year cuts and second-year funding increases are taken into account, no town’s ECS grant stands to be cut more than $900,000 below what it received last fiscal year, and four cities stand to gain more than $1 million.

(Read more about how the formula was crafted here and how each town fares here.)

Towns spared teacher pension bills

Democratic and Republican lawmakers have balked since February at Malloy’s proposal to ask cities and towns to absorb a portion of the state’s required contribution to the teachers’ pension fund.

One of the largest, and fastest-growing line items, the state’s contribution jumps by about 33 percent over the next two fiscal years, from $1 billion in 2016-17 to $1.33 billion by 2018-19. Most of that surge stems from seven decades of inadequate state savings between 1939 and 2008.

Malloy originally proposed that communities pay one-third of the cost, but reduced his proposal twice. His last plan would have required municipalities to pay the “normal cost” — only the amount needed to cover benefits for present-day teachers, and not retirees. This would have involved just under $190 million per year by 2018-19.

The new budget avoids that entirely, but does tighten local aid.

A 2015 plan to share sales tax receipts with cities and towns is all but eliminated in this budget, which officially ends the diversion of these receipts into a special account.

The last remnants of a program which was supposed to distribute more than $300 million per year in sales tax receipts are:

• A “municipal transition grant” worth $13 million this fiscal year and $15 million in 2018-19.
• And a $36.5 million payment this year to offset a portion of the funds communities with high property tax rates lose because of a state-imposed cap on motor vehicle taxes.

The cap, which stood at 37 mills last fiscal year, rises to 39 mills this fiscal year. It hits 45 mills in 2018-19.

Legislators briefly considered repealing the local property tax on motor vehicles but relented. Municipal officials objected, noting that cities and towns collect between $700 million and $800 million per year from this levy, and the new state budget had no plan to replace most of those funds.

The new budget also would cut $19 million in each year from grants that reimburse communities for taxes they cannot collect on exempt property owned by the state and by private colleges, hospitals and other nonprofit entities.

A program that provides communities with $58 million in video slot receipts from the two southeastern Connecticut casinos was preserved.

Aid to repair roads, crumbling foundations

The new budget also retains road repair grants and local capital improvement grants. Connecticut borrows funds to provide that assistance.

The new budget provides a mechanism to assist owners of residential buildings plagued by crumbling concrete foundations. It creates a not-for-profit insurance company charged with helping homeowners repair or replace crumbling foundations with the least possible borrowing.

Lawmakers authorized $20 million in bonding this fiscal year and in each of the following three to support the Crumbling Foundations Assistance Fund.

Aid for Hartford, other distressed communities

Hartford Mayor Luke Bronin warned the capital city needs an additional $40 million in yearly assistance to avert insolvency. The city might need to file for bankruptcy protection next month if the state budget is not resolved.

The two-year state plan includes $28 million per year in a new “municipal restructuring grant.” Sources say Hartford would receive at least $20 million of those funds.

The new budget also includes another $20 million in annual assistance for the capital city that specifically would be used to help cover Hartford’s debt service on bonded debt.

Hartford would be required to refinance a significant portion of  its bonded debt. But Connecticut also would guarantee this refinancing, helping the city to obtain a more favorable interest rate.

And though specific projections were not available, Hartford’s annual debt service costs also would drop in the short-term because of the refinancing.

New budget tightens social services safety net

The new budget would reduce the eligibility cutoff for the Husky health care program for poor adults with minor children from 150 percent of the federal poverty level to 133 percent.

Advocates have projected this would end health insurance coverage for 9,500 poor adults, who would have to buy subsidized insurance on the state’s insurance exchange.

The new budget also would not fund a plan from the Malloy administration to bolster compensation for about 8,500 unionized, private workers who provide home care for seniors who otherwise might need to enter nursing homes.

The governor recommended gradually raising hourly wages for these workers from $10.50 to a minimum of $15. A $13 million appropriation was recommended this fiscal year to begin increasing compensation and to enhance workers’ compensation benefits and training.

The workers’ wages are negotiated by the state and by SEIU Healthcare 1199 New England.