Lamont eyes emergency budget cuts, even as reserves swell
While mustering legislators’ support for tolls and a long-term transportation plan remains his top priority, Gov. Ned Lamont has also recently raised the specter of emergency budget cuts — something his predecessor did frequently to the consternation of the General Assembly.
But while Gov. Dannel P. Malloy’s cuts came amidst significant budget shortfalls, Lamont is weighing reductions to close a deficit equal to just 1/7th of 1% of the General Fund.
More importantly, Lamont is taking aim at the $28 million deficit projection even as analysts estimate a new savings program in the current budget holds a $318 million windfall. In other words, under old budget rules, instead of a $28 million deficit projection, Connecticut would be anticipating a $290 million surplus.
“While the projected shortfall represents only about 0.1 percent of the General Fund, agencies are making efforts to curtail hiring and discretionary expenditures, and the governor is prepared to exercise rescission authority if necessary to mitigate against ending the year with an operating deficit,” Lamont’s budget chief, Office of Policy and Management Secretary Melissa McCaw wrote in her last monthly budget forecast, issued Dec. 20.
“Usually when we have discussions about rescissions we have a very large [budgetary] wall to climb over,” said Rep. Toni E. Walker, D-New Haven, longtime co-chairwoman of the Appropriations Committee. “That’s not the case now. It does not sound like this is being propelled by real planning and real thought.”
State law gives governors tremendous discretion to unilaterally rescind spending ordered by the legislature, allowing line-item reductions of 5% or less in many areas. In theory, this reduces the chances of any one department, program or other budget initiative from absorbing a deep cut.
But reality works a little differently.
“Usually when we have discussions about rescissions we have a very large [budgetary] wall to climb over. That’s not the case now. It does not sound like this is being propelled by real planning and real thought.”
Rep. Toni E. Walker, D-New Haven
Municipal aid, grants to hospitals, and allocations for watchdog agencies such as the Freedom of Information Commission and Office of State Ethics are exempt. Debt payments, state employee salaries and benefits and other contractual obligations also effectively are exempt.
And governors try to limit cuts to health care programs supported in part with federal Medicaid funds because Washington takes back 50 cents or more of its payments to Connecticut for every dollar of spending that’s rescinded.
What all this means is that emergency cuts traditionally have fallen heaviest on higher education, community-based social service programs not backed by Medicaid, and miscellaneous agency accounts. But the last item only provides limited savings, meaning the first two typically are hit harder.
Malloy, whose tenure from 2011 through 2018 was dominated by a sluggish economic recovery, ordered emergency cuts a whopping nine times. Seven of the nine fell between November 2014 and December 2017, and he canceled almost $400 million in legislature-approved spending during his second term.
Walker said the last eight years took a heavy toll on the social services safety net — and some of Connecticut’s most vulnerable residents.
“It was dramatic,” she said, arguing many of the hundreds of community-based nonprofits that Connecticut hires to deliver social services are hanging on by a thread. “They can’t afford to stay in business any more. We’re destroying the infrastructure we have here.”
Lamont rebuffed a request from nonprofits last fall for $100 million from the state’s swelling budget surplus, which is currently pegged at a record $2.5 billion.
The CT Community Nonprofit Alliance responded by modifying its request. If the rainy day fund — Lamont’s chief defense against the next recession — is off-limits, it asked, could the governor and legislature dedicate a share of future revenues to an industry whose state funding hasn’t kept pace with inflation for more than a decade?
The governor said no.
Despite the $28 million deficit forecast, Lamont expects to grow the $2.5 billion reserve after the fiscal year ends on June 30 — the result of a new program that skims off a portion of state income tax receipts tied to investment earnings once they exceed a threshold level of roughly $3.1 billion.
This “volatility adjustment” — labeled as such because investment-related tax receipts are among the most unstable of revenue sources — is projected at $318 million. Before this system was created in November 2017, those funds would have been counted in the regular budget forecast. That would have turned the current $28 million deficit projection into a $290 million surplus.
In the late 1990s and early 2000s, then-Gov. John G. Rowland, a Republican, infuriated majority Democrats in the legislature by using his budget-cutting authority to trim spending even in years when the state finished with a large surplus — typically when Democrats hadn’t adopted a lean budget according to his standards.
But state law gives the governor great discretion to order cuts whenever he or she fears government’s resources “will be insufficient to finance all appropriations in full.”
Still, Lamont has reason to be cautious.
This year’s budget was drafted to run $141 million in surplus and the $28 million deficit represents a $169 million swing in the wrong direction.
Most of that hole is tied to cost overruns, and two-thirds of the problem reflects payments to help settle a risky lawsuit with the hospital industry — a problem Lamont inherited from Malloy.
Also, it’s been more than 10 years since the last recession ended and the governor has noted on many occasions that history suggests the next downturn cannot be far off.
Yet Lamont also is struggling to convince his fellow Democrats in the legislature to adopt a new plan to finance a long-term rebuild of the state’s aging, overcrowded transportation infrastructure.
He had sought to largely finance this plan with electronic tolling of all vehicles, but lawmakers from both parties balked. Lamont now is backing a request from Democratic legislative leaders to accept tolls just on trucks, though Republicans remain opposed.
Walker’s fellow co-chairwoman on the Appropriations Committee, Sen. Cathy Osten, D-Sprague, said it’s important that legislators respect the new initiative to force better savings habits.
McCaw did not comment on potential emergency cuts beyond her written warning, but Osten said “I believe what Melissa is really saying is that she does not want the legislature to come in and make a lot of changes to the budget.”
The regular 2020 General Assembly session convenes on Feb. 5 and some legislators from both parties already have said they want to add $5.3 million in spending to reverse cuts in state aid to nine nursing homes with high bed vacancy rates.
Still, Osten added, the $28 million deficit hopefully can be eliminated without emergency cuts. One option might be if the administration and unions are successful with ongoing negotiations to trim health care costs.
“We’ve pared down the [non-fixed] budget year after year,” she said. “I don’t think we’ll need rescissions.”
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