By Keith M. Phaneuf, Mark Pazniokas, and Jacqueline Rabe Thomas
Unveiling his final budget proposal two days early, Gov. Dannel P. Malloy today challenged legislators to take politically difficult steps to close modest deficits in the current, two-year budget and mitigate larger shortfalls looming after the November elections.
Malloy, who is not seeking re-election, recommended eliminating a middle-class income tax credit, boosting cigarette, hotel and real estate conveyance taxes, closing a sales tax exemption for over-the-counter medications, and stretching out spiking teacher pension costs similarly to last year’s restructuring of government contributions to the state employees’ pension.
Spending growth in the $20.7 billion proposal is limited to 0.3 percent while many programs would face cutbacks compared with the preliminary 2018-19 budget adopted last October.
Malloy’s plan came two days before the opening of the short, even-year legislative session, when the administration normally releases its proposed revisions to the two-year budget.
Malloy also will deliver his annual budget address on Wednesday
The governor recommended that new restrictions on a popular health care program — already delayed once — finally be imposed on July 1, threatening to end or reduce benefits for as many as 113,000 poor seniors and disabled patients, saving the state nearly $90 million.
A new taxing arrangement with Connecticut’s hospitals — which still hasn’t received necessary federal approval — should continue next fiscal year. But Malloy said that plans to ease taxes on hospitals after that should be deferred as the state grapples with huge projected budget deficits.
The governor’s plan for the fiscal year beginning July 1 also would establish a seven-cents-per-gallon gasoline tax hike this summer and electronic tolling on highways by mid-2022 to stabilize the Special Transportation Fund and support a long-term infrastructure overhaul.
“The budget we are proposing today is about the future — specifically Connecticut’s long-term fiscal stability,” Malloy said. “This plan continues to pay down the state’s long-term obligations, further reduces our reliance on one-time revenues and identifies clearer and more achievable savings targets in the underlying budget.”
As both parties struggled for nearly nine months in 2017 to adopt a new, two-year state budget, legislative leaders ultimately excluded the Malloy administration from the final six weeks of bipartisan talks.
The governor signed into law the budget that narrowly passed in late October — saying the stalemate had to end — but argued the plan was flawed on several grounds.
It orders the governor to find unprecedented levels of savings after the budget is in force, about $880 million in the General Fund this fiscal year and a whopping $1.09 billion in 2018-19.
It raids more than $290 million in the first year and $250 million in the second from specialized accounts and one-time sources. And hundreds of millions in sales tax receipts previously promised to municipalities no longer would be delivered.
Analysts now project the second part of that biennial plan — the preliminary budget for the 2018-19 fiscal year — is on pace to run modestly in deficit, with a General Fund shortfall of $165 million or just under 1 percent.
Much larger deficits are projected for the next two-year budget that Malloy’s successor and the 2019 General Assembly must tackle just 12 months from now.
Analysts project finances — unless adjusted — would run $2.2 billion in deficit in 2019-20 and $2.9 billion in the red one year after that, gaps of 11 and 14 percent, respectively.
Much of that is driven by surging costs tied to public-sector retirement benefit programs that were badly underfunded dating back to 1939.
Malloy, who first took office in 2011, had inherited even larger budget deficits from his predecessor, Gov. M. Jodi Rell, and from the 2010 General Assembly. That involves projected gaps of $3.7 billion in 2011-12 and $3.4 billion in 2012-13.
The total value of tax and fee hikes the governor proposed to balance the General Fund — including deferring a previously approved business tax cut — is about $190 million next fiscal year. It also includes some items with a relatively minor revenue impact that are bound to be politically difficult, such an expansion of the bottle-deposit law to liquor and wine bottles.
No other state in the Northeast has such a deposit law. Malloy is proposing a deposit of 25 cents per bottle to raise $13 million annually, but he also is once again seeking repeal of a minimum-pricing law.
The single-largest tax hike involves eliminating entirely the state income tax credit that middle-class families can claim on their returns to partially offset local property tax costs. The legislature limited that credit, which is worth a maximum of $200 per filer — only to households with dependents or seniors.
The governor’s proposed change would raise income taxes on middle-income households by nearly $50 million next fiscal year. Another $16.1 million would be raised by reversing recently approved expansions of income tax exemptions for pension and Social Security income.
Malloy would add 25 cents per pack to the state’s cigarette levy, which currently is $4.35 — tied with New York for the nation’s highest. This proposal and other tobacco tax changes would raise $34 million in 2018-19.
Other tax increase proposals include:
Ending the sales tax exemption for non-prescription medications, which would raise $30 million next fiscal year.
Ordering three small business tax hikes and to raise a total of $47 million.
Increasing the hotel occupancy tax from 15 to 17 percent, which would raise $16.7 million next fiscal year.
For the governor’s new plan to work, though, legislators also must close the $244 million deficit projected for the current fiscal year. And most of the options he recommended for mitigating that gap involve the sales tax, including:
Raising the base rate from 6.35 percent to 6.9 percent;
And establishing a special 7 percent rate for restaurant transactions.
The governor also listed the legalization of the sale of recreational marijuana as potential revenue-raiser.
Malloy also proposed a few more revenue hikes to begin in the coming years to reduce the huge deficits just down the road.
Canceling a previously-approved tax break for hospitals, scheduled to take effect in 2020, would save $516 million per year, the administration says.
Lawmakers postponed an income tax cut last fall for retired public school teachers — who already received income tax cuts in each of the previous two years. That deferred break, which would make 50 percent of teacher pensions exempt from the state income tax, compared with the current 25 percent exemption, now is scheduled to take effect with the tax returns retirees file in 2020.
But the governor says Connecticut should cancel that break permanently.
Lawmakers also largely reneged this year on a huge plan to share more than $300 million in sales tax receipts annually with cities and towns, delivering less than $70 million.
Technically the budget pledges to restore the program in a few years, but with state pension costs projected to surge dramatically for the next 15 years, the administration says lawmakers should concede this restoration won’t be happening any time soon.
If these and other measures are taken, the administration says, those post-election deficits of $2.2 billion in 2019-20 and $2.9 billion in 2020-21 could be shaved down to $1.35 billion and $1.4 billion, respectively.
One Republican legislative leader said the Democratic governor, who has battled deficits throughout much of his administration, is trying to re-write his legacy as his tenure ends.
“In his last term, Gov. Malloy is doing everything he can to make sure his failed policies outlive his time in office,” Republican Senate leader Len Fasano of North Haven.
“After seven years of disappointment, the governor still hasn’t learned from his mistakes. His brand of irresponsible tax policies, what he calls a progressive agenda, has created the crisis Connecticut now faces.
“What the governor released today is nothing more than a continuation of his legacy of tax increases, economic decline and penalties on the most vulnerable.”
House Minority Leader Themis Klarides, R-Derby, called several of the governor’s proposed tax cuts troublesome. Malloy also reduce the level of municipal aid compared with the original 2018-19 budget adopted last fall by $18 million.
“We have to deal with the current deficit and address another multi-billion hole in the next two-year budget cycle. We will put forth our ideas and see where there is common ground. We have a lot of work to do,’’ Klarides said.
House Speaker Joe Aresimowicz, D-Berlin, didn’t comment on specific proposals from Malloy, but noted that the governor’s proposal is just the beginning of the budget adjustment process.
“The reality is that starting Wednesday the legislature takes over, and we all know some of those ideas will likely survive and many won’t,” the speaker said.
“I try to be careful not to dismiss any proposals out of hand, as the budget challenges ahead require that all options be considered by all parties as we move forward to build consensus over the next three months.”
Part of the governor’s strategy to put the state’s finances on steadier fiscal footing is to stretch out how long the state pays down the $13.1 billion it owes the teachers’ pension system.
One report projected the annual contribution to the pension, which stands at $1.29 billion, could exceed $6.2 billion by 2032.
Last year, the governor proposed requiring cities and towns to pay some of this bill. He originally suggested one-third, then capped it at no more than $400 million per year.
A final plan would ask communities only to cover the cost of saving for present-day teachers, which likely would limit annual costs to around $200 million per year.
Legislators from both parties balked at all three proposals.
This year his budget does not recommend local governments pick up these costs. Instead he recommends that the state focus on realigning its contributions.
Connecticut took a similar approach one year ago, shifting $14 billion to $21 billion owed to the state employees’ retirement system between now and 2032 until after the latter date.
The governor did not recommend specific changes to pension contributions Monday, but said a detailed plan would be released later this year.
Any proposal to realign contributions to the teachers’ pension is expected to draw heavy scrutiny, though, because Connecticut doesn’t have the same legal flexibility to restructure payments into the teachers pension fund.
When the state borrowed $2 billion in 2008 to shore up the teachers’ pension system, it pledged to its bond investors not to short-change pension contributions for the life of the 25-year bond issuance.
In other words, if the state wants to pay less into the teachers’ pension than fund actuaries recommend — with a very limited exception — it needs to pay off the bonds first.
The state’s bond counsel, Day Pitney of Hartford, spelled this out in an opinion provided in late April 2016. And state Treasurer Denise L. Nappier has said she agrees.
Malloy said Monday that “we don’t believe there is a conflict with the bond” convenant and even if there were, he doesn’t believe any of the state’s bond investors would object. Restructuring pension payments would make state finances more stable and predictable, he added.
