Gov. Malloy to Use Higher Tax Revenues to Close Concessions Gap

Connecticut Gov. Dannel Malloy is proposing to use a surge in state revenues to close the gap between what he targeted for state employee concessions in the new state budget and what was agreed to in negotiations.

In the new budget, the governor and Democratic lawmakers included nearly $2 billion in tax increases, about $800 million in spending cuts, and the assumption of $2 billion in union concessions.

The $40.1 billion budget also planned for revenues to surpass expenditures by about $1 billion.

Negotiations with the unions produced $1.6 billion in concessions — leaving a gap of $400 million. Union members still have to vote on the concessions package, and the vote is unlikely until after the General Assembly adjourns on Wednesday, June 8.  

Last Friday, the governor presented a plan to use about $320 million of the expected “surplus” revenues in the budget to close that gap.

(The revised plan also included about $80 million in additional spending cuts over two years — mostly from newfound savings in state retiree healthcare benefits.)

Both the state Office of Fiscal Analysis (OFA) and comptroller’s office have reported much-stronger-than-estimated tax revenues from the personal income tax, petroleum gross receipts tax and others. 

In spite of this, the budget’s $2 billion in tax increases remains intact. Especially impacted by the higher sales tax and the increase in the personal income tax are Connecticut’s small and midsize businesses.

The personal income tax is the vehicle for many small employers to pay their state business taxes.

State employee unions still have to vote on the concessions package, and the vote is unlikely until after the General Assembly adjourns on Wednesday, June 8.  

GAAP delay

In other developments this week, the House passed a budget-implementer bill (HB 6651) that will delay by two years the use of Generally Accepted Accounting Principles (GAAP) in state government.

In his first official act as governor in January, Gov. Malloy issued an executive order starting the process to move Connecticut to the more fiscally transparent GAAP accounting. Under HB 6651, the state would not start reporting in accordance with GAAP until July 1, 2013.

Cap gap closing

While revenues are improving, the state is also spending much more than it projected — which brings the constitutional spending cap back into play.

The governor’s initial budget proposal for the fiscal year starting July 1 was $406 under the spending cap. But that was before spending overruns of $290 million in this year’s state budget (2010-2011), mostly in the state Department of Social Services.

Because of the higher overrun, a compromise with the legislature to increase spending by $87 million, and use of tax revenue growth in lieu of realizing the full amount of state labor concessions, next year’s budget will come within $9 million of what would be permitted under the spending cap.

That’s a very tight margin, because in most years, state agency spending overruns are around $100 million.

To exceed the cap, the governor would have to declare a fiscal emergency. In addition, each chamber of the legislature will have to approve the emergency override with at least a 60% vote.

Voters overwhelmingly approved the spending cap after a period of annual double-digit percentage budget increases in the late 1980s led to a $900 million deficit on a $7 billion state budget in 1992.

Since then, the cap has worked to control spending, help the state reduce taxes, retire debt, fund the “Rainy Day” account and make many one-time expenditures for priority state projects.

For more information, contact CBIA’s Pete Gioia at 860.244.1945 or pete.gioia@cbia.com.