Changes in State SpendingGovernor Dannel Malloy and legislative leaders released new budget proposals this week as another Wall Street credit rating agency—the third in a four-day span—downgraded Connecticut's bond rating.

Malloy released his second budget proposal Monday, followed a day later by revised tax and spending plans from legislative Democrats and Republicans.

A $450 million shortfall in anticipated tax revenue for the current fiscal year saw the projected budget deficit for 2018-2019 balloon past $5 billion, forcing the revised proposals.

While the plans are vastly different—Democrats call for legalizing marijuana while Republicans want spending cuts across most state agencies and programs—all three rely heavily on concessions from state labor unions.

The Malloy administration continues to negotiate with state employee unions but has yet to announce an agreement.

In the meantime, layoff notices were sent to 1,100 state workers, with layoffs expected to total 4,200 if an agreement cannot be reached with unions.

“It's hard to move a solution without any understanding of a labor agreement,” Malloy said.

While a labor agreement is key to restoring fiscal stability, it cannot be linked to an extension of the current contract on healthcare and retirement benefits with state employee unions, which is set to expire in 2022.

Deliberations Begin

Malloy and legislative leaders held their first budget meeting for about 90 minutes May 17, saying after the meeting that "there was a long way to go."

“I think it was a useful meeting to have the leadership of the legislature and myself sit down and talk about what are big issues,” Malloy said.

“I can assure you we did not resolve any big solutions.”

The General Assembly session ends June 7 and the new fiscal year starts July 1. It's possible lawmakers won't agree on a budget before the current fiscal year ends.

Whatever lawmakers do, broad tax hikes cannot be part of the discussion.

Lawmakers approved the two largest tax increases in state history in 2011 and 2015 to address deficits, yet the cycle of tax hikes followed by deficits continues.

Connecticut must adopt spending reforms, long-term solutions, and best practices other states used to lower taxes, bring state employee benefits in line with the private sector, and create predictable, sustainable budgets.

Six Downgrades in Six Months

Three Wall Street agencies downgraded the state's bond rating this week—the sixth downgrade in six months—giving lawmakers another hurdle to clear in their budget deliberations.

The Federal Reserve Bank is expected to raise interest rates at least twice this year and, possibly, more next year.

That means Connecticut will pay more to borrow, which affects the budget and taxpayers.

“Failure to produce a budget that is balanced and sustainable will undoubtedly lead to another downgrade in Connecticut’s bond rating,” CBIA economist Pete Gioia said.

Gioia also said the state's disappointing April employment report released Thursday "should be setting off alarm bells at the State Capitol."

“We can't expect to add jobs and grow the economy without solving our fiscal issues," he said.

"Job and economic growth must be the guiding principle for lawmakers as they work to resolve the budget deficit."

Job and economic growth must be the guiding principle for lawmakers as they work to resolve the budget deficit.
— CBIA economist Pete Gioia
Malloy's revised plan calls for an additional $241 million in spending cuts in 2018 and increases revenue by $383 million.

His plan:

  • Cuts more than $700 million in municipal aid
  • Increases the real estate conveyance tax on properties valued above $800,000 from 1.25% to 2%
  • Eliminates the sales tax exemption on non-prescription drugs

Malloy also calls for maintaining the $400 million transfer of teacher pension payments to municipalities proposed in his first budget, eliminating $35 million in municipal grants for property tax exemptions, and cutting staffing across several agencies.

Marijuana, Third Casino, Tolls

Democrats, meanwhile, proposed legalizing marijuana, a third casino, fee increases of $150 million, and taking steps to return tolls to state highways.

They also want $400 million in municipal aid cuts, $135 million in cuts to state colleges and universities, $90 million cut from transportation funds, and to cap annual bonding at $1.3 billion.

Only Malloy's proposal shifts teacher pension costs onto cities and towns.

House Speaker Joe Aresimowicz (D-Berlin) was optimistic that lawmakers can settle on a budget.

“If we focus on what we agree on and build on that instead of just sitting and talking about what we disagree on, I think we can get a deal done,” he said.

Senate and House Republicans both called for $650 million more in labor concessions than Malloy is seeking, a total of about $2.2 million.

Concessions, Spending Cuts

The House Republican plan relies on those concessions plus a wide range of cuts across many state agencies and programs.

It maintains school funding at current levels but eliminates the Municipal Revenue Sharing Account, reduces the corporate tax surcharge, and cuts funding for culture, arts, and tourism line items.

“Our goal was to come up with a plan that does not increase any taxes and mitigates the revenue losses to our cities and towns, and we did just that,” said House Republican Leader Themis Klarides (R-Derby).

The Senate Republican plan is similar to the House plan but assumes $958 million in union concessions in 2018.

“When we get down to these big numbers, you've got to look at things that normally you would not look at,” said Senate Republican President Pro Tem Len Fasano (R-North Haven).

“There's a bunch of things on this list I wish we could do differently.”

The Republican plans also call for using non-profits to deliver—at a lower cost—some of the services the state currently provides.

Such a move could save taxpayers more than $1 billion, according to a report from the Connecticut Institute for the 21st Century.

Legislative leaders will continue to hold budget talks with Malloy.

CBIA remains concerned with any budget proposals that not only increase taxes, but shift the tax burden onto cities and towns, which raises property taxes.

Comparing the Budget Proposals

 GovernorDemocratsRepublicans
TaxesIncreases revenues by $680 million, including:
• Raising real estate conveyance tax on properties over $800,000 from 1.25% to 2%
• Eliminates property tax exemption for nonprofit hospitals
• Ends sales tax exemption on nonprescription drugs
• Eliminates angel investor, green building tax credit programs
• Eliminates $200 property tax credit
• Reduces income tax credit for low wage earners
• Raises cigarette, tobacco taxes
Increases revenues by $850 million, including:
• $150 million in fee increases
• $121 million in agency fund sweeps
• Legalizes marijuana
• Approval for third casino
• Paves the way for highway tolls
• Increases insurance broker fees
• Restricts eligibility for $200 property tax credit (Senate)
• Reduces income tax credit for low wage earners
• Reduces corporate tax surcharge (House)
Union concessions• $1.57 billion• $1.57 billion• $2.2 billion
Municipal aid• Over $700 million in cuts
• Shifts $400 million annually in teacher pension costs to cities and towns
• $400 million in cuts
• Shifts $400 million annually in teacher pension costs to cities and towns
• Eliminates sales tax revenue sharing program
• Cuts $5.4 million annually from fund for distressed municipalities
OtherCuts spending to a number of state agencies and programs, including the Department of Social Services, DEEP, UConn, and the state colleges and universities system.• Caps bonding at $1.3 billion
• $135 million in higher education cuts
• Cuts $90 million in transportation funding
• Adds paid FMLA
• Consolidates some state agencies
• Eliminates eight legislative committees
• Closes a prison
• Closes Connecticut Juvenile Training School
• Reduces state election public finance program
• Calls for nonproifts to provide some state services
• Caps state borrowing
• Sweeps $160 million in surcharges form consumer electric bills
• Cuts $90 million in transportation funding
• Closes a prison
• Closes Connecticut Juvenile Training School
• Reduces spending for magnet schools (Senate)

For more information, contact CBIA’s Louise DiCocco (203.589.6515) | @LouiseDiCocco