For the first time in more than a generation, Connecticut lawmakers crafted a compromise $41 billion bipartisan state budget that also includes some of the structural reforms CBIA and its members have long sought.

Lawmakers passed the two-year budget Oct. 26 by veto-proof margins after legislative leaders spent weeks assembling the plan.

State budget vote
The compromise budget passed the House 126-23 hours after the Senate approved it 33-3.

The reforms include establishing realistic spending and bonding caps, requiring legislative approval on labor contracts and binding arbitration awards, having teachers pay more toward pensions, and putting excess income tax revenue in a reserve fund.

They are the first of many moves Connecticut needs to make to improve its economy and grow jobs.

"Before the budget process even started earlier this year, we were clear that the budget needed to pass the following test: It must be bipartisan, avoid broad-based tax increases, and include structural reform of state government and our budgeting process," CBIA president and CEO Joe Brennan said.

"This state budget meets that test."

After a phase-in period, the spending cap will cover pension payments and aid to distressed municipalities.

This means legislators must consider rising pension costs and other state spending when drafting a budget.

Hopefully, this puts the brakes on excess spending and helps avoid future deficits.

Major Taxes Unchanged

While the budget includes $1 billion in tax and fee hikes over the two years, it does not raise the sales tax, income tax rates, or the corporate earnings tax.

It scraps Gov. Malloy's plan to shift a portion of teacher pension costs onto cities and towns, and it doesn't place an additional property tax on second homes or add a cellphone tax.

The budget raises revenue through a variety of steps, including a 45-cent increase in the cigarette tax, a $10 surcharge on motor vehicle registrations to support state parks, and a 25 cents-per-ride fee on ride-sharing services like Lyft and Uber.

It also cuts $130 million from the University of Connecticut over two years—much less than the $309 million cut contained in a previous budget that lawmakers approved but Malloy vetoed.

And it makes $40 million available to help Hartford with its struggling finances.

Senators approved the package just before 2 am Oct. 26 by a 33-3 vote while House members approved it 126-23, with two legislators absent, later in the day after about three hours of debate.

The vote came 118 days after the July 1 start of the fiscal year.

A deadlocked Senate, where Democrats and Republicans each hold 18 seats, and a House where Democrats hold a narrow 79-72 margin, resulted in the protracted budget process.

The budget now goes to Malloy's desk. His office said only that he would "carefully review" the 881-page document.

Pension Problems

Lawmakers had to grapple with a projected two-year, $3.5 billion deficit in drafting the state budget. A large part of it stemmed from the failure of previous legislatures and administrations to properly fund state employee pensions.

That's just one reason CBIA and its members have been calling for structural changes to bring state wages and benefits more in line with what’s offered in the private sector.

Our problems didn't happen overnight and they won't be solved overnight, but this budget sets Connecticut in a new direction.
— CBIA's Joe Brennan
"The challenge lawmakers faced was tough, as our state's fiscal crisis is, in part, the result of years of poor economic growth and bad policy choices," Brennan said.

"Our problems didn't happen overnight and they won't be solved overnight, but this budget sets Connecticut in a new direction."

The budget increases spending by $875 million, or 4.9%, in the first year. But $190 million of that covers payments to hospitals that will be offset by tax increases on hospitals and federal Medicaid payments.

Without the hospital plan, the first-year spending increase is 3.8%. Spending is up just under 1% in the second year.

Municipal Relief, Aid

The plan provides relief to municipalities in a couple of ways.

First, it changes the state's binding arbitration law.

Currently, in contractual negotiations between municipalities and unions, each side makes a proposal and the arbiter chooses one. Under the change, arbiters can select an amount that falls between the two offers.

The arbiter must also weigh a town's ability to pay by not considering 15% of the town's fund balance in determining the award.

Second, the budget changes Connecticut's prevailing wage law.

The prevailing wage is what must be paid to workers involved in public works renovation or new construction projects above certain cost thresholds.

Many businesses and municipalities say that the prevailing wage—an above-market rate—makes government projects more expensive by requiring non-union contractors to pay union wages to their employees.

The budget changes the law by increasing the threshold for new municipal projects subject to the law from $400,000 to $1 million but also extends the law to state Department of Economic and Community Development funds.

CBIA hopes applying the prevailing wage law to DECD funds doesn't discourage companies from investing in Connecticut.

The prevailing wage and arbitration changes give municipal leaders more flexibility in negotiations with unions.
Brennan, nonetheless, said the prevailing wage and arbitration changes give municipal leaders “more flexibility in negotiations with unions when it comes to towns projects.”

Under the new state budget, most towns—136—have their Education Cost Sharing grant cut by 5% this fiscal year, while funding remains level for 33 towns, including the 30 lowest-performing districts.

A revised ECS formula in year two would direct more funds to towns with students from low-income households.

Municipal aid is also cut by about 1.3%.

In the budget's first year, it caps the municipal car tax at 39 mills, a two-mill increase over the previous threshold of 37 mills. In the second year, the cap increases to 45 mills.

In a move that's good for business, the budget allows companies to use stranded tax credits on other venture projects, including capital projects that expand the business or increase employment.

Brennan said it "not only encourages growth and investment, but it provides companies with an incentive to do so here in Connecticut."

The budget sweeps $170 million from the Energy Efficiency Fund, which is largely financed by ratepayers. Businesses working in the energy industry have threatened a lawsuit, saying the change will lead to job losses.

It also cuts $14 million annually from the Connecticut Green Bank.

Bonding Cap

The bonding cap is set at $2 billion per year but falls to $1.9 billion per year on July 1, 2018.

In passing the budget, lawmakers also approved a $3.5 billion, two-year bonding package that includes $40 million for renovations to the XL Center in Hartford, and $80 million over four years to assist eastern Connecticut homeowners with crumbling foundations.

But the bonding package provides $50 million less in funding to the Manufacturing Assistance Act in 2019 than was allocated in the bipartisan budget Malloy vetoed.

Brennan praised lawmakers for putting aside their differences for the state’s benefit.

"We thank the legislative leaders for working together to craft a state budget that has strong bipartisan support among their colleagues," he said.

"As we look forward to the upcoming session, we hope this sense of cooperation stays with lawmakers.

"Residents deserve a General Assembly that despite their differences can come together to debate and deliver solutions that will turn our fiscal difficulties around and create more economic opportunities for everyone."