Governor’s Budget: Cuts, Concessions, Funding Changes

Governor Dannel Malloy proposed a mix of spending cuts, labor concessions, and changes in municipal aid funding to close a projected two-year, $3.6 billion state budget deficit.
The Governor’s $40.6 billion budget proposal includes almost $3 billion in spending cuts and assumes $1.5 billion in state employee wage and benefits concessions.

Malloy said his administration is currently negotiating with state employee unions to find $700 million in concessions for fiscal 2018 and $810 million the following year.
“These cuts are not made lightly, and I know they will include things that people in this chamber strongly support,” he told a joint session of the General Assembly Feb. 8.
The proposed budget outlines a new model for funding state and local obligations, overhauling the state’s Education Cost Sharing grant and other municipal grants, as well as requiring cities and towns to contribute more than $400 million annually to teacher pensions.
This would be a major shift, as the state currently makes those payments, expected to be $1.2 billion this year.
Gov. Malloy also called for mandate relief for cities and towns, which he says is aimed at helping them reduce fixed costs.
News of these changes sent many legislators to the back of his budget to review the town-by-town grant projections. Many towns face significant reductions in state aid.
Republican leaders Sen. Len Fasano and Rep. Themis Klarides issued statements citing, among other concerns, the proposed budget’s impact on middle-class taxpayers.
Democratic leaders Sen. Martin Looney and Rep. Joe Aresimowicz expressed reservations about some aspects of the Governor’s proposals, but were otherwise supportive.
The Governor also proposed creating a municipal accountability system to provide state intervention and support to local governments facing fiscal challenges.

Spending Cap

On the heels of a legislative commission failure last year to define the state’s constitutional spending cap, the Governor proposed a “strong cap,” telling legislators “I hope you’ll join me in making it a reality this year.”
CBIA president and CEO Joe Brennan said making government more efficient, changing the way it operates, and resolving the state’s fiscal issues were major priorities for businesses, small and large.

“There’s a number of positive steps in this proposal that our members will respond to well,” Brennan said.
“And closing a multi-billion dollar budget gap without having these broad-based tax increases we saw in 2011 and 2015 sends a really good message.
“We hear from our members that they seek a state they can be confident in, one with a stable and predictable budget.”

Property Tax Concerns

Brennan said the potential for property tax increases in the proposed budget “may pose competitive problems for many small and family-owned businesses across the state.”
“But having the dialogue with municipalities about how we’re going to fund both state and local obligations going forward, and the impact that has on property taxes and other taxes, is an important discussion to have," he said.

CBIA economist Pete Gioia was encouraged by many aspects of the budget.
“The economic assumptions behind the budget appear to be reasonable and set the stage for sustainability," he said.
“Corrections reforms and having not-for-profit providers provide social services are positives. But one of the biggest challenges depends on successful negotiations with the unions.”
Now the legislature takes over, as committees comb through the spending plan, revenue plan, and the dozens of bills submitted by the Malloy administration to implement his proposals.

Corporate, Insurance Taxes

CBIA will be closely monitoring the budget debate, including the following issues:
Corporate tax surcharge. The Governor’s plan provides for the scheduled reduction of the 20% corporate surcharge tax, implemented as a temporary measure in 2012, but extended to the present day.
The surcharge is slated to drop to 10% in the 2018 income year.
The budget also retained the scheduled phased-in increase of the cap on tax credits for research and development and urban and industrial site reinvestment.
Insurance premium tax cut. As announced in late January, the proposed budget includes Malloy’s plan to lower the tax on insurance premiums from 1.75% to 1.5%, a move the Governor called a “simple and relatively inexpensive way we can improve the business climate.”
Transportation. While the proposed budget  calls for hiring more than 100 new transportation workers, most for project planning or transit services, it contains no funds for the transportation initiative the Governor released in 2015, essentially leaving the question of tolls or other funding to the legislature.

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For more information about the budget and state spending, contact CBIA’s Pete Gioia (860.244.1945) | @CTEconomist
For more information about state tax policy, contact CBIA’s Louise DiCocco (203.589.6515) | @LouiseDiCocco