In a bid to end Connecticut’s budget stalemate and persuade legislators to abandon a legally questionable deferral of contributions to the state’s underfunded pension system, Gov. Dannel P. Malloy unveiled his fourth budget proposal for the new biennium Monday. It asks lawmakers to reduce tax increases by accepting deeper cuts to town aid, education and social services.
The governor’s new plan would reduce spending by an additional $144 million, over this fiscal year and next combined, compared to a budget endorsed by Malloy and Democratic legislative leaders that fell short of passage when a three Democrats in the Senate and five in the House balked and voted for a GOP version.
Malloy’s revisions to the September plan maintain emergency relief for distressed municipalities by including a revised formula for redistributing education aid. It still shifts funding from wealthy communities to poorer ones, but not to the degree originally sought by the governor.
“This is a lean, no-frills, no-nonsense budget,” Malloy said. “Our goals were simple in putting this plan together: eliminate unpopular tax increases, incorporate ideas from both parties, and shrink the budget and its accompanying legislation down to their essential parts. It is my sincere hope this document will aid the General Assembly in passing a budget that I can sign into law.”
One pivotal question is whether his plan was designed to win back enough of the defecting Democrats for passage, attract GOP votes or a combination of the two.
Bipartisan acceptance of his revisions seem unlikely, if only because of his continued insistence on the state’s meeting its pension obligations. The GOP-crafted budget cuts contributions to pension funds for teachers and state employees by $411 million, which Malloy says is one of the fiscal gimmicks employed by past administrations that have contributed to Connecticut’s chronic fiscal challenges.
The governor and state employee unions say the GOP cuts are based on pension changes that would not survive a legal challenge. GOP leaders insist their plan is defensible.
Malloy also faulted the GOP plan for directing the governor to find an extra $260 million in savings after the two-year budget is in force. That’s on top of an unprecedented $1.84 billion in savings the governor already has said he could achieve.
Scaling back tax increases to gain votes
Malloy’s political challenge is to propose a budget that is attractive to the fiscally conservative Democrats who abandoned him in September — or, less likely, some of the Republicans who unanimously voted against the Democratic bill — while not alienating liberals.
Malloy is asking Democratic legislators to scrap several tax and fee increases they negotiated with his office in mid-September, including:
- A statewide property tax on second homes.
- A 49-cent surcharge on monthly cell phone bills.
- A new fee on fantasy sports betting contests.
- A 25-cent fee on ride-share services.
- And cancellation of only $30 million in tax breaks to be determined next fiscal year, instead of the $50 million the compromise originally called for.
He also abandoned a criminal-justice reform that would have expanded a youthful offender program to save young adults from criminal records. The measure was opposed by at least one of the Senate Democrats who voted against the September plan.
And he made a significant concession on education aid.
Malloy would cut overall state spending on education by about $132 million this fiscal year – mostly hitting affluent and middle-income communities as cuts to the state’s primary education grant – the Education Cost Sharing grant. The ECS grants would total $1.9 billion under the plan – a 6 percent cut in state support.
But Malloy significantly changed his initial request to funnel an additional $300 million to the state’s 30 lowest-performing districts. Instead they would receive just $7.7 million more this fiscal year – an increase of just one half of 1 percent. The Democrats’ budget would have increased aid to these towns by $11 million.
Those districts, like all others, would be expected to pick up part of their teacher retirement costs for the first time, wiping out any gains for these districts.
The Republican plan increases overall education aid by $68 million this fiscal year, though struggling districts would not have a higher priority than they do currently for that additional aid. The 30 lowest-achieving districts would get a $46 million increase, and the better-off communities would receive $22 million more. No towns would lose aid.
Malloy’s plan includes measures certain to be unpopular among many Democratic lawmakers.
It maintains the new requirement that cities and towns cover a portion of the required contribution to the teachers’ pension fund, about $282 million over the biennium. The state, not municipalities, now contributes to the teacher pensions.
Lawmakers of both parties have balked at imposing this expense on communities.
The Connecticut Council of Small Towns also remains steadfastly opposed to this cost-sharing.
“Requiring towns to pick up millions of dollars in teachers’ pension costs without giving towns any opportunity to manage these costs going forward is simply unfair,” said Betsy Gara, the executive director of COST. “Towns have had no say in managing the teachers’ pension fund or in negotiating benefits or contribution levels, which are set forth in statute. … Accordingly, COST is determined to pursue legal action if a budget is adopted that shifts teachers’ pension costs to towns.”
The Connecticut Conference of Municipalities said the new proposal “still remains very problematic for cities and towns,” due to the teacher pension provision and the loss of ECS grants to three dozen communities.
The governor would expand a tax hike on the working poor by reducing an income tax credit those households receive. By lowering the state Earned Income Tax Credit (EITC) from 27.5 percent to 23 percent of the federal EITC, the state would reduce state income tax refunds for those households by $72 million. The compromise plan in September had reduced those refunds by $51 million.
The top Democrats in the Senate, President Pro Tem Martin M. Looney of New Haven and Majority Leader Bob Duff of Norwalk, said they would review the governor’s proposal. “It is important that all parties make progress toward reaching a final budget agreement that provides predictability and stability for families, school districts, social service providers and businesses,” they wrote in a joint statement.
“I appreciate the governor’s effort to try and help move our budget negotiations toward a final agreement,” said House Speaker Joe Aresimowicz, D-Berlin. “I look forward to fully reviewing his latest compromises, and continuing our bipartisan discussions on how best to move our state forward and get to a budget that becomes law.”
Connecticut has gone three-and-a-half months into the new fiscal year without an approved budget. Analysts say state finances, unless adjusted, will run $1.6 billion in deficit this fiscal year and $1.9 billion in the red in 2018-19.
Much of that gap is driven by surging retirement benefit and debt costs and by declining income tax receipts.
Malloy, who has been running state finances by executive order since July 1, has been shut out of budget negotiations for the last two weeks as legislative leaders try to strike a bipartisan deal.
The governor has been wary, though, since leaders announced last week they were considering backing several of the GOP cost-cutting proposals that led to Malloy’s veto.
These include:
- Reducing payments into the state employees’ pension fund on the assumption of savings from statutory changes that would be imposed in 2027 after the expiration of the current contract. Malloy says that provision would prompt a veto.
- Boosting teachers’ contributions toward their retirement plan and using that increase to scale back state contributions there as well.
- Directing the administration to achieve massive “lapses,” or savings the administration must achieve after the new budget is in force.
- And reducing annual operating payments to public colleges and universities by nearly $340 million below last fiscal year’s level.
“We’ve produced an honest budget that does not rely on gimmicks or smoke and mirrors to arrive at balance,” the governor said.
Can GOP get legal opinion supporting pension cuts?
While he didn’t directly dare Republican leaders to pursue an opinion from Attorney General George Jepsen on the legality of their pension contribution cuts, the governor noted GOP leaders haven’t hesitated to go that route on other occasions.
“Interestingly, no one’s asked for one” this time, the governor said, adding that he has no doubt the Republican proposals would not survive a court challenge.
“The answer is quite clear,” Malloy continued. “You can’t do that. You can’t change retirees’ benefits without negotiations. You can’t change by-and-large, vested obligations without negotiations. No one has put forth a cogent argument that you can.”
The State Employees Bargaining Agent Coalition already has said it believes the cuts are illegal and would sue if they are enacted.
Under Malloy, the state each year has met its pension obligations, breaking precedent with predecessors who balanced budget by skipping pension contributions, essentially borrowing money. Malloy said in the strongest terms he opposes what he calls “stealing” money from the fund system to balance the budget.
“If I stand for anything, I stand for that,” he said.
The GOP proposal would scale back state employee pensions after the current benefits contract expires in mid-2027, but take some of the savings now, reducing the actuarially required state contributions in the upcoming biennium by $321 million.
But while it would reduce pension benefits after July 1, 2027, a portion of those benefits would have been earned before that date, when they still were guaranteed by the current agreement.
Similarly, a proposal to supplant $95 million in contributions the state owes to the teachers’ pension fund with increased contributions from teachers is risky as well.
Teachers can be required to contribute more. But the state’s ability to reduce its own payments are limited, the administration says, by contractual pledges the state made to its bond investors when it borrowed $2 billion in 2008 to shore up the teacher pension fund.
Republican leaders did not address Malloy’s legal argument in their initial response to his new budget.
“We’re the author of that provision,” Senate Republican leader Len Fasano of North Haven said “Therefore, we’re confident that the provision is fine legally and we don’t need someone to review our work. I have plenty of confidence in my staff.”
Fasano added that “certainly the governor is free to ask the attorney general if he thinks what we have is illegal. He hasn’t done so.”
House Minority Leader Themis Klarides, R-Derby, referred to the governor’s new budget as a “distraction.”
“Four caucuses are sitting in that room day after day and making progress,” she said. “And we’re going to continue to do so. The governor will be brought into this process when we all believe that it is the most efficient time for him to be brought in, and that’s not right now.”
More cuts in the governor’s plan
Malloy unveiled his first plan for the biennium on Feb. 8, following with revised two-year plans on May 15 and Sept. 8.
The latter proposal led to a compromise budget negotiated by the administration and Democratic legislative leadership. But that budget was rejected on Sept. 15 and 16 when the legislature instead narrowly passed the GOP-crafted plan that Malloy would later veto.
Malloy would eliminate $30 million earmarked for magnet schools across the biennium, another $8 million for special education, after-school programs and cooperative ventures between school districts.
The governor also would reduce non-education aid by $27 million compared with the September compromise he reached with legislative leaders.
The governor’s latest plan maintains a new taxing arrangement with hospitals that would leverage hundreds of millions of dollars in new federal aid for the state and the industry to share.
But other health care and social service programs took a hit.
The governor would cut $11 million from the state home care program that helps provide home care to seniors to keep them from going into a nursing home.
Another $3.2 million would be cut from various programs within the Department of Social Services and the Department of Mental Health and Addiction Services.