Hugh McQuaid photo
Office of Policy and Management Secretary Ben Barnes briefs the media on the budget (Hugh McQuaid photo)

(Updated 12:11 p.m.) Gov. Dannel P. Malloy’s new budget will increase spending $1.8 billion or 9.7 percent over the next two years. It also raises about $700 million in new revenue and converts $222 million in municipal grants to capital programs.

The $43.8 billion, two-year budget attempts to radically change how the state funds municipalities. From eliminating certain grant programs and increasing the size of others, municipal leaders were at a loss Wednesday morning to comment on exactly the proposal will impact their budgets.

Office of Policy and Management Secretary Ben Barnes said they made up for the elimination of the PILOT program and the Mohegan-Pequot grants in other places in the budget in order to hold towns harmless. The PILOT program revenue will be used for education funding and the Mohegan-Pequot grant will transition into a program for local capital projects.

Malloy’s budget also eliminates the tax on motor vehicles assessed at $20,000 or less. The car tax nets about $560 million a year for all 169 municipalities in the state, and budget does not propose making towns whole for the lost revenue.

Jim Finley, executive director of the Connecticut Conference of Municipalities, said they appreciate the sentiment that Malloy’s goal was to hold cities and towns harmless, but the problem is that he moved some of the traditional funding programs into different buckets.

“The funding is still there and towns are going to be held harmless, but through the ECS grant,” Finley said. “One of the reasons they did it was to move that funding into the general fund and by putting it into ECS it’s exempt from the spending cap.”

The change sets up a battle at the local level between local chief executives and school boards. He said it also places pressure on the property tax because while the state programs pay for things like roads and bridges, they don’t pay for town personnel like police and fire.

“It’s property tax relief that doesn’t cost the state a dime, but puts more pressure on towns and cities,” Finley said.

He said municipal leaders have big challenges ahead to figure out how they will make the switch from money being in one basket to another.

The municipalities are expected to hold a press conference at 2 p.m.

House Speaker Brendan Sharkey, D-Hamden, said he understands the governor’s desire to continue to promote education locally, but he thinks there are other ways to do it.

“This is a process and we’re going to be able to work on how we are going to do this,” Sharkey said.

Meanwhile, in order to get around the spending cap, Malloy decided to redefine it by exempting certain pots of money. The new budget exempts all new federally funded programs, such as the increased money the state will receive from the federal government under the Patient and Affordable Care Act. The administration also wants to exempt pension payments above the actuarially required contribution.

Barnes said that in order to make these changes it needs the legislature’s help. The General Assembly would need to approve the changes by a three-fifths majority.

Republican lawmakers were critical of the amount of money the administration seems to be switching from the operating budget to the state’s credit card.

During a media briefing, Barnes argued that for anyone who would say the administration has been reckless with the amount of borrowing, he said the administration “we mitigated the projections for debt service over the past few years.”

The budget recommends paying about $1.8 billion toward Connecticut’s debt service in the $20.15 billion budget for fiscal year 2014. It also wants to authorize $1.5 billion in borrowing in 2014 and $1.6 billion in bonding in 2015.

Barnes said the administration worked hard to maintain the state’s safety net, even though it rolled forward about $468.8 million in rescissions it made as part of the deficit mitigation package passed by the General Assembly in December. Hospitals received the biggest hit in that package, which cost about $103 million in revenue from the state for uninsured patients.

The proposed budget reduces those payments even further by cutting them 50 percent in the first year and completely eliminating them in the second year. Barnes said that as the Medicaid expansion and the Affordable Care Act is put into place, the amount of uncompensated care to hospitals will dramatically shrink.

Currently, the state gives about $1.6 billion to hospitals and is cutting that amount by $270 million in 2014. Barnes believes the hospitals will be able to survive without the revenue as the Affordable Care Act leaves fewer people uninsured.

The budget also reduces the number of individuals eligible for Medicaid by about 40,000 families and children. Barnes argues the families will be able to get their insurance through the exchange starting in 2014 and they will receive a subsidy directly from the federal government to help them pay for it.

The General Assembly, controlled by Democrats, will offer their own spending proposals next month. It may be difficult for many of them to find common ground with the governor after seeing the radical changes he has proposed in his budget.

Republican lawmakers like Sen. Minority Leader John McKinney already have said the budget doesn’t really give his party any room at the negotiating table.

Malloy obviously doesn’t want to continue bipartisan budget discussions because “he’s already knocked us out of the park,” McKinney said Tuesday evening in a phone interview.

Malloy is scheduled to give his budget address to the General Assembly at noon.