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It preserves the safety net, education funding, and municipal funding, but the two-year $37.6 billion budget adopted Sunday morning by the House of Representatives also sweeps several funds and moves about $6.4 billion out from under the spending cap.

The House voted 95-48, along party lines, in favor of the budget around 5:12 a.m. just as the sun peaked through the stained-glass windows of the state Capitol.

The most controversial piece of the budget — moving $6.4 billion out from under the spending cap — received the most attention from lawmakers trying to make sense of a document they received moments before debate began at midnight.

It was explained to members of the Finance Committee late Saturday night that by “net appropriating” federal Medicaid reimbursements the state will receive under the Affordable Care Act and other federal programs, the budget effectively removes about $2.9 billion in 2014 and $3.5 billion in 2015 out from under the cap.

Democratic lawmakers argued that no other state in the nation includes federal revenue under their spending cap, and Republicans who largely opposed the budget said it’s an unprecedented temporary fix in favor political expediency.

In February, Gov. Dannel P. Malloy proposed a budget that redefined the spending cap, but he was unable to secure the three-fifths majority necessary in the General Assembly to make the changes. Support for changing the definition of the spending cap eroded last month when some of the 22 Democratic Senators refused to support it. Instead, a small group of senators sought to find ways to cut $500 million from each year of the budget in order to remain under the current spending cap.

But the handful of lawmakers and Malloy administration officials negotiating the budget decided that removing some federal funds out from under the cap was a better solution. Instead of removing $500 million from the cap in the budget’s first year, they decided to remove $2.9 billion in the first year and $3.5 billion in the second year.

“For the first time we’re going to treat some — not all — federal funds differently than we’ve ever treated them in the past,” House Minority Leader Lawrence Cafero, R-Norwalk, said. “What we’re doing tonight just with regard to revenue is different than we’ve ever done it before . . . that doesn’t make sense to me.”

He said it ignores the constitution and 20 years of budget writing history.

But Democratic lawmakers said Connecticut is the only state that counts federal funds as part of its budget, and it does so to its detriment.

Christine Stuart photo

“We would be squeezing out other programs because of the federal dollars coming,” Rep. Patricia Widlitz, co-chairwoman of the Finance Committee, explained. “That really is not a benefit to the taxpayers of our state.”

Rep. Vincent Candelora, R-North Branford, said when the state stops receiving 100 percent reimbursement of these funds in 2017 it’s going to have trouble moving them back under the spending cap.

“We are prolonging the agony,” he said. “No one here should be fooled we solved the problem.”

The Medicaid maneuver was called “voodoo” by one Republican lawmaker during the floor debate and it wasn’t the only “gimmick” or “broken promise” included in the budget.

The budget also sweeps about $30.4 million from the Clean Energy Financing and Investment Authority and $5 million from the Regional Greenhouse Gas Initiative account. The move was the nail in the coffin for environmentalists frustrated with at least three pieces of legislation passed recently by either the House or the Senate.

“They’re going back to a trick that’s been tried before,” Chris Phelps, director of Environment Connecticut, said Sunday.

The funds, which help finance residential solar and other clean energy efficiency projects, have been raided during tough budget times under previous administrations.

“It takes a huge bite out of the clean energy programs and could be potentially devastating to those programs,” Phelps warned.

But taking money out of those programs wasn’t easy for lawmakers.

“We had to make some very difficult decisions in the budget and there were some items we were negotiating until just a few hours ago,” Widlitz said.

She said they decided to take the funds from the Clean Energy Finance and Investment Account because the other choices were worse. She said they hope to be able to restore those funds, which is why the bulk of the money was included in the second year of the budget.

The budget also sweeps more than $76 million from the Special Transportation Fund, a budget gimmick for which Malloy had criticized his Republican predecessors.

The budget also legalizes Keno for the first time in Connecticut outside of the tribes’ sovereign territories.

According to the bill, which was posted online shortly before midnight, it allows the Connecticut Lottery Corporation to offer Keno games. In Connecticut, the two Indian tribes, have exclusive rights to casino games under a compact negotiated with the state more than 20 years ago.

The state will negotiate an agreement with the Mashantucket Pequot and Mohegan tribes to share Keno revenue, but as of Sunday morning there was no formal agreement. The budget authorizes the state to give each tribe up to 12.5 percent of the gross Keno revenues. Keno is expected to raise $3.8 million in 2014 and $27 million in 2015.

Sen. Andrea Stillman, D-Waterford, said in a Finance Committee meeting late Saturday that she’s disappointed Keno is in the budget. She said she understands the problem the state is facing but remains concerned about gambling addiction and the lack of funding for addiction treatment.

“I don’t know that Keno will ever happen,” Sen. Minority Leader John McKinney said Saturday. “They’ll put the numbers in the budget,” but they need to work out an agreement with the two tribes.

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That agreement has yet to be reached, even though at least one of the two tribes has expressed a willingness to negotiate. Widlitz was unable to comment on those negotiations Sunday morning during the House debate.

Cities and Towns

Municipalities who were unhappy with the budget Malloy unveiled in February were largely content with the budget approved Sunday morning.

“The new state budget is a clear win for towns and cities and their local property taxpayers,” Jim Finley, CEO of Connecticut Conference of Municipalities, said.

Cities and towns will receive about $3 billion a year under the budget adopted Sunday.

Municipalities were upset with Malloy’s proposal to phase out the PILOT program as it currently exists and to also eliminate the municipal motor vehicle tax. Earlier this month a group of lawmakers led by House Speaker Brendan Sharkey proposed setting a statewide mill rate for property taxes on vehicles and phasing it out over time.

Sharkey said Saturday that many of the proposals from his municipal commission will be adopted as part of the language implementing the budget.

Taxes

Malloy proposed extending a tax on electric generators earlier this year to raise about $76 million, but Democratic lawmakers removed it from the budget by re-prioritizing some of its borrowing. The final version of the budget adopted Sunday included $17.5 million in revenue from electric generators.

However, the proposal sunsets the tax in October before lawmakers return to adjust the budget in 2014.

Dan Weekly, vice president for government affairs for Dominion, said they were pleased the legislature understood the importance of sunsetting this tax. He said it was greatly reduced from where it was when negotiations began.  Dominion pays the largest portion of the tax.

The budget does not sunset a 20 percent surcharge on the corporation tax, which is expected to raise $44 million in 2014 and $74 million in 2015. It also extends a cap on the use of tax credits for insurance premiums to raise about $27 million over the biennium.

Also, the provider tax hospitals have been paying will be extended. Unable to reach a deal with the administration, the state’s 32 acute care hospitals will continue paying the tax without reimbursement. The administration argues that it will see more money starting in 2014 because more individuals will be covered under the Affordable Care Act.

Rep. Penny Bacchiochi, R-Somers, offered an amendment that would have restored the funding to hospitals. She warned that the hospitals will have to layoff employees in order to make up for the loss in revenue.

The budget also restores a sales tax exemption for clothing and footwear priced under $25. The measure was touted by Malloy as “middle class tax relief.”