(Updated 9:18 a.m. Sept. 19) Based on the poor performance of the stock market, Gov. Dannel P. Malloy’s budget office announced Friday it would rescind nearly $103 million from the 2016 state budget.
Office of Policy and Management Secretary Ben Barnes said in his monthly letter to state Comptroller Kevin Lembo that volatility on Wall Street and uncertainty about the future have led him to rescind nearly $103 million from the state budget to make sure they end the year in the black.
“OPM’s estimate of capital gains has decreased for the current fiscal year, and it would be reckless to expect these revenues to grow when the S&P 500 is down more than 6 percent since May,” Barnes said. “Only once since 1994 have we seen positive capital gains revenue growth when the market was down. Conversely, five times in the last 20 years a down market has led to significant revenue drops.”
Barnes said that’s why they made the decision to rescind nearly $103 million, because toward the end of the month the second quarter allotments will be sent to state agencies, which likely would spend the money. He said there’s an opportunity to withdraw the rescissions if things turn around before the end of the year. However, Barnes conceded that there’s a “possibility there will be further reductions needed in the future.”
Barnes said his office rescinded $99.2 million from executive branch agencies and expects legislative leaders and the Judicial Branch to reduce spending by $420,000 and $3.1 million, respectively.
The largest rescission is $63.4 million in Medicaid funding that was supposed to go to state hospitals. Barnes estimated that it represents about 40 percent of the total amount of funding hospitals receive from the state. The remaining 60 percent is reimbursed by the federal government.
Jennifer Jackson, CEO of the Connecticut Hospital Association, said she was “outraged” by the cut.
“It puts a tremendous additional strain on healthcare providers, who already provide services with reimbursement that is nowhere near the actual cost of delivering that care,” Jackson said.
She urged lawmakers to intervene and restore the funding. But it’s unlikely the Democrat-controlled legislature will take action against a Democratic governor.
Malloy has the power to rescind up to 5 percent of any line item and 3 percent of any fund without seeking legislative approval.
As part of his announcement Friday, Barnes also changed some underlying budget assumptions. Mainly, he revised personal income tax growth from 7.1 percent down to 4.5 percent. As a result, Barnes said the state expects to collect about $96.1 million less than it did in June when the General Assembly approved the budget.
In addition to the $103 million in rescissions, Barnes identified $15 million in municipal aid reductions. The $15 million is part of a $20 million reduction mandated by the state budget. This reflects an effort by the Municipal Opportunities and Regional Efficiencies Commission (M.O.R.E) to create incentives for multi-municipal cooperation.
The state’s largest municipal lobby expressed concern about the reduction because it doesn’t believe Malloy has the ability to make it without the legislature.
“These cuts, while included in the state budget, still represent a breach in the state-local funding arrangement in the middle of the fiscal year, after local budgets have been set, and would adversely affect some of our neediest communities,” the Connecticut Conference of Municipalities said in a statement. “Furthermore, the MORE commission has not created, enacted or provided for any specific set of efficiencies that towns can immediately use that will make up dollar-for dollar for these aid cuts.”
House Speaker Brendan Sharkey said he’s disappointed in the rescissions just three months into the fiscal year.
“I’m disappointed and certainly opposed to what appear to be cuts targeting some of the very areas we sought to protect in the budget,” Sharkey said in a statement. “Under our budget agreement, the bipartisan MORE Commission was charged with identifying additional municipal savings, and they haven’t been given the opportunity to do so yet. We also agreed to restore hospital funding the governor proposed to cut, and so these renewed cuts will very likely impact the delivery of healthcare services.”
Sharkey admitted it’s within the governor’s purview to make these cuts, but the legislature will continue to monitor their status.
Senate President Martin Looney, D-New Haven, agreed.
“The intent of our budget was to achieve cost savings on the municipal level through greater cost sharing and efficiencies,” Looney said. “I would emphasize that nothing announced today in any way decreases our commitment to increase funding to cities and towns so that residents throughout Connecticut will realize significant property tax relief.”
At least one Republican, Rep. Melissa Ziobron of East Haddam, was happy the administration’s decision to take steps to reduce the budget, even if she disagrees with where the cuts were made.
Ziobron said she appreciates the decision to make these cuts so early in the fiscal year.
“This is exactly what my caucus has asked be done early on in the last session,” Ziobron wrote on her Facebook page. “It’s time we live within our means.”
Those statements were made before Ziobron had a list of the cuts. She said that it was not an endorsement of specific cuts many of which she opposed.
“To blame the stock market fluctuations on Connecticut’s ongoing and apparently perpetual inability to balance its budget is absurb,” House Minority Leader Themis Klarides said Friday. “We have relied on one-shot budget gimmicks to keep the lights on—this is just an earlier than expected move timed right after the local primary elections that signals what it ahead.”
However, Senate Republican Leader Len Fasano believes lawmakers should be allowed to participate in the process.
“The legislature should convene in special session next week to address this mess,” Fasano said in a statement. “What are Democrats waiting for? Are we just going to let the governor make 5 percent cuts to social services every month like he did last fiscal year?”
Barnes said the rescissions became necessary largely because of the lackluster performance of the stock market, and this was reinforced by the lower-than-expected second quarter estimated income tax payments — paid by the self-employed and individuals whose income is derived from the stock market.
“Everyone’s belief we would return to a normal business cycle has faded,” Barnes said. Most economists and most observers believe this recovery will continue at a slower pace.” However, he added that he hopes it will be a longer recovery.
Barnes has two tools in order to keep the budget in balance: hiring and rescissions.
He said the budget already assumes the state won’t be hiring, even though there’s no hard hiring freeze in place at the moment. He said they were simply riding the brakes. The second tool is rescissions, and in fiscal year 2015 there were three rounds of rescissions starting in November after the fall election.
Asked why he was sounding the alarms much earlier this year, Barnes said the changes they saw last year were “far less troubling” and provided no clear trends.
But last year ended with a deficit and Barnes said he didn’t want that to happen again this year.
“I don’t want to have deficits at the end of the year. I’m embarrassed we had a deficit at the end of the year. ”Barnes said “I do not wish to repeat that.”