Malloy Unveils His Final Budget Pitch, Two Days Ahead of Schedule

HARTFORD, CT — (Updated 3:15 p.m.) In his penultimate attempt to influence Connecticut’s budget, Gov. Dannel P. Malloy didn’t propose any sweeping changes, but he did take aim at some legislative initiatives, increase spending and taxes, and attempt to find ways around the new federal tax law.

The 2019 budget adjustment unveiled Monday by Malloy at a state Capitol press conference recommends a $20.73 billion budget, which is a $70.5 million increase or 0.3 percent. The budget, according to Office of Policy and Management Secretary Ben Barnes, reduces the forecasted deficits in 2020-22 by cutting them almost in half.

That would leave Malloy’s successor with an $844.1 million deficit in 2020 and $1.5 billion deficit in 2021. Malloy inherited a two-year, $6.72 billion budget deficit when he first took office in 2011. He also pointed out that state government is much smaller than it was when he first took office.

At the end of 2017 there were 25,830 permanent, full-time employees in the Executive Branch, which is 3,726 — or 12.6 percent — fewer than the number at the end of 2010.

Malloy said that what he inherited and what he will give to the next governor is entirely different because he made the changes he made while also fully funding the state employee pension obligations — something his predecessors and previous legislatures failed to do.

But the challenge of funding them remains. The unfunded liabilities are nearly $33.4 billion — about $20.3 billion for the State Employees Retirement System and $13.1 billion for the Teachers’ Retirement System.

Malloy also proposed changes to the Teachers’ Retirement System as part of the 2019 budget adjustment.

As it currently stands, the state would be obligated to pay off the $13.1 billion in the Teachers’ Retirement System by 2023. Malloy has proposed lowering the assumed rate of return from 8 percent to 6.9 percent and adopting a new amortization schedule to avoid the cliff. However, that’s complicated by language in a bond covenant adopted in 2008 that requires the state to make its contributions to the fund.

“We don’t believe there’s a conflict with the bond,” Malloy said Monday. “Having said that, even if there is a conflict with the bond, it is far better for the fund overall.”

Malloy said he didn’t think about his legacy when crafting the budget adjustment. He joked that the middle name for his administration is “funding our obligations.”

“My approach to this year’s proposal is very much in line with past practice,” Malloy said. “Fiscal integrity remains our guiding principle, which means we value achievable savings, realistic expectations and long-term stability.”

The proposal Malloy put forward Monday assumes that the legislature will come up with a plan to close the $244.6 million budget deficit for 2018.

Malloy put forward a number of ideas for closing the 2018 budget deficit in December and dozens more as part of the document he released Monday, including:

• Increasing the 6.35 percent sales tax rate
• Allowing grocery stores to sell wine
• Increasing excise taxes on liquor and beer
• Reducing hospital Medicaid rate
• Re-closing Care 4 Kids
• Reducing services for behavioral health care
• Eliminating the renters rebate program
• Requiring towns to contribute to the Teachers’ Retirement System
• Further reducing municipal aid, and;
• Legalizing and taxing the recreational use of marijuana.

Also within the 2019 budget, Malloy is proposing another 25-cent increase in the cigarette tax, an increase in the real estate conveyance tax, elimination of the $200 property tax credit, repeal of the exemption for nonprescription drugs, the creation of a 25-cent bottle deposit on wine and liquor, and continuing the corporate surcharge at 8 percent. The corporate surcharge was scheduled to sunset in 2019.

Malloy also seeks to make changes to budget proposals the legislature adopted in 2018, but which won’t go into effect until 2020. Among those changes, Malloy said he would opt to maintain the current level of hospital taxes at $516 million. The tax was scheduled to decrease to $384 million in 2020. Further, he would eliminate the exemption on income taxes for pension income and Social Security income, and eliminate the $500 tax credit for STEM graduates.

The budget also reduces funding for municipalities by another $32 million and it eliminates education grants for Connecticut’s 33 wealthiest communities. The $32 million cut in general municipal aid is in addition to the $91 million cut in municipal funding in the 2018 fiscal year budget.

“The proposed cuts in municipal aid will force steep increases in property taxes at a time when homeowners are already frustrated about rising property tax levels,” Betsy Gara, executive director of the Connecticut Council of Small Towns (COST), said. “Changes in federal law which cap the amount of state and local taxes residents can deduct from their income taxes are shining a spotlight on Connecticut’s property tax levels.”

Lawmakers on both sides of the aisle have expressed a desire to restore municipal aid.

“It is helpful to know the governor’s budget ideas early,” House Speaker Joe Aresimowicz, D-Berlin, said in a statement. “The reality is that starting Wednesday the legislature takes over, and we all know some of those ideas will likely survive and many won’t. I try to be careful not to dismiss any proposals out of hand, as the budget challenges ahead require that all options be considered by all parties as we move forward to build consensus over the next three months.”

Joe DeLong, executive director of the Connecticut Conference of Municipalities, said Malloy’s proposal is a better starting point than a year ago, but zeroing out “over 30 towns for their education aid is troubling.” 

Something Malloy and the legislature may agree upon is changes that will help lessen the tax burden for Connecticut residents by allowing municipalities to set up charitable foundations to accept property tax payments.

The legislation would be permissive so municipalities could decide whether to set up a charitable organization to help taxpayers in that town circumvent changes to the federal tax law that caps state and local tax deductions at $10,000. An estimated 181,000 Connecticut taxpayers will be impacted by an inability to deduct state and local taxes from their income.

“COST appreciates the governor’s efforts to explore strategies to address concerns with the new federal cap on state and local tax deductions by allowing municipalities to create charitable organizations supporting local interests,” Gara said. “We are concerned, however, that there is a tremendous amount of uncertainty regarding how the IRS will treat such contributions. COST will be assessing the viability of this proposal as it moves forward in the legislative process.”

In addition, Malloy would create a new personal income tax credit offsetting a tax on pass-through entity income to provide small businesses in the state better tax treatment at the federal level.

House Minority Leader Themis Klarides, R-Derby, praised Malloy for offering an innovative solution to the federal tax changes and his promptness with a budget proposal.

However, Klarides labeled as troublesome the governor’s return to some of the options to balance the budget that Republicans have rejected in the past — elimination of the property tax exemption altogether, taxing non-prescription drugs, and cutting all municipal aid to selected towns. Last week, Klarides criticized the governor’s proposed highway toll program, as well as plans for a tire tax and increasing the gas tax, all of which were noted in the budget adjustments released Monday. Specifically, Malloy proposed increasing the gas tax by seven cents, creating a new $3 per tire fee, and establishing electronic tolls by 2023.

“We have to deal with the current deficit and address another multi-billion hole in the next two-year budget cycle. We will put forth our ideas and see where there is common ground. We have a lot of work to do,’’ Klarides added.

Senate Republican President Len Fasano, R-North Haven, was more partisan in his remarks, suggesting that Malloy is rejecting the bipartisan budget effort.

“He is rejecting our progress,” Fasano said. “He is rejecting a new direction. He is living up to the labels that have ruined Connecticut’s image across the country. He is going back to what he has always said: ‘Let’s tax more!’”

Malloy was not included in the discussions that led to the bipartisan budget agreement for the current two-year budget. Legislative leaders reached a deal without him, even though he ended up signing the budget on Oct. 31.