Four months after the beginning of the fiscal year, Connecticut has become the last state in the US to pass a budget after Democratic Gov. Dannel Malloy signed a bipartisan budget bill, but used his line-item veto power to block a section of the nearly 900-page document related to the controversial hospital tax.
The deal marks the culmination of a bitter struggle between Malloy and lawmakers in both chambers of the CT legislature as they struggled to close a $3.5 billion two-year budget deficit. Fiscal problems have plagued the state since the financial crisis thanks to its overly generous benefits from state employees that have left its pension accounts dangerously underfunded. Malloy was effectively frozen out of the budget negotiations after vetoing a bipartisan budget that was sent to his desk in late September.
“After 123 days without a budget, it is time to sign this bipartisan bill into law and continue the steady and significant progress our state has made over the past several years,” Malloy said.
“Connecticut’s families and businesses deserve to have a budget in place, one that provides a stable environment to live and work,’’ Malloy said.
“While there are certainly many provisions of this budget I find problematic, there’s also a clear recognition of many of the fiscal priorities and concerns I’ve consistently articulated since January. I appreciate the work of the General Assembly in passing a budget to my desk that I can sign.”
The budget battle became the longest such stalemate in Connecticut history, surpassing the epic, summer-long fight to create the state income tax that ended on Aug. 22, 1991.
Connecticut was the last of nearly a dozen states that experienced last-minute budget battles in May and June ahead of the end of the fiscal year. Many of those states – as a senior official at S&P Ratings warned at the time – were struggling with festering budget problems and woefully underfunded employee pension programs that the official characterized as “chronic budget stress.”
The battles triggered government shutdowns in Maine and New Jersey, and nearly triggered a ratings downgrade in Illinois after the state legislature and Gov. Bruce Rauner blew past a deadline set by the ratings agencies to pass what became the state’s first budget in more than two years.
Malloy finally expressed his frustration with the drawn-out process, which cast a shadow over his final months as governor after he announced last year that he wouldn’t seek a third term, given his low popularity rating after eight years in office and two tax hikes.
“There’s nothing in this budget that couldn’t have been done in June or May,’’ he told reporters during a mid-afternoon press conference at the state Capitol. “People in the state of Connecticut are rightly frustrated by how long this has taken.’’
But according to the Courant, Republican leaders said that it took a veto by Malloy in September and then extensive negotiations for them to get a constitutional spending cap on expenses and a bonding cap on construction projects as part of the final budget deal.
Republicans also obtained changes to the binding arbitration system and to the “prevailing wage’’ on local construction projects as part of a comprehensive, bipartisan compromise.
However, the battle isn’t finished just yet. Senate Republican leader Len Fasano said legislators would return to the capitol in the next two weeks to either override Malloy’s line-item veto of the hospital provider tax, or vote on an amendment to fix language regarding the hospital provider tax. In the days before signing the budget, Malloy complained that the budgetary language regarding the hospital tax contained significant flaws – which he characterized as oversights by the bill’s writers – that could cost Connecticut $1 billion over two years. Malloy said that unless language about an increase in the hospital tax was changed, the state risked losing out on hundreds of millions of dollars in federal Medicaid funding.
However, as Fasano pointed out, lawmakers have been skeptical of these claims.
Even if Malloy had vetoed the bill, the House and Senate had enough support for the bipartisan budget to force it through.
Connecticut’s constitution gave Malloy until Wednesday to act on the $41.3 billion two-year spending plan. If no action were taken, the bill would've automatically become law. As the Courant pointed out, the budget closes a $3.5 billion deficit without significant income tax or sales tax increases, but cuts municipal aid, funding for the University of Connecticut and eliminates the property tax credit for many homeowners. It also includes a new surcharge on motor vehicle registrations to fund the operations of state parks. It would raise the state's tax on cigarettes by 45 cents per pack and reduce a tax credit designed to help the working poor. And it would assess a new fee on all rides booked through Uber and Lyft.
Connecticut has struggled with deteriorating finances for much of Malloy’s tenure in office – a problem made worse over the last year by the departures of three high-profile companies – GE, Aetna and Alexion Pharmaceuticals. Back in May, S&P became the last of the big three ratings firms to cut Connecticut’s debt into single-A territory.
The budget provides relief for Connecticut’s troubled capital, Hartford, which city officials had warned would’ve been facing a bankruptcy filing by year’s end if it couldn’t secure relief from either its creditors or the state.
The budget deal greenlighted by the General Assembly Thursday calls for the capital city to receive at least $40 million in additional revenue, half from an account set aside for distressed municipalities, and half through state-subsidized debt payments – meaning that taxpayers across the state are picking up a $20 million tab for Hartford debt relief.
Despite the relief, city leaders will continue to negotiate with bondholders and employee unions, Mayor Luke Bronin said, according to the Courant.
While the elimination of the $3.5 billion deficit is an important development, unfortunately it’s not a cure-all: Funding ratios for the state’s public-employee pensions are still among the lowest in the country by market value:
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