May 10, 2017

Malloy would empty reserve, cut local aid to close deficit

PHOTO | Bill Morgan Media LLC
PHOTO | Bill Morgan Media LLC
Gov. Dannel P. Malloy..

Gov. Dannel P. Malloy unveiled a plan Wednesday that relies on one-time revenue sweeps, withholding $19 million in municipal aid, dozens of small agency cuts, and draining the state's reserves to close the roughly $390 million gap in current state finances.

The plan, which was prompted by a huge drop in anticipated state income tax receipts in April, effectively concedes Connecticut will close its third successive fiscal year in deficit.

It also means the state probably will enter the upcoming two-year budget on July 1 with little or nothing in its Rainy Day Fund.

The plan "requires actions we would all prefer to avoid," Malloy wrote in a letter to legislative leaders, the legislature's nonpartisan Office of Fiscal Analysis and Comptroller Kevin P. Lembo. "However, I believe we all can agree that our constituents, our taxpayers, our creditors and our employees all expect that we will decisively address our current-year problem and turn our attention to the greater challenges we face in the upcoming biennium."

The challenges for this fiscal year, which ends on June 30, became huge in late April when fiscal analysts reported that General Fund revenues should be $403 million below anticipated levels. And most of that shortfall is tied to April's poor income tax performance.

Further compounding that problem, Malloy and the General Assembly have very few options to close the gap, since the fiscal year ends on June 30.

Traditionally, the bulk of agency spending occurs during the first three quarters of the fiscal year. And departments and agencies received their funding for the fourth quarter in early April, several weeks before the negative income tax revenue trend had been confirmed.

The governor is required by law to issue a deficit-mitigation plan whenever the comptroller certifies a shortfall in excess of 1 percent of the General Fund, which would mean something greater than $181 million this fiscal year.

That's not really an issue, though, since Lembo, the Malloy administration, and nonpartisan analysts all reported very similar deficits of just over 2 percent of the General Fund.

Those deficit estimates vary: $379.5 million by the Office of Fiscal Analysis; $389.8 million by the Malloy administration; and $393.4 million by the comptroller.

Malloy offered a plan to whittle $155.6 million off of the deficit using a combination of spending cuts and revenue sweeps.

The governor has limited authority to reduce spending unilaterally, and Malloy ordered a series of small rescissions totaling $33.5 million.

The governor also is asking the legislature to cancel a $19.4 million payment owed to towns, which represents a share of the casino proceeds Connecticut distributes to municipalities. That grant was slated to provide towns with $58 million this year, with aid ranging from $8,178 in Cornwall to $6.2 million in Hartford.

Malloy also would cancel $750,000 in grants to regional councils of government and $4.8 million in transportation spending on maintenance and planning. He would cut $2 million in hospital reimbursements.

Funding for UConn would be cut by $2.2 million and the Board of Regents, which oversees the regional state universities and community colleges, would lose $1.7 million. The network of state-run vocational high schools would be cut $2 million.

Malloy's plan also erases nearly $100 million in red ink by asking lawmakers to sweep funds from a series of one-time sources including:

  • $47.6 million that was to be held in reserve as part of Connecticut's efforts to comply with Generally Accepted Accounting Principles;
  • $14.1 million from a legal settlement the state reached with Volkswagen.
  • $10.1 million from the Tobacco and Health Trust Fund;
  • $7.7 million from funds supporting nearly three dozen park and other environmental programs.
  • $7.3 million from funds that support regionalization of services and other municipal initiatives.
  • $3.4 million from the probate court system;
  • $1.3 million from a fund that holds the proceeds of sales from Correction Department enterprises.

These spending cuts and revenue sweeps would whittle the $390 million deficit down to $234 million.

This means state government would finish in deficit for a third consecutive fiscal year. Connecticut closed the 2015-16 fiscal year $170 million in the red and 2014-15 with a $113 million shortfall.

The final component of Malloy's plan is to drain most or all of Connecticut's $235.6 million emergency reserve.

The administration estimates there would be $1.3 million remaining. In the context of an $18.1 billion General Fund, this effectively represents no reserve and technically equals 1/139th of 1 percent.

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