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Still Need to Tie Up Loose Budget Ends

Details, Bond Package Remain; Much Revenue is Short Term

CHRISTOPHER KEATING

September 06, 2009

A lot of people thought the state's seven-month budget crisis was finally over last week when Gov. M. Jodi Rell said she would allow a spending plan to become law, even without her signature.

But the crisis is not over — at least not completely.

In less than three weeks, the legislature will return to Hartford for a special session to debate important "implementation bills" that will provide the precise details about the shape of various budget cuts.

The legislators will also vote on a bond package that will outline how much money the state will spend on construction projects to kick-start the state's economy, where unemployment is now 7.8 percent.And there's a lingering problem. The budget was balanced with massive amounts of one-time revenue that eventually will cause more problems: $1.3 billion in borrowing, $1.4 billion from draining the state's entire "rainy day" fund and $1.5 billion in federal stimulus money that will run out at the end of the two-year budget period."I don't think we have to wait two years. In three to six months, we will be back," said Senate Republican leader John McKinney of Fairfield. "Two years from now, we will have a deficit of $2.5 billion to $4.5 billion in 2012 alone. If you don't have the rainy-day fund and stimulus, you've taken away the two largest chunks of dollars to solve this budget crisis."

The state historically has benefited in post-recession periods from an economic rebound that filled up coffers with sales and income taxes.

It happened following the recession in the early 1990s that prompted the creation of the state income tax. After that downturn, the state had 10 consecutive fiscal years of budget surpluses.After the downturn in the 2002 and 2003 fiscal years following the September 2001 terrorist attacks, the state ran up record-setting operating surpluses that topped $1 billion.

But with unemployment still climbing, even though some economists believe the current national recession has ended, many are not predicting a quick recovery this time.Democrats, though, defend the budget that they formulated and passed by saying it was the best plan they could get at a time of a severe national economic downturn.Senate Majority Leader Martin Looney, a New Haven Democrat who has been in the legislature for 29 years, rejected Rell's assertion that the Democrats had not cut spending enough.

"That was a bit of political rhetoric and posturing to cover the fact that she let the bill become law," Looney said.

Without Rell's signature, the two-year, $37.6 billion budget bill that was passed by the Democratic-controlled legislature officially becomes law on Tuesday.

Looney said he was pleased that the budget will raise the state income tax on the wealthiest residents, starting at $500,000 for individuals and $1 million for couples. He described the so-called millionaires' tax as "the centerpiece of Democratic tax policy for this whole decade."

Many of the budget cuts, Looney said, were difficult to make. He noted the cut of about $25 million to cities and towns per year, which was taken from slot-machine revenue paid to the state from two tribal casinos. He also cited cuts in the healthy foods program in the public schools, which was one of many reductions in social services and educational programs.

To close a deficit projected at $8.5 billion over two years, the legislature voted to borrow $1.3 billion for operating expenses in the second year, a practice that all agree is a bad idea and should only be done in dire economic times.

The state borrowed the same way during the 1991 and 2003 budget crises. Republicans particularly criticized the level of borrowing this year.

But Derek Slap, a spokesman for the Senate Democrats, noted that both the Republicans and Rell had included borrowing in their budgets, adding that the legislature's finance committee must approve any plans for "securitization," a complicated process in which various revenue streams are put up as collateral.

The second year of the two-year budget will be renegotiated next year, and if the economy improves, legislators are hoping that they can avoid borrowing for operating expenses.

While many programs were saved from budget cuts and others were cut less than expected, the state's nursing home industry was left unhappy. For a financially weak industry that has seen five nursing homes close during the past 18 months, state cutbacks could lead to layoffs and potential closures of nursing homes that are already close to bankruptcy, said Matthew Barrett, executive director of an association representing 110 homes. The homes were subjected to a cut of more than $290 million over two years from the "current services" budget, which includes increases they would have received under previous law.

"The context is there's been no rate increase since 2007," Barrett said. "Our costs are going up. We're flat-funded since 2007. It's going to make it worse."

Separately, Republicans and Democrats are already battling over the bonding package, which is expected to be discussed in a special session Sept. 23 and 24.

McKinney charged that a Democratic cut of $7.8 million in debt payments in the second year of the budget would lead to a two-year moratorium on school construction, including previously approved projects. He said towns would be forced to pay millions in interest to keep construction projects going forward.

But Rep. Cameron Staples, a New Haven Democrat who is co-chairman of the tax-writing committee, said that any thoughts of a moratorium were a misunderstanding.

"It's flatly absurd that there would be a moratorium for two years," Staples said. "That's just not the case. There's no question we have to pay for all the projects in the pipeline. Towns are definitely not going to be stiffed. They're going to be fully paid. Existing projects are not in jeopardy at all."

While all sides said the budget is not perfect, some believed it was the best one under the circumstances.

For months, the Senate Democrats couldn't get more than 19 votes for a budget because five moderate Democrats — Joan Hartley of Waterbury, Bob Duff of Norwalk, Gayle Slossberg of Milford, Paul Doyle of Wethersfield and Edward Meyer of Guilford — would not support the tax-increase budgets that were put in front of them.

But on the final budget deal that passed last week, all of the skeptical Democrats except Hartley voted yes. The final tally was 22-13 with one member, Sen. Andrew Maynard, absent because he was out of the country.

"This is the best budget that I've had the opportunity to vote on," Slossberg said, adding that the package included the highest amount of spending cuts and the lowest amount of tax increases among the various Democratic budgets.

Some conservative Democrats opposed a budget that would have raised the state income tax on couples earning $250,000 per year and a separate proposal at $500,000 per year. But the final budget raises the income tax only on couples earning above $1 million — a relatively small number of people. The measure also includes a cut in the sales tax from the current 6 percent down to 5.5 percent, but that tax cut can be repealed if the state's tax collections are 1 percent off from the projected rates.

"It does provide middle-class tax relief with the sales tax," Slossberg said. "I strongly believe the sales tax cut will help all the people of the state, as well as business, and most important, everyday people. The revenue projections were very conservative. That tax cut should happen."