A local town is refusing a state grant in an act of opposition to a spending cap the state plans to impose on municipal budgets.

Lyme has directed its bank to decline a deposit from the state for a new municipal revenue sharing grant.

"The town of Lyme is not for sale for $21,000," First Selectman Ralph Eno said of the grant in a phone interview Friday.

"The conditions attached to the funds disenfranchise local voters who approve school district budgets at referendum and local operating and capital spending plans at town meeting," Eno wrote in a previous email. 

The state has no business imposing the cap, "especially given its habitually dysfunctional budget development process and annual deficit difficulties," he added. 

The state is distributing the new municipal revenue sharing grants this fiscal year. 

In fiscal year 2018, the state would decrease those grants for any towns whose budgets exceed a 2.5 percent spending cap first enacted in 2015, or the inflation rate if that is larger, according to the Office of Legislative Research.

The municipal revenue sharing grants would be reduced by 50 cents for every dollar over the cap.

Lyme's refusal of the grant follows efforts during the past legislative session by the Council of Small Towns and Connecticut Conference of Municipalities to repeal or modify the planned municipal spending cap, which is part of a larger property tax relief initiative that includes efforts to reform the car tax.

Joe DeLong, executive director of Connecticut Conference of Municipalities, said he hasn't heard of other towns that have declined the grant. 

“It’s a discussion that I know has certainly taken place in other communities,” he said.

Betsy Gara, executive director of the Council of Small Towns, said a number of small towns oppose the spending cap.

"COST maintains that the Municipal Spending Cap should be eliminated or substantially modified to ensure that towns are not penalized or otherwise discouraged from adopting local budgets that provide for the delivery of critical education, infrastructure, public health and safety services," she said. 

She added that at minimum, towns whose budgets are approved at a town meeting or at referendum should be exempt from the municipal spending cap.

The state Office of Policy and Management is in the process of developing guidelines that it hopes to distribute in the fall before municipalities begin to formulate their fiscal year 2018 budgets, spokesman Chris McClure said.

The fiscal year 2018 budget has not yet been written, so there could be changes by July 1, 2017.

"We're waiting for that guidance," Gara said. "At this point, I think there is a lot of uncertainty of how the cap will impact local operations."

Some expenditures, including certain capital expenditures, legal settlements and arbitrations, already are exempt from the cap, she said.

Norwich Comptroller Joshua A. Pothier said the 2.5 percent cap on spending hikes "is restrictive, but the cap is not a straight-forward calculation."

For example, there is a debt service exemption, but it is unclear how broadly it should be interpreted. It possibly could include pension and other post-employment benefits contributions, he said.

East Lyme First Selectman Mark Nickerson noted the exemptions provided. But he called it "ludicrous" that the state would penalize towns for exceeding a limit, if local residents decide the expenditures are reasonable.  

"It's incredible that the leadership in Hartford would put this on our towns," he said. 

North Stonington First Selectman Shawn P. Murphy said the 2.5 percent spending cap should not be a problem since it excludes debt.

DeLong, the Connecticut Conference of Municipalities executive director, said smaller communities are faced with having to "strike the balance" between the small grant and the restrictions that accompany it.

He also noted that some modifications were made in the last session and Connecticut Conference of Municipalities will continue to have conversations with members of the General Assembly on how the spending cap can evolve to meet its original intent without having unintended consequences.

If a town refuses the grant, any unexpended money will remain in the Municipal Revenue Sharing Fund, McClure said.

Eno said the idea of finding additional municipal revenue sharing streams for towns and cities is admirable as a state policy concept, but he takes issue with sales tax revenue as the mechanism.

"To use this regressive taxing vehicle to redistribute wealth is just horrific public policy," he said. "That tells me, as one small town first selectman, that the policy shapers in the majority party in Hartford don't have a clue what is going on."

Eno said small to mid-sized communities are holding the state together.

He said the town of Lyme does not waste money and the state does not have the right to intervene in its budget process.

Day Staff Writers Claire Bessette and Nate Lynch contributed to this report.

k.drelich@theday.com