Malloy rejects hospital tax plan but signs most of CT budget into law

Gov. Dannel P. Malloy used his line-item veto to reject a new taxing arrangement on hospitals but signed into law the bulk of a new, two-year state budget negotiated without direct input from his administration.

The governor signed a $41.3 billion biennial plan that closes major projected deficits while boosting taxes close to $500 million per year; cutting municipal aid, higher education and social services; and sweeping tens of millions of dollars annually from energy conservation programs.

It also would provide emergency assistance to keep Hartford out of bankruptcy, implement a stringent spending cap and enact a new statutory limit on borrowing.

“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. 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.”

Hospital tax still needs a fix

The hospital tax is a complex legal and fiscal maneuver designed to increase federal Medicaid reimbursements to the state and to ease burdens on the industry.

Technically the state’s tax on hospitals would rise from $556 million to $900 million per year. Connecticut would redistribute those funds and return them to the industry — plus about $229 million more — qualifying the state for a big boost in federal aid.

The net effect on the state budget would be a $137 million annual gain.

This taxing change still needs to be approved by the U.S. Centers for Medicare and Medicaid Services, commonly referred to as CMS, which oversees the Medicaid program.

The administration says the budget bill appears to guarantee the hospitals a windfall paid by the state, regardless of whether the federal government signs off on the Medicaid change.

The governor added that absent his line item veto — and had federal officials rejected the tax increase agreement — Connecticut still would be obligated to pay roughly an extra $1 billion to the hospital industry across this fiscal year and next combined.

“I am not opposed to a new, mutually beneficial relationship with hospitals that realizes additional federal dollars for the state of Connecticut,” Malloy wrote in a letter to legislative leaders. “In fact, my administration has repeatedly offered workable language to that end — language developed by nonpartisan, classified attorneys in the executive branch with considerable expertise in this specific area.”

Legislative leaders have said they didn’t receive the administration’s proposed language in time to incorporate it into the budget, which was adopted last Tuesday. Malloy’s budget chief, Office of Policy and Management Secretary Ben Barnes, disputes this assertion.

Legislative leaders nonetheless have said they are willing to adopt corrective language regarding the hospital tax in the near future, if it is necessary. There was some grumbling on that point.

“The ongoing dispute between the governor, the hospitals and the legislature on the language required to access the pool of federal money the hospitals are seeking we believed was settled in the compromise budget,’’ said House Minority Leader Themis Klarides, R-Derby. “Now we need to deal with his line item veto.’’

Senate Republican leader Len Fasano of North Haven said lawmakers are certain to return, either to override the line-item veto or make revisions suggested by Malloy.

“The governor made the right decision to sign the budget into law, thus assuring that critical funding, particularly for our schools as well as important services and programs, will now be in place,” House Speaker Joe Aresimowicz, D-Berlin, said. “Though I disagree with his line-item vetoes, the legislature is committed to working with the administration on any fix necessary to ensure that taxpayers are protected and our hospitals have the resources to provide residents with quality health care.”

“I appreciate the patience of Connecticut’s residents,” said Senate President Pro Tem Martin M. Looney, D-New Haven, thanking Malloy for signing the budget. “Reaching a bipartisan agreement was a difficult process, but it was the right course for Connecticut to take. I am confident that now that this budget is law, legislators will be able to work with the governor to make any technical fixes which may be necessary.”

Jennifer Jackson, CEO of the Connecticut Hospital Association, said, “The governor’s line-item veto of hospital supplemental payments undermines the agreement to maximize federal funds for the benefit of the state, hospitals, and the patients they serve.”

Jackson also said “the language in the budget approved by the General Assembly is similar to language used and approved in other states. We stand ready to work with the state to address additional legitimate issues throughout the implementation of the hospital agreement contained in the budget.”

Is the budget truly balanced?

The new budget relies on revenue from tax and fee hikes worth $494 million this fiscal year and $535 million in 2018-19, or just over $1 billion for the biennium.

The largest increase, though, is the $344 million per year tax hike on hospitals. If the hospital tax hike is not counted, the overall tax and fee increase is $150 million in the first year and $201 million in the second.

The budget raises income taxes on middle class and working poor households by reducing tax credits. It raises taxes on cigarettes and other tobacco products, and creates a new fee on fantasy sports betting. A $10 surcharge on motor vehicle registrations will go to support state parks.

Still, Malloy — who urged lawmakers to minimize tax hikes — questioned whether the numbers truly add up.

“I want to be clear, that this is not a document that I would have negotiated,” Malloy told reporters shortly after signing the budget. “And I do have very real concerns about many aspects of it.”

The governor also cited nonpartisan projections that the budget is far from sustainable.

The nonpartisan Office of Fiscal Analysis projects that when the next governor and General Assembly must begin drafting the biennial budget for the 2020 and 2021 fiscal years — a process that begins in February 2019 — that budget will have a built-in deficit approaching $4.6 billion.

That’s more than the $3.5 billion, two-year shortfall that analysts said state finances would face this fiscal year and next without adjustment.

Legislators also failed to take steps to protect the state’s transportation program from insolvency in the not-too-distant future, the governor said. The Special Transportation Fund likely is facing that scenario, analysts say, in the early 2020s.

Legislators had considered ordering the establishment of tolls but opted not to include that in this budget.

Malloy: Energy fund raids will harm CT

The budget cuts deeply into operating funds for the University of Connecticut — but far less than a Republican-crafted budget would have one month ago.

It also does not shift a portion of skyrocketing teacher pension contributions onto cities and towns, as proposed by Malloy. But it does direct the governor to achieve unprecedented savings after the budget is in force — adding $114 million over two fiscal years combined to an already aggressive target Malloy had proposed.

Present-day teachers also take a hit in the new budget. Their annual contributions to their pension fund grow from 6 percent to 7 percent of their salaries starting in January — a $775 yearly increase for the average teacher and school administrator.

But lawmakers also balanced the books over the current biennium by tapping resources that may not be available in the next two-year budget cycle.

The budget would draw $87.5 million per year from three energy conservation programs, including $14 million from the Green Bank.

Most of those raids involve funds the state raised through surcharges on consumers’ monthly utility bills. The governor and clean energy advocates particularly balked at the Green Bank raid because it leverages an estimated $8 to $10 in private investments from every $1 utility customers pay into the program.

“It is my firm belief that these sweeps will increase Connecticut residents’ and businesses’ energy costs, will curtail hundreds of millions of dollars in private investment in Connecticut, will hamstring a growing alternative energy and energy efficiency industry that employs thousands of Connecticut residents and will eliminate a crucial set of tools for helping businesses in the state with cost-saving energy investments,” the governor wrote.

Bondholders, labor must help Hartford avert bankruptcy

Malloy praised the assistance the new budget offers for Hartford, but said others must step up to help the capital city remain solvent. The legislation, he added, does not prohibit Hartford Mayor Luke Bronin from filing for bankruptcy protection for the capital city.

“Unless those who have previously made statements in support of avoiding bankruptcy — which include the representatives of the city’s employees and the bondholders — can come to an agreement, then the city will have no recourse but to go bankrupt,” the governor said.

Bronin has said a minimum of $40 million is needed this fiscal year simply to keep the city solvent, though this would not solve Hartford problems over the long haul. There are sufficient resources in the new budget to cover that.

The new budget also includes $20 million the state could dedicate to help cover Hartford’s payments on bonded debt, if the city refinances that debt.

Bronin has not ruled out refinancing, but has been cautious about extending the city’s debt repayment schedules — which almost certainly would increase debt service costs over decades. Bronin has said that he is unwilling to do any deal that would cause future mayors to face the same problem the city faces today.

Governor: Budget has some strong points

Malloy also praised lawmakers for several other components of the new budget.

“The reality is this budget has a lot of wins,” he said.

The emergency relief to help Hartford avert bankruptcy was complemented with a new Municipal Accountability Review Board that will monitor all cities and towns’ finances and intervene early before other communities become at risk of insolvency.

Lawmakers adopted a new education distribution formula “that recognizes that resources should be allocated according to the needs of a district and its students,” Malloy wrote. And while the distribution was not as sweeping as the governor proposed, he called it “a step in the right direction.”

The budget also provides funds to assist homeowners in eastern Connecticut struggling with crumbling concrete foundations.

The legislature will be required in the future to vote on all state employee contracts, ending a system that allowed for default approval without casting any ballots.

And it offers mandate relief for cities and towns.

Keith M. Phaneuf and Mark Pazniokas are reporters for The Connecticut Mirror (www.ctmirror.org). Copyright 2017 © The Connecticut Mirror.

kphaneuf@ctmirror.org

mpazniokas@ctmirror.org

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