The Connecticut state legislature approved a new state budget shortly before their midnight deadline Wednesday that restores aid for towns; reverses health care cuts for the elderly, poor and disabled; and defers a transportation crisis — at least for another year.

The $20.86 billion package does not increase taxes, though it does raise the maximum tax rate cities and towns can levy on motor vehicles. It also would spend rather than save more than $300 million from this April's $1 billion surge in income tax receipts.

It does not include several major changes sought by Republicans to collective bargaining rules regarding state and municipal employees.

And while state finances are projected to face multi-billion-dollar deficit projections after the next election tied in part to legacy debt costs amassed over eight decades, the new budget would leave Connecticut with $1.1 billion in its emergency reserves.

The budget, which the Senate passed 36-0 and the House passed 142-8, boosts General Fund spending about 1.6 percent over the adopted budget for the current fiscal year, and is 1.1 percent higher than the preliminary 2018-19 budget lawmakers adopted last October.

In a related matter, legislators also passed several state tax changes aimed at protecting Connecticut households and businesses that may face higher federal taxes under the tax plan passed this past winter by Congress.

"Leaders came together and said the state of Connecticut matters," Senate Republican leader Len Fasano of North Haven, said. "We need to move the state of Connecticut forward. ... This is another monumental step forward for this state."

Senate President Pro Tem Martin M. Looney, D-New Haven, praised both parties for uniting to make government work for its citizens. "We've been able to make those changes in response to the needs and outcries of our constituents," Looney said.

The Senate passed the budget after a mere 17 minutes of debate before sending it down to the House.

Reversing Medicare, Husky A cuts

Democrats and Republicans alike faced a hailstorm of criticism last fall after they voted to tighten eligibility requirements for the Medicare Savings Program, which uses Medicaid funds to help low-income elderly and disabled patients cover premiums and medication costs.

Lawmakers scrambled and postponed the cutbacks to July 1, even though it worsened a deficit in the current fiscal year, after learning an estimated 113,000 seniors and disabled residents would lose some or all assistance.

The new budget reverses all cutbacks, at a cost of approximately $130 million.

Legislators also put $12 million back into the budget to reverse new restrictions on the Medicaid-funded health insurance program for poor adults, Husky A. Advocates say this funding would enable approximately 13,500 adults from households earning between 155 and 138 percent of the federal poverty level to retain state-sponsored coverage.

For a family of three, the 155 percent threshold represents an income limit of $32,209 while 138 percent is $28,676.

The new budget also would:

• Provide a 1 percent increase in rates paid to private, nonprofit social service agencies.

• Add $5 million for emergency residential placements for individuals with intellectual and developmental disabilities.

• Add $5 million for the Temporary Aid for Needy Families welfare program.

Shielding cities and towns

Legislators also took a different approach with this budget regarding aid to cities and towns.

Democrats and Republicans clashed with Malloy back in November when the governor — who was mandated to achieve unprecedented savings after the budget was in force — cut $91 million from statutory grants to cities and towns.

The new budget gives communities $70.5 million more in 2018-19 than they received this year — and prohibits the governor from cutting town grants to achieve savings targets.

It also provides additional education and other funding for communities with large numbers of evacuees from Puerto Rico.

Big reserve — even bigger post-election deficits

Legislators did tap a portion of this April's $1.3 billion surge in state income tax receipts tied chiefly to capital gains and other investment income. And that's despite a new revenue "volatility" cap that was established last fall to force Connecticut to save such funds.

How did they get at those funds?

The budget "carries forward" $299 million in resources earmarked for payments to hospitals this fiscal year. The industry, which originally expected to get the money this spring, won't get paid unless federal Medicaid officials approve a new state hospital taxing arrangement — and approval is not expected until late summer or in the fall, after the next fiscal year has begun.

By carrying those resources forward, the state has an extra $299 million to spend in the next budget while simultaneously enlarging the outgoing fiscal year's deficit by the same amount.

The new deficit for the outgoing fiscal year would be $686 million, which would be closed entirely with the dollars in the budget reserve — which is filled primarily with this spring's income tax receipts.

Even after that maneuver, the budget reserve is expected to have between $700 million and $800 million on hand when the books close on 2017-18.

But analysts also project the volatility cap system will direct more income tax receipts tied to investment earnings into the budget reserve next fiscal year — albeit a more modest amount. After that deposit is made, and if the state budget remains in balance in 2018-19, it would close the fiscal year with about $1.1 billion in reserve.

That potential fiscal cushion, which represents just under 6 percent of annual operating costs, would be the state's largest reserve since 2009 — but also well below the 15 percent level recommended by Comptroller Kevin P. Lembo.

More importantly, it also is smaller than the projected deficits in the first two fiscal years after the November elections.

According to the legislature's nonpartisan Office of Fiscal Analysis, the newly adopted budget — unless adjusted — would run $2 billion in deficit in the 2019-20 fiscal year. And the potential shortfall rises to 2.58 billion in 2020-21.

Much of those deficits are attributable both to surging retirement benefit costs stemming from decades of inadequate state savings, and also to the Connecticut economy's sluggish recovery from the last recession.

Scaling back the 'bond lock'

The new budget also retains and scales back a controversial plan to reinforce new state caps on spending and borrowing and other mechanisms designed to encourage better savings habits.

Lawmakers agreed last October when they enacted these caps to lock them in contractually by pledging — in legal covenants with state bond investors — not to alter them, with limited exceptions, for 10 years.

The new budget retains the so-called "bond lock" provision, but reduces the pledged period from 10 years to five.

Stabilizing transportation — for now

The new budget would transfer an extra $29 million in sales tax receipts next fiscal year to the Special Transportation Fund. This is expected to stave off planned rail and transit fare increases.

It does not establish tolls on state highways.

In addition, the state would issue $250 million in General Obligation (GO) Bonds next fiscal year to complement another $750 million in Special Tax Obligation (STO) Bonds, all to support transportation infrastructure work.

While STO bonds are the traditional workhouse of the Special Transportation Fund, paid off with fuel tax receipts and other revenues assigned to the transportation program, GO bonds are paid off out of the General Fund — which pays for the bulk of state programs and services.

But sources said the extra funding  and bonding is not sufficient to stabilize the fund and enable a major rebuilding of transportation infrastructure over the next two decades. Many legislators have said they expect the legislature will have to revisit next year the question of whether to install electronic tolls on state highways.

GOP drops collective bargaining changes

Republicans made a big concession to Democrats when they withdrew a series of proposed changes to collective bargaining laws.

These included:

• Ending collective bargaining for retirement benefits after the current contract expires in mid-2027, leaving all of these matters to be resolved solely by the legislature.

• Removing overtime from pension calculations.

• Suspending cost-of-living adjustments to pensions for retirees who become vested after mid-2027 until the system holds enough assets to cover 80 percent of pension obligations. The funded ratio currently stands at less than 40 percent.

"We're not going to let that be the deal-breaker" Fasano said during a press conference a few hours before the Senate's budget debate. But he added that Republicans still feel strongly about these issues and expect to raise them again in future years.

Countering federal tax changes

In a related matter, the legislature also approved a series of tax changes in response to new federal tax laws. At issue are new federal income tax laws capping deductions for state and local taxes at $10,000 —  a change that primarily falls on a dozen states, including Connecticut, that voted against President Trump in 2016.

One provision would establish a new Pass-Through Entity Tax aimed at certain small businesses — such as limited liability corporations — whose principals report their business's income and their personal earnings collectively through their personal income tax returns.

This would allow them to pay the same tax rate, but report their business's earnings through a separate state tax — thereby reducing the personal income they would report on their federal return.

A second provision allows municipalities to provide a property tax credit to taxpayers who make voluntary donations to a "community-supporting organization" approved by the municipality.

For example, a household owing $7,000 in state income taxes and $6,000 in local property taxes could — in lieu of paying the local tax — make a $6,000 contribution to the local municipality's charitable organization.

And while their federal deduction for state and local taxes paid could not exceed $10,000 under either scenario, by making the charitable contribution, the rationale is that some or all of that $6,000 payment also could be deducted from federal taxes.

Keith M. Phaneuf is a reporter for The Connecticut Mirror (www.ctmirror.org). Copyright 2018 © The Connecticut Mirror.

kphaneuf@ctmirror.org