Gov. Dannel Malloy's budget chief faced a barrage of tough questions Thursday from both sides of the political aisle.
None of the lawmakers on the finance, revenue and bonding committee appeared pleased with Office of Policy and Management Secretary Benjamin Barnes.
Despite not proposing any significant tax increases, Malloy’s budget dramatically changes the state’s relationship with municipalities.
Malloy has proposed that towns pay one-third the cost of teacher pensions. It also gives the state more control over “distressed municipalities” and allows municipalities to levy property taxes on hospitals.
Barnes said the state could not raise taxes on businesses and its more affluent citizens again. “We risk creating an environment in which our most successful individuals and businesses which are growing will elect to reside elsewhere which is a concern I have for the long term vitality of our economy.”
Many towns, however, see these proposals as a way to shift the state costs onto the backs of towns that will, in turn, increase property taxes.
Currently, the state bears the cost of paying for teacher pensions across Connecticut. This amounts to more than $1 billion in education funding that towns never see, but it also means towns don't need to pay for retirement benefits for teachers. Since teachers don't receive Social Security, towns also save by not paying those payroll taxes.
The cost of teacher pensions to the towns will be $407 million this year and then increase over the following two years to $420 million.
Towns have said they shouldn’t have to pay for pensions when they have no ability to negotiate the teacher retirement benefits.
Rep. Lonnie Reed, D-Branford, told Barnes that her town of Branford has been “well managed” and has avoided the problems that plague the state. “There’s going to be a reallocation of resources that punishes the well-managed towns and gives them to those that are not so well managed and that’s a real concern in terms of fairness.”
Rep. Laura Devlin, R-Fairfield, also criticized the plan saying the state regularly delivers “budget bombs” that force towns to rework their budgets “with no discussion up front.”
Towns have argued the teacher pensions would increase their costs significantly. The plan would also affect Connecticut’s struggling cities which receive state funding. Hartford would see a net loss in education funding due to the teacher pension bill, potentially worsening its continuing budget crisis.
Malloy’s budget would create a tiered program in which distressed municipalities, like Hartford, would face increasing levels of state fiscal oversight. The state could in some cases have the ability to accept or reject collective bargaining agreements and act as an arbitrator in collective bargaining disputes.
The proposal drew the ire of Hartford officials aligned with the city’s labor unions. Larry Duetch of Hartford’s Court of Common Council offered the idea of taxing the state government buildings in the city to solve Hartford’s deficit.
The state has exercised greater control over distressed municipalities in the past. The state instituted an oversight board for the City of Waterbury in 2001 when it appeared the city would become insolvent.
Although the city remains a “distressed municipality,” it is better off than Connecticut’s other major cities like Hartford and Bridgeport, according to a 2016 study and was able to avoid bankruptcy.
Yankee Institute policy director, Suzanne Bates, said it was likely that Hartford would have to approach the state for money at some point in the near future. “If that’s the case than we need to have more significant accountability than we have now.”
The cities of Hartford, Waterbury, New Haven and Bridgeport have been considered distressed municipalities for many years and, on average, receive more than 40 percent of their funding from the state.
Malloy has proposed allowing municipalities to tax hospitals as a possible remedy for their deficits. Barnes acknowledged that there is “mutual distrust” between the state and the hospitals since the state levied a tax on hospital services as a way to increase federal funding.
Connecticut was supposed to redistribute the tax revenue back to the hospitals but instead, the increased revenue from the tax was used to pay for other government programs.
Barnes insists that this will be different, claiming that hospital will be “net winners” in this deal. Part of the budget proposal includes giving hospitals $250 million in Medicaid supplemental payments.
Hospitals, however, claim otherwise and Jennifer Jackson, CEO of the Connecticut Hospital Association, said they would “vigorously fight” Malloy’s proposal.
Rep. Devlin questioned the proposal to tax hospitals saying it would cost more jobs and services.
Barnes said he welcomed the Republican’s budget proposal. “We can only get the government we can afford and if we’re not prepared to raise fees or taxes to fund those activities than we should be prepared to discontinue those activities and I look forward to seeing your caucus’ proposal to do just that.”
But no budget debate would be complete without discussion of the state’s pension system. Sen. Toni Boucher, R-Wilton, questioned why the governor’s office hasn’t considered switching to a 401(k) style retirement plan for state employees as many municipalities have done.
Barnes dismissed the idea and said the change wouldn’t help. “I believe we should continue to rely on a well-managed, well-funded defined-benefit program and we are working as aggressively as the state can tolerate to get to that system.”