governor rowland’s budget proposal fy 2003-2005 biennium march 4, 2003

Governor Rowlands Budget Proposal FY 2003-2005 Biennium March 4, 2003

2 Back to Basics Budgeting States are facing the worst budget crisis since WWII Drastic changes in the stock marketunprecedented growth in the 90s followed by a dramatic drop off beginning in 2001 9/11, its fallout, & the anticipation of war may forestall the nascent recovery Expansion and creation of new programs in the 90s Spiraling health care inflation Quick fixes and one time revenues have not provided a remedy In 2001 and 2002, states generally failed to make the fundamental choices necessary to adapt to the changing economy Instead, quick fixes, one time revenues and gimmicks were used to fill the gaps as they surfaced, only the holes reappeared A structural and balanced solution is overdue Tempered spending accompanied by modest tax increases, shared by all, will provide a basic, balanced solution

3 From Boom to Bust CT enjoyed unprecedented surpluses in the mid and late 90s From 1995 to 2001, the surpluses were between $81M and $700M per year But in 2002, the state registered an $800M plus gross deficit The deficit would have exceeded $1.2B if not for actions taken in Special Session

4 From Boom to Bust During the Boom of the 90s, capital gains realizations drove much of the surpluses we saw in the mid to late 90s and into 2001 In the years of the greatest surpluses, anywhere between 1/3 and 70% of each fiscal years surplus was tied to the stock market gains For six years in a row, CT residents capital gains increased by booming double-digit growth From 1994-2000, CT capital gains realizations grew by more than 500%

5 From Boom to Bust The rising stock market meant healthy increases in other tax revenues as well Withholding taxes grew between 7.5% and 15.1% annually Sales taxes went up 3.6% to 8.6% annually The estimates and finals category of the state income tax rose between 14% and 32% annually

6 From Boom to Bust But a series of major market corrections occurred IT & Telecom bubble burst Corporate fraud and abuse scandals 9/11 tragedy The major stock indices are still down between 30% and 75% With the stock fall came a precipitous fall in state tax revenue

7 From Boom to Bust In the current fiscal year the state is looking at the second year in a row of negative withholding performance because of poor bonuses and stock options Estimates and finals are estimated to be about 10% below last fiscal year This equates to yet another drop in capital gains realizations of between 20%-25% on an already pitiful FY 02 base The sales tax is expected to post a gain of just 0.9%, after performing barely above that last fiscal year

8 From Boom to Bust How bad was the stock crash on state revenue? Wealthy states like Connecticut saw their revenues drop more than the national average of 6% In Connecticut, so-called economic growth of general fund revenues was down 7.5% in FY 02 In the current fiscal year, a meager rebound from FY 02 of 1.6% is expected

9 Putting the Deficit and State Fiscal Crisis in Context

10 Thank Goodness for the Spending Cap Clearly the spending cap isnt perfect since we do have a deficit But the spending cap did what it was supposed to do Held growth rates between 2.1% and 6.4% over the past 8 years Spending growth stayed down under the cap, in spite of several years of robust revenue growth In FY 00 and 01, actual GF revenue grew almost 16%, but the budget grew over 12% If not for the constitutional spending cap, our problems would clearly be much worseour structural gap would be billions more Consequently, CTs fiscal situation is less severe than many other states

11 Both a Spending and a Revenue Problem If the revenue side is a problem, so is the spending side Even if the revenue base had stayed artificially high for the foreseeable future, we still could not afford the services our current laws call for State employees and retiree health care are expected to grow over 20% in FY 04 Medicaid is growing at about 9% Overall growth in the GF is 12.3% Even if revenues were still growing at 7%-9%, there would still be a substantial structural gap

12 And a Spending Cap Problem Too! The spending cap demands that spending be reduced from current services by at least $1B over the next two fiscal years The FY 04 current services gap is about $2B The cap will only allow a blended capped and uncapped growth of just over 6% But current services growth is about 12.3%, outpacing allowable growth in expenditures for FY 04 by $763M

13 Bond Rating at Risk The gaps in our budget clearly put our states bond rating at risk Any significant revenue deterioration not offset by expenditure adjustments or revenue enhancements could cause a change in the ratingachieving structural budget balance in FY 04 and beyond will be necessary to maintain the current rating. Standard and Poors Adoption of balancing plans with recurring benefits is critical to the rating. Fitch Ratings The basic message here is that there is a growing negative number with no solution and there remains a structural imbalance. Moodys upon putting Connecticut on its watch list for possible downgrade A lower bond rating could mean tens of millions of dollars in increased debt costs decades into the future, meaning less will go to programs, services or other expenditures Because of the deficit mitigation plan, the rating should be held

14 Changing the Entitlement Culture The recent fiscal crises have forced states to rein in burgeoning entitlement programs At least 40 states, including CT, have enacted significant Medicaid reforms At least 22 states have restricted Medicaid eligibility At least 16 states have established or increased co-payments At least 29 states will implement reductions or freezes in provider payments Given the spiraling health care inflation in the nation, state governments have had to realize that either benefits must be reduced or service populations must be restrictedyou cant have it both ways anymore

15 Where Does All the Money Go? Any discussion of the equity of spending cuts must begin with an understanding of where the money currently goes Total personnel costs make up about 30% of GF spending Debt service accounts for about 8% of GF spending Various entitlements amount to about 25% of GF spending Local aid is about 17% of GF spending Is there any doubt, then, that labor cost must be part of the solution

16 The Economic Outlook What Does the Future Hold? From a national perspective, the recession and sluggish recovery appear to be longer than the early 90s downturn Recovery over the next several years appears moderate and prolonged Consumer moderation in spending prevails over the next several years Jobless Recovery Phenomenon --Productivity gains rather than job growth will drive the economy Job, personal income and GSP growth will lag the nation Connecticut tends to lead nation into recession, lags by two quarters in coming out A Slew of Uncertainties Economic recovery or continued recession rests on two main factors (1) the performance of the equity markets and (2) the outcome of the threat of war with Iraq

17 Liquidating the FY 2002 03 Deficit How did the deficit come about? Total revenues are down by $388M below budgeted amounts for FY 03 Personal income taxes are down $421M because of reduced corporate bonuses and a downturn in capital gains revenue due to deterioration of the market Sales and use tax revenues are down $82M On the positive side, corporate tax revenue is up by $40M due to corporate downsizing in the private sector

18 Liquidating the FY 2002-03 Deficit On the spending side, the state is expecting that expenditures will exceed budgeted appropriations by about $140M Medicaid is anticipated to be over budget by almost $100M caused by the softened economy, liberal eligibility rules and health care inflation. Specific areas of deficiency include HUSKY enrollment for both adults and children, pharmacy expenditures and healthy home care enrollment Major workers compensation deficiencies totalling about $17M State employee and retiree health accounts have a deficiency of about $16M due to heavier than anticipated enrollment activity

19 Liquidating the FY 2002-03 Deficit When the FY 03 budget adjustments were passed last year, the legislature cut $94M in anticipation that the administration would receive savings from union concessions for the current year As no concessions were forthcoming, a portion of that $94M will be made up through savings from layoffs of nearly 3,000 state employees and savings from an early retirement plan. (Even with these measures we are still short by $50M)

20 Liquidating the FY 2002-03 Deficit Deficit mitigation plan to close entirety of $638.3M gross deficit and deposit $47.8 million into Budget Reserve Fund. Combination of measures taken by Governor already, the legislative deficit mitigation bill, and future steps to be taken by the Governor within his own authority November allotment rescissions of $27.9M in addition to $35M in Section 52 extraordinary rescissions already accounted for in the FY 03 adjusted budget passed last year (these Section 52 cuts do not reduce the deficit) January allotment rescissions and agency forced lapses of $9.1M after duplication with legislative deficit mitigation plan is taken out. The legislatures deficit plan also enacted some of the Governors forced lapses. Because the budget is balanced, the remaining forced lapses will not be taken and will be available for expenditure.

21 Liquidating the FY 2002-03 Deficit $107.6 million in attainable spending reductions in legislative deficit mitigation plan out of $222.5 million reported in bill. Included in the attainable cuts is $4.65 million FY 2000-01 surplus. Included here is $21 million for layoffs and $23 million for the early retirement that was passed Within existing authority, Governor and the Secretary of OPM can choose to lapse salary reserve monies of $29.5 million Within existing executive authority, the Governor and the Secretary of OPM can choose to lapse $18.7M in collective bargaining monies that were set aside for unsettled contracts

22 Liquidating the FY 2002-03 Deficit According to OPMs analysis, the legislative deficit mitigation plan will infuse $485.2M into the general fund revenue stream. Pure tax increases amount to about $296M, with an additional temporary corporate surcharge raising $46M. Other transfers and accrual changes make up rest New additional tax increases in this budget proposal that raise $8.1M in FY 03

23 Liquidating the FY 2002-03 Deficit About $350M in ongoing and temporary tax increases, or about 50% About $223M in spending cuts, or one-third Its fair. Its equitable. The plan should preserve the states bond rating Final estimated FY 03 spending in the general fund will be about $28M higher than what the Governor was going to initially propose ($12.112B versus $12.140B) It balances the state budget and reduces next fiscal years hole by more than one half. Total FY 04 mitigation is $1.118B, dropping gap from over $2B to just below $900M Mitigation because of plan in FY 05 is $1.146B, dropping gap from over $2.5B to below $1.4B

24 The FY 2003-05 Biennial Budget The Spending Plan Governor Rowland continues his record of fiscal prudence The proposed FY 04 budget is $333M below the cap and for FY 05 $65.6M below the cap GF current services reduced by $1.16B in year one and $1.59B in year two GF net revenues increased $852M in FY 04 and $950M in FY 05

25 The FY 2003-05 Biennial Budget Revenue Forecasts Revenue assumptions are based upon the most prudent and realistic forecasts currently available

26 The FY 2003-05 Biennial Budget Revenue Forecasts For the state income tax, modest growth is predicted for the withholding side and even more modest growth is predicted in the estimates and finals component. It will raise $4.75B in FY 04 and over $5B in FY 05

27 The FY 2003-05 Biennial Budget Revenue Forecasts The Sales and Use Tax, the states second largest tax generator, will rebound during the FY2003-05 biennium and will raise almost $3.3B in the first year and $3.46B in the second year

28 The FY 2003-05 Biennial Budget Limiting the use of one-time revenues Many states have used one-time revenues as a quick fix in order to avoid the necessity of making significant structural changes to both the expenditure and revenue sides of the budget. Poor fiscal practice will impact our bond ratings if no structural changes to state budgets are made Connecticut has used one-time revenues of $656.3M as well to adjust and balance the FY 03 budget as follows $475M in the FY 03 budget adjustment plan of last year including $85M in additional tax amnesty monies over what was budgeted $181M under House Bill 6495 The use of one time revenues drops from approximately 5.4% in FY 03 to 1.7% in FY 04 and to 1.3% in FY 05. Total one-times $207M and $172M in each each year. Included are sweeps of ECLM, CEF, CHFA, CDA, and CII

29 Tax Changes and Revenue Enhancements Taxes were already increased $250M last year

30 Tax Changes and Revenue Enhancements

31 Tax Changes and Revenue Enhancements Legislative deficit mitigation plan increased income tax rate Effective with income year 2003, increase the 4.5% to 5% only; 3% rate unchanged 0.5 percentage point across-the-board rate increase for all filers Raises $231M in FY 03, $428M in FY 04, and $446M in FY 05

32 Tax Changes and Revenue Enhancements To ensure that the current fiscal year deficit is closed New tax tables will be in force by April 1 Increase withholding so as to collect a full six months worth of increases in the three remaining months of the fiscal year In effect, taxpayers would be asked to double up April, May and June make up for January, February and March New tax tables would be issued again for implementation in July, which would be the permanent ones

33 Tax Changes and Revenue Enhancements Reducing the property tax credit on all filers Reduce the $500 property tax credit to no more than $400 and remove the minimum $100 credit for higher income filers Phase out the minimum $100 property tax credit, even at higher income levels The property tax credit begins to be phased down beginning at $54,500 for singles and $100,500 for joint filers. The current $100 minimum begins at $144,500 for singles and $190,500 for joint filers

34 Tax Changes and Revenue Enhancements What The Property Tax Credit Change Will Mean? All who pay at least $500 in property taxes and file for the credit will see the $100 loss. Those who pay and claim less than $500 in property taxes will see a reduction of up to $100 and those whose claim is less than $400 will have no reduction Increase revenue in FY 04 by $68M and by $69.4M in FY 05 Property tax minimum phase-out saves $12M in FY 04 and FY 05

35 Tax Changes and Revenue Enhancements Elimination of phase-in of higher singles exemption Last session, the legislature suspended the phase-in for two years effective January 1, 2002. The 2001 exemption level of $12,500 remains in effect until January 1, 2004 The Governor proposes to permanently repeal any further changes to the singles exemptions. The exemption and phase-out threshold will stay at the January 2001 levels permanently. Will save $7M in the FY 05

36 Tax Changes and Revenue Enhancements Summary of Income Tax Increases Total income tax increases or repeal of past reductions amount to $231M in FY 03, $508M in FY 04 and $535M in FY 05 On the property tax credit, no filer gets hit with more than a $100 loss. Every filer is paying 0.5 percentage points more on all taxable income period Families earning less than $100K pay less than $500 more than they did before about $10 per week The filer earning $500K will pay up to $2,550 more. The filer earning $1M will pay up to $5,050 more About three quarters of the tax hike will be borne by those earning more than $100K Since the beginning of the Rowland administration, families earning less than $125K still enjoy an overall income tax decrease

37 Tax Changes and Revenue Enhancements Lowering sales tax exemption on clothing and footwear Accomplished in the legislative deficit mitigation plan Return to the $50 threshold per item effective April 1 Increased revenue to the general fund of $8.2M in the current fiscal year, $33.6M in FY 04 and $35.3M in FY 05 New proposal: Eliminate sales- tax free week to save $3M in FY 04 and $3M in FY 05

38 Tax Changes and Revenue Enhancements Sales on business computer services Repeal the phase-down The Governor is proposing a permanent rate of 1%. This change would raise about $10.8M in FY 05

39 Tax Changes and Revenue Enhancements Corporate tax surcharge 20% surcharge in income year, falling to 10% in income year 2004. Surcharge will be gone by income year 2005 Businesses will pay in estimated taxes what would have been owed if the tax were in place as of January 1 Last session, two major changes increased corporate expenses by at least $60M. Total of $105M in new temporary surcharges in the two income years

40 Tax Changes and Revenue Enhancements Increasing the Cable TV Gross Receipts Tax Increase cable gross receipts tax portion of the public service tax from 5% to 6% to raise $6.3M in FY 04 and $6.7M in FY 05 The Hospital Sales Tax Permanently rescind the 5.75% hospital sales tax Cigarette Tax Increase Increase the cigarette tax rate to $1.51, effective March 15 to raise $31M in FY 03, $78M in FY 04, and $76M in FY 05

41 Tax Changes and Revenue Enhancements Increases in the real estate conveyance tax Effective April 1 No increase in the real estate conveyance tax on homes valued at or under $300K or on the first $300K of a homes value The incremental portion of a homes value between $300K and $800K will be taxed at.75% as opposed to 0.5% The portion of a home over $800K will be taxed at an incremental rate of 1.5% as opposed to 1% The commercial rate will increase from 1% to 1.5% Will raise $5M in FY 03, $25M in FY 04, $25M in FY 05

42 Tax Changes and Revenue Enhancements Tourism funding changes Combine the Historical Commission, the Commission on the Arts, the Film Commission and the Tourism Office into a new commission, the Commission on the Arts, Culture, and Tourism To bring greater oversight and accountability to the system, current tourism districts will be disbanded and the central commission will determine what local entities should be set up and the funding they should receive

43 Tax Changes and Revenue Enhancements Escheating unclaimed bottle deposits to the State of Connecticut The Governor again is proposing that unclaimed deposits on unreturned beverage containers be escheated to the state Will raise $18M in year one and $20M in year two Its Time!!

44 Tax Changes and Revenue Enhancements Internet sales tax Change Connecticuts status on the Streamlined Sales Tax project from observer status to voting participant status Connecticut is currently losing between $300-$400M Governor Rowland now favors taxation of internet sales

45 Tax Changes and Revenue Enhancements Governor Rowland is proposing ongoing tax increases, including the permanent freeze of the singles exemption at $12,500, of $214 million. Including the legislative deficit mitigation plan, total taxes will increase $851 million.

46 Tax Changes and Revenue Enhancements Net tax decrease of $961M Economic Competitiveness fundamentally safeguarded

47 Education: Developing the Next Generation Reducing Racial Isolation and Improving Urban Education Sheff Initiatives Under Governor Rowland, spending on initiatives to improve urban education and reduce racial isolation has increased from $21M to $208M over the decade Funding for Magnet Schools will increase from $45M in FY03 to $73M in FY05, the number of schools will increase from 31 to 48 and enrollment will go from 11,000 to 17,000 over the biennium Funding for the OPEN Choice Program will increase $300K in FY 04 and $1.6M in FY05, with enrollment going from 1,600 to 2,000 in FY05 Funding for Charter Schools will be $16M in FY04 and $16.8M in FY05 with 2,400 students participating in FY05 up by 150 students over the biennium The Interdistrict Cooperation Grant, serving some 60,000 students, will be increased by $1.2M during the biennium

48 Education: Developing the Next Generation Reducing Racial Isolation and Improving Urban Education Sheff Initiatives

49 Education: Developing the Next Generation School Choice Governor proposes allowing parents of children in failing schools to take up to $3,000 in ECS funding to attend school of their choice including public, magnet, charter or private schools Regional Vo-Tech Schools Due to fiscal exigencies, institute a freeze in enrollment at current levels for FY04 Educational Cost Sharing To restrain growth but maintain equalized distribution: (a) keep ECS Cap in place but continue $50M subsidy for capped towns, (b) eliminate Density Supplement (c) institute 3% reduction in each towns grant for the biennium and (d) calculate ECS grant only once for the biennium These measures will save $170M over the biennium The proposed $1.488B for ECS, although a $27M reduction from current year, is up $100M from FY 01 level

50 Education: Developing the Next Generation Special Education Changes Under current law, the threshold for state funding of per pupil costs would go from 5x to 4.5x costing $37.3M over the biennium. The proposed budget maintains the current eligible costs over 5x the average per pupil cost funding level and caps the grant at FY03 level Holding Other Grants to Level Funding Because of the States fiscal condition, level funding is proposed for Public and Non-public School Transportation, Adult Education and Health and Welfare Services grants RESC Subsidies Reduce current operating subsidy grant by $1M and lease grant by $300K

51 Education: Developing the Next Generation Restructuring Higher Education The proposed budget recommends creation of a new governing entity the Board of Regents for Higher Education

52 Education: Developing the Next Generation Higher Education Block Grants Governor Rowland has always considered higher education to be a key component in growing the economy and attracting new employers Under the Governor, from FY95-FY03, education block grants increased more than a third for UConn and CSU and almost 50% at the CTCs The proposed budget fully funds the states portion of all new facility costs at each unit Because of fiscal constraints, the units will get 1/2 of the gross increase in the Current Service level for annualization and new wage increases, less the amount estimated for unsettled collective bargaining contracts The units can cover these reductions through concessions from bargaining units or implementation of announced layoffs Despite these cutbacks, block grants increase by about $3M across all units in FY 04 and by an additional $7M in FY 05; without the CSU/CTC merger, block grants would have increased $14M in FY 04 and an additional $18M in FY 05

53 Education: Developing the Next Generation Eliminating NEBHE Funding Encourages New England states to join a compact to provide benefits similar to the NEHBE sponsored program that allows students to enroll (at reduced rates) in NE colleges with programs not offered in state Matching Grants Proposes to defer bond authorization for endowment fund-raising match during the biennium Tuition Aid

54 Education: Developing the Next Generation 21 st Century UConn Continues The Governor is committed to maintaining UConn as one of the best research institutions in the nation and attracting academically gifted students who will become future leaders in the state The Governor proposes no changes to his program that allocates $1.3B to capital improvements at the Storrs, regional and Health Center campuses Renewed Commitments to CSU and the CTCs Since the Governor took office through FY07, capital funding for CSU is $843M and for the CTCs it is $708M For this biennium, capital funding for CSU has increased some $17M and for the CTCs about $30M

55 Maintaining a Commitment to the Development of Nursing Home Alternatives For the past 8 years, Governor Rowland has championed the enhancement of long-term care alternatives in the community The Governor proposes to fully fund Home Care expansion, assisted living in congregate and HUD facilities, and 276 freestanding assisted living units

56 Putting Reins on the Human Services Safety Net Health Care Costs Skyrocketing There is not one single driver of health care costs today, complicating cost containment strategies State government is more vulnerable than the private sector because of the richness of its employee plan and the Medicaid benefit, as well as the acuity of clients served Burgeoning Eligibility Rolls Increases due to economic recession Legislature expanded eligibility in the 90s

57 Putting Reins on the Human Services Safety Net Governor Rowland is recommending a series of changes to the states entitlements: Repeal of Certain Entitlements Removal of Certain Eligibility Groups from the Benefit Rolls Reductions in Benefit Levels for Remaining Recipients New or Increased Cost-Sharing for Recipients Competitive Bidding and Provider Reimbursement Reductions

58 Putting Reins on the Human Services Safety Net Joining many other states that have closed their General Assistance programs, the Governor proposes to eliminate cash and medical assistance under SAGA to approximately 25,000 individuals.

59 Putting Reins on the Human Services Safety Net Medicaid is expected to grow 17% from $2.7B in FY 03 to $3.17B in FY 05 if no changes are made. To cut costs, the Governor is proposing to Eliminate Medical Coverage for 27,000 HUSKY Adults with income between 100-150% of FPL with an anticipated savings of $54.9M in FY 04 and $65.9M in FY 05 (Accomplished in legislative deficit mitigation bill) Eliminate Other Optional Medical Coverage in Medicaid affecting approximately 7,000 individuals will have an anticipated savings of $7.2M in FY 04 and $12M in FY 05 (Partially accomplished in legislative deficit mitigation bill) Presumptive Eligibility Guaranteed Eligibility Continuous Eligibility

60 Putting Reins on the Human Services Safety Net Reductions in Benefit Levels and Increased Cost-Shares Restructure Benefits in Medicaid managed care and FFS Benefits will more closely resemble commercial coverage Institute Premium and other cost-sharing Will save $6.5M in FY 04 and $15M in FY 05 Small Employer Health Insurance Subsidy Program Establish a capped, non-entitlement program for 3-5,000 enrollees under 300% FPL. Budget includes $1.8M in FY 04 and $3.6 M in FY 05 to implement. Medicaid Co-Pays Impose Co-payments to the extent permitted by federal law on doctor visits, outpatient services and pharmacy. Will save $11.1M in FY 04 and $11.7M in FY 05 (Accomplished in legislative deficit mitigation bill)

61 Putting Reins on the Human Services Safety Net Changes to HUSKY B Program Increase HUSKY B Premiums $30 per child for income between 185-235% FPL $50 per child for income between 236-300% FPL Suspend HUSKY B Enrollment Restructure HUSKY B Benefits Benefits will more closely resemble commercial coverage These measures will save $4.6M in FY 04 and $10.78M in FY 05

62 Putting Reins on the Human Services Safety Net Pharmacy Changes The state has already enacted cost- cutting measures across Medicaid and ConnPACE. To further curtail the high cost of prescription drugs, the Governor is proposing to Reduce the dispensing fee from $3.85 to $3.50 (Partially accomplished in legislative deficit mitigation plan) Reduce the AWP reimbursement from 12% to 13.5% Phase-in implementation of a preferred drug list for certain drugs; limited to PPIs in FY 04 Maximize dosage efficiencies

63 Putting Reins on the Human Services Safety Net Additional changes to the ConnPACE program Increase the co-pay from $12 to $15 (Accomplished through legislative deficit mitigation plan actually goes to $16.25) Institute an asset test of $50K for singles and $75K for married Limit the quantity dispensed to a 30-day supply Suspend the COLA used in determining income eligibility

64 Putting Reins on the Human Services Safety Net Medical Provider and Private Provider Rate Increases While rate increases are limited because of the fiscal exigencies, some increases are budgeted for in the first year of the biennium

65 Putting Reins on the Human Services Safety Net Continue to support TFA families, but make the following changes: Limit the number of TFA extensions from 3 to 2 creates savings of $2.3M in FY 04 and $5.7M in FY 05 (Accomplished through legislative deficit mitigation plan) Modify TFA child care eligibility from 75% of state median income to 55%. Savings are $1.2M in FY 04 and $1.1M in FY 05 (Partially accomplished through legislative deficit mitigation plan) Revise methodology for child support pass through to maximize revenue for $6.75M in FY 04 and $9M in FY 05 Defer COLA for TFA and AABD to save $3.6M in FY 04 and $7.7M in FY 05 Eliminate AABD pass through for a savings of $500K annually (Accomplished through legislative deficit mitigation plan) Discontinue cash, medical and state food stamp assistance for legal aliens to save $1.3M in FY 04 and $1M in FY 05 Eliminate Safety Net Services, but preserve T-RAP

66 Putting Reins on the Human Services Safety Net Improving Dental Services for Children on Medicaid Implement a carve-out dental program funded by elimination of adult dental services ($10M) and transfer of an additional undetermined amount from managed care Procure a dental benefits manager to coordinate all coverage Develop a hybrid system of community dentists and new innovative community-based programs to increase access and oral health education Major Changes in DPH $15M, to bring to a total of $20M, in bonding for a state-of-the-art Public Health Laboratory Eliminate general fund support for immunizations and assess insurers for the cost of vaccines

67 Putting Reins on the Human Services Safety Net Initiatives in DMR Make Birth to Three a non- entitlement program which could result in capping enrollment, reduction in benefits, and/or means testing and cost sharing $5M in FY 04 and $7M in FY 05 for new placements, including new high school graduates, age-outs from DCF, and emergency placements

68 Investing in Behavioral Health KidCare. The first phase has been initiated over the past year with 14 Emergency Mobile Crisis teams and 60 Care Coordinators statewide. About $13.3M will have been expended in FY 03; that will rise to $14.4M in FY 04for these new programs DCF, DMHAS and DSS are implementing an integrated system for financing and delivering public behavioral health services and programs for children and adults

69 Investment in Child Protection and Welfare DCF budget has increased from $256.3M in FY 95 to a proposed appropriation of $609.4M in FY 05, an increase of $353M or 138%. DCF will increase $41M in the biennium In 2002, 1,103 children in need were placed in permanent homes, an increase of 655% from 1996 Covenant to Care Funding is continued for the Covenant to Care program which works as liaison between church groups and social workers Closing Long Lane School The facility will close in the Spring of 2003 and services will be outsourced in order to provide a high level of care together with cost savings DCF is negotiating with private providers to develop appropriate services for this population

70 Ending the Gridlock Transportation Strategy Board (TSB) The proposed budget carries forward $6.3M to continue ongoing initiatives initially funded by the TSB that include Extension of Shore Line East to Serve Bridgeport/Stamford Expanding bus service to/from train stations Enhancing commuter busses in Fairfield County Expanding express bus service into downtown Hartford Continuing funding for Tweed-New Haven Airport The budget also includes $13M in bonding for 1300 train station parking slots in New Haven and Bridgeport and $1M for highway improvements in the Coastal Corridor Bus and Rail Fare Increases Bus transit fares will rise by 25 cents on January 1, 2004; rail fares will rise by about 15% in October 2003. Transit users are only being asked to pay their fair share of the operating costs; by FY05 state rail subsidy will be $73.5M and the bus subsidy will be $76.1M

71 Protecting the Homeland and Ensuring Public Safety The proposed bond package includes $3M to equip Connecticuts new Urban Search and Rescue (USaR), $88K in capital equipment to purchase personal protective equipment for troopers and $500K in federal Byrne money to provide training to USaR team and fund Statewide Anti-terrorism Task Force An additional $1.1M in the bond package would be for the Military Department to purchase a mobile command post and related equipment $10M for the purchase of a 100 bed mobile and surge hospital along with 65 HEPA filtrated isolation rooms in emergency rooms across the state A total of $20M for the development of a new Public Health lab with a Level 3 capacity $75K to DPH to outfit, train and equip the Disaster Medical Assistance Team. (DMAT)

72 Other Public Safety Changes DPS Suspending scheduled trooper training classes through FY 04 and perhaps through FY 05 Suspending the 1248 Trooper mandate through December 31, 2005 Number of troopers will remain above level of several years ago DOC In order to manage the growing prison population, Governor Rowland proposes enabling legislation to send an additional 1,000 inmates out of state in order to save $1.6M of direct inmate costs in the first year and $9.2M in the second year of the biennium This will temporarily, or even permanently, postpone the need for prison expansion at Somers

73 Agency Consolidation and Downsizing Closures as a Result of Layoffs Without concession savings, the Governor had to resort to layoffs to save money and close the deficit. Office closures as a result will impact clients and taxpayers alike. In the case of DSS, DOL and DMV, offices chosen for closure were either small or were located close to another agency office.

74 Agency Consolidation and Downsizing Because of layoffs in DEP, numerous parks are targeted for reduced hours or will be changed to walk-in parks which do not accommodate vehicular traffic or provide staff

75 Agency Consolidation and Downsizing While some downsizing was a result of the lack of labor concessions, Governor Rowland is also proposing consolidations and downsizing to reduce duplication of services and inefficiency In addition, Governor Rowland is proposing closing down all legislative commissions

76 General Government Changes and Efficiencies From FY 95 to FY 03, Legislative Managements budget has increased 57% Now they want ANOTHER 20% over the biennium The Governor cannot adjust the budget submitted to him by the legislative branch, but he CAN recommend lapses for the branch

77 General Government Changes and Efficiencies Recommended lapses for the legislative branch Eliminate new positions asked for by Legislative Management Eliminate the Industrial Renewal Plan appropriation Eliminate CTN coverage Annualize all rescissions the Governor made at Legislative Management Total reductions are $7.3M in FY 04 and $9.3M in FY 05

78 Agency Consolidations and Downsizing The Department of Higher Education, the Chancellors Offices of the State University System, and the community colleges will be merged into a new Board of Regents for Higher Education The Commission on the Arts, the Film Commission, the Historical Commission, and the Office of Tourism are being merged into the new Commission on Arts, Culture and Tourism The Department of Agriculture and the Regional Market Fund will be merged into the Department of Consumer Protection and Agriculture The Boards of Parole and Pardons are being merged into the Department of Correction The Office of Workforce Competitiveness will be merged into the Department of Economic and Community Development BESB is being split up between DSS and SDE in anticipation of more efficient administration and improved client services. CDHI is merged into DSS The Elections Enforcement Commission, the Ethics Commission and the Freedom of Information Commission are being merged into the new Commission on Fair and Open Government The business offices of the Connecticut Siting Council and DPUC are being merged

79 General Government Changes and Efficiencies Changes at DMV Eliminate the requirement to establish a vision-screening program, saving $1.1M annually Eliminate the requirement that DMV collect social security numbers prior to issuing registration to save $600K annually Repeal the statutory requirement that DMV enforce delinquent property taxes and parking tickets to save $250K annually Teachers Retirement Board Changes Fund retirement contributions for the Teachers Retirement Board for FY 04 and FY 05 at the FY 03 level. The state will fund approximately 68.5% of the certified amount for FY 04 and 65.9% of the certified amount for FY 05 Increase the active teachers contributions to the Retired Teacher Health Insurance Premium account from 1% to 1.25% effective July 1, 2004 Increase the states share and the retirees shares for the Boards health insurance plan from 25% to 1/3 rd the estimated cost of the plan effective July 1, 2005 Increase the states share of the municipal health insurance subsidy from 25% to 1/3 rd of the $110 subsidy effective July 1, 2005

80 General Government Changes and Efficiencies Relocate Elected Officials from 55 Elm Street to 20 Church Street 20 Church Street provides more square feet, better parking, and the ability for the AG to consolidate approximately 103 positions from Sherman Street into one building Purchase of 20 Church Street is far wiser than leasing 55 Elm Street and will save $45M over 20 years

81 Sizing Government To Fit The Times Under Governor Rowland, unionized state workers have received wage increases on average of 43%

82 Sizing Government To Fit The Times Fringe benefits are among the best in Connecticut and the nation Drug co-pays are either $3 generic or $6 brand for a 90-day supply of medication Compared to the plan by legislative Democrats to increase ConnPACE elderly drug program co-pay from $12 to $16.25, much less than the co- pays of private sector drug plans State employees also have a defined pension benefit plan that gives them, on average, between 1.3% and 2% for each year they worked In FY 00, health and retirement contributions in all funds were $814M compared to this fiscal year of $1.07B, an increase of $257M in three years Estimates suggest that in the next two years costs in all funds will increase another $339M Since FY 95 general fund fringe benefit costs have increased 89% through this fiscal year and are estimated at 144% through FY 05

83 Sizing Government To Fit The Times Administrations labor offers The administration has been flexible in its concession requests from the union including developing a plan that would have brought back every state employee and offered unprecedented job protection through December 31, 2006

84 Sizing Government To Fit The Times Retired Teachers, not on municipal plans, pay 25% of the cost of their Medicare Supplement policy plus deductibles and between 15% and 35% of each drugs cost In comparison, state retirees and employees receive medical coverage for themselves and dependents at no cost to them and the drug co-pay is $3 or $6 for up to a 90 day supply. The proposed change would increase the co- pay to $5 and $10 for a months supply (double for a 90-day supply)

85 Sizing Government To Fit The Times Layoffs Due to the lack of reasonable concessions agreed to by the SEBAC coalition, Governor Rowland was compelled to resort to layoffs The FY03 budget was passed with $94M in targeted general fund savings to come from state employee concessions. In order to realize any cost savings in this fiscal year, layoffs were needed when labor concessions were not successful In the development of the FY 03-05 budget, it was clear labor concessions are needed to help close the budget gap, especially because labor costs represent almost 1/3 of total spending A total of 3006 employees have been issued layoff notices most of whom have separated from state service General and transportation fund savings is about $140M in year one and $160M in year two. General fund savings in the current fiscal year will be $23M

86 Sizing Government To Fit The Times Early Retirement Incentive Plan (Accomplished in legislative deficit mitigation plan) In addition to layoff savings, an ERIP with a window from March 1, 2003 through June 1, 2003 will effect savings The ERIP will provide three chips to be used for age or service, or a combination of the two All employees 52 or older with at least 10 years service or hazardous duty employees with at least twenty years service will be eligible Payments for accrued leave will occur over a three-year period starting July 1, 2005 Over 10,500 employees will be eligible for the incentive and it is anticipated approximately 4,300 will take advantage of it A targeted ERIP is proposed for the FY 05-07 budget, giving the administration the ability to offer early retirement to individuals in certain agencies, programs, or classifications to reduce cost in out years Total savings in the GF and STF resulting from ERIP is $22.7M in FY 03, $164.4M in FY04 and $150.5M in FY 05

87 Sizing Government To Fit The Times Total work force reduction and savings Layoffs and ERIP together will reduce the states work force by at least 4,544 after some refills of positions throughout the biennium The total saving from the two work force reductions is $304M in FY 04 and $310.8M in FY 05 in the GF and STF This package of layoffs and ERIP is roughly equivalent to the general and transportation fund savings that were requested by labor givebacks. This is a real ongoing savings without inhibiting the states ability to manage its business

88 Sizing Government To Fit The Times Other potential work force reductions The administration will continue to look for opportunities that can save money beyond the net savings assumptions for the ERIP ERIP provides opportunities to reduce the scope of public sector services and transfer the responsibility to the private sector without staff layoffs. As a result, taxpayers would benefit from lower overall costs Portions of the savings could also be invested to close the private and public sector wage disparity as well as reduce the DMR waiting list The budget includes less than 200 of the additional 1,000 layoffs that the Governor announced. Since an ERIP has been passed, there is a strong likelihood that the balance of these further layoffs will not have to be carried out if the plan can be implemented in a timely fashion

89 Sizing Government To Fit The Times All monies for unsettled contracts from FY 03-05 are removed in this budget

90 The Capital Budget Given the uncertain times, prudence dictates that the capital program and debt issuance be scaled back significantly Governor Rowland has put a moratorium on discretionary bond projects For the foreseeable future, only school construction, higher education, transportation and emergency needs will be bonded Long-term GO state debt continues to increase over $600M on average per year, much of which is driven by the school construction conversion

91 The Capital Budget Debt service as a percentage of general and transportation fund expenditures is expected to leap from 10.8% in FY 03 to 12.2% in FY 04 and 12.8% in FY 05 The actual amount of General Fund debt service will increase next fiscal year by $203M and another $159M in FY 05 About $50M of the increase in each year is due to payments for the five-year notes to retire the FY 02 deficit

92 The Capital Budget New net general obligation authorizations for FY 04, including the UConn 2000 program already in law, are $900M In FY 05, net new authorizations, including UConn 2000, will be $1.05B Net new authorizations in the Special Transportation Fund will be $242.2M in FY 04 and $195M in FY 05

93 The Capital Budget School construction authorizations for FY 04 will be $488M and $623M in FY 05 That is between 50% and 60% of all bond authorizations each year In the mid 90s, authorizations were between $73M and $130M annually Total education-related authorizations are $843M or 94% of total net authorizations in FY 04 and $891M or 85% of total net authorizations in FY 05

94 The Capital Budget Already Enacted School Construction Changes The latest priority school list is capped at $1B for Dec 03 & Dec 04 Effective for the Dec 03 list, communities must gain local approval before any project is submitted for inclusion on the priority list Reimbursement was lowered from 100% to 95% for the construction of Vo-Ag centers, Regional Special Ed facilities, and Interdistrict Magnet schools Proposed School Construction Changes Reduce the Dec 01 list ($1.7B) and move $400M to the Dec 02 list Reduce the Dec 02 list ($1B) to $600M, plus the $400M from the Dec 01 list Limit the Dec 03 list to $600M in new projects, plus the $400M from Dec 02 list Cap the Dec 04 and Dec 05 lists at $600M Cap future lists at $800M State reimbursement for new (not delayed) projects on the Dec 03-05 lists will be 10 percentage points below current levels, changing the scale from 20-80% to 10- 70% for three years. Thereafter, reimbursement will return to current levels Delay the start dates of some Vo-Tech school construction projects to the second year of the biennium

95 The Capital Budget The Governor is proposing some major cancellations, including $132M in the urban act in FY 04 on top of $154M reduced in FY 03, leaving $60M for projects $20M in the Manufacturing Assistance Act, leaving $50M for projects $100M in Clean Water GO bond authorizations, leaving $25M to match $100M in revenue bonds About $10M in open space preservation funding Other projects in the bond package include $20M for the core financial system in FY 05 $30M for LoCIP in FY 04 and again in FY 05 $10M for affordable housing in FY 04 $25M in FY 05 for Clean Water GO bonds $7M over the biennium for UConn Law School building repair $10M annually for prison infrastructure $19M for acquisition of 20 Church Street

96 Municipal Aid From legislative deficit mitigation plan, municipal aid is projected to be reduced in FY 04 by about $50 million, or 2 percent. Aid would increase by $13 million in FY 05

97 Municipal Aid Important to remember that many communities have significant undesignated fund balances while the state has completely depleted its $600M Rainy Day Fund

98 Municipal Aid PILOT Payments Both State Owned Property and Private Tax Exempt PILOT Programs will be funded in FY 04 and FY 05 at the FY 03 funding levels of $65M and $100.9M, respectively Full funding the State Owned Property PILOT would have cost $69.9M in FY 04 and $87.4M in FY 05 Full funding the Private Tax Exempt Property would have cost $104.5M in FY 04 and $125.2M in FY 05 Pequot Aid $6.71M was reduced utilizing the Governors extraordinary rescission authority this fiscal year HB 6495 provides for an additional cut of $21.5M this fiscal year. This program would be funded at $106M this year Funding for this grant is proposed at $85M per year for both FY 04 and FY 05

99 Municipal Aid Manufacturing PILOT Program began in FY 92 as a modest $15.8M program designed to facilitate the conversion of defense contracting manufacturers Has been expanded over the years to include a number of activities and types of equipment not traditionally associated with manufacturing Governor Rowland proposes to remove the following activities and types of equipment from the program Video and sound recordings and machinery and equipment used in direct or indirect mail distribution effective immediately Commercial trucks, including trucks for hire immediately Governor Rowland proposes to reduce the town reimbursement from 80% to 65%. Businesses that continue in the program cannot be charged any tax by towns during eligibility period Funding drops by about $11 million over the beinnium

100 Municipal Aid Eliminate Property Tax Exemption for the Disabled Removes the exemption for totally disabled persons for which the state currently pays $419K. Most totally disabled persons receive benefits under other state reimbursement programs Eliminate Non-Income Qualified Veterans from the Additional Veterans Exemption The non-means tested portion of the veterans reimbursement program would be eliminated at a savings of $5.9M. Although not reimbursed by the state, towns would be obligated to continue offering this additional exemption to about 185,000 veterans Reimbursement for 22,000 low-income veterans would continue

101 Municipal Aid Significant collective bargaining relief In order to offset aid reductions Governor Rowland is proposing significant mandate relief to municipalities The Governor is sponsoring a bill that allows municipalities to bow out of collective bargaining and arbitration for any unsettled contract for up to three years The legislative body of the town would have to approve a resolution notifying a union with an open contract that it desires to keep the contract language, including wage levels and benefits status quo for anywhere from one to three years The Governor is proposing a similarly worded state statute that allows the state employer as defined by statute to notify collective bargaining units of a desire to keep wages and benefits status quo for up to three years This proposal would provide relief of greater value than the total reductions in state aid to municipalities

102 Municipal Aid Even with the biennial budget changes, municipal aid will have grown by $585M (or 38%) over the last decade While state spending has grown 43% during the same period, much of that funding has gone to high growth entitlement programs for which municipalities are no longer responsible

103 Conclusion No one will like this budget proposal It relies heavily on tax increases and spending cuts It negatively impacts the lives of tens of thousands of residents But what are the alternatives? Are there any? Are they realistic? Twin pillars of revenue gap and spending cap frame the challenge Must abide by the spending cap spending cuts must occur Revenue gap exists tax increases must occur This budget seeks to balance spending cuts with tax increases Like the bullish stock market over the last several years, budget surpluses gave policy makers the ability to be all things to all people And like the bullish stock market.that too has come to an end

104 Any Questions?

105 For More Information This is the link to the Biennial Budget Homepage: http://www.opm.state.ct.us/budget/2004-2005BudgetBooks/GovBudget.htm Governor Rowlands 2003-05 Biennial Budget The Economic Report of the Governor 3 Year Forecast Midterm Budget PowerPoint Presentation

106 Index (Final 2003-2005) Back to Basics..2 The Economic Outlook16 Liquidating the FY 02-03 Deficit..17 The 2003-05 Budget24 Tax Changes and Revenue Enhancements..29 Education.47 Nursing Home Alternatives.55 Human Services Safety Net.56 Investments in Behavioral Health..68 Child Protection & Welfare....69 Ending the Gridlock70 Homeland Security and Public Safety..71 Agency Consolidation and Downsizing.73 General Government..76 Sizing Government to Fit The Times..81 The Capital Budget.90 Municipal Aid.96 Conclusion....103

governor rowland’s budget proposal fy 2003-2005 biennium march 4, 2003

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