Connecticut Gov. Malloy Seeks to Cut Aid to Cities, Towns

By Joseph De Avila Features Dow Jones Newswires

Connecticut Gov. Dannel Malloy has a plan for how to make up for the state's gaping budget deficit: cut funds from cities and towns.

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Mr. Malloy said Monday he wants to slash more than $700 million in town aid to help make up for an income-tax revenue shortfall. His original budget released in February forecast a deficit of $3.6 billion over the next two fiscal years. But budget officials said last week the two-year figure has now ballooned to $5.1 billion.

"Make no mistake, this is a challenging budget that contains many difficult decisions, several of which we wish we didn't have to make," Mr. Malloy said. "But the truth is the new economic reality demands this of us."

In addition to cutting funding to cities and towns, the governor's latest budget also raises $80 million largely from eliminating a sales-tax exemption on nonprescription drugs and raising taxes on home sales valued at more than $800,000. Mr. Malloy's budget doesn't increase income-tax rates.

Moody's Investors Service downgraded Connecticut's debt rating Monday from A1 from Aa3, citing the state's growing budget hole and rising debt levels. Fitch Ratings Inc. also downgraded the state's rating Friday.

"This underscores the severity of the economic crisis our state is facing," said Senate Republican President Pro Tempore Len Fasano, in response to the downgrades. "It also makes it clear that any budget moving forward cannot look like the budgets of past years. There needs to be a bipartisan effort to pursue significant long-term structural changes."

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The governor's latest budget again asks the Connecticut municipalities to help shoulder the burden of expenses typically picked up by the state, but he changed the terms. Originally the governor wanted to shift one-third of the state's annual teacher pension costs from the state to towns and cities. In the latest proposal, he caps that figure at $400 million annually and spares the municipalities from growing obligations as pension outlays increase in the future.

"The proposed budget is a disaster for small towns and our property taxpayers," said Elizabeth Gara, executive director of the Connecticut Council of Small Towns.

Ms. Gara said Mr. Malloy's budget amounted to a tax increase on Connecticut residents because towns will have to raise property taxes to make up for the shortfall in state aid and to chip in for teacher pensions.

Mr. Malloy said he believed cities and towns can handle receiving less from the state without resorting to property tax increases.

"They have to manage their budgets," said Mr. Malloy, a former mayor of Stamford, Conn.

The governor also is counting on public-sector unions agreeing to $700 million in unstated concessions. Otherwise the state may lay off thousands of public employees, he said.

Write to Joseph De Avila at joseph.deavila@wsj.com

(END) Dow Jones Newswires

May 15, 2017 17:27 ET (21:27 GMT)