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FY 2004-2005 Midterm Budget Adjustments

FY 2004-2005 Midterm Budget Adjustments Governor Rowland’s Budget Proposal Celebrating 150 Years of Bushnell Park, 1854-2004 February 4, 2004 Photograph of 1876 Painting of Park River, unknown painter Budgeting In These Precarious Times

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FY 2004-2005 Midterm Budget Adjustments

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  1. FY 2004-2005 Midterm Budget Adjustments Governor Rowland’s Budget Proposal Celebrating 150 Years of Bushnell Park, 1854-2004 February 4, 2004 Photograph of 1876 Painting of Park River, unknown painter

  2. Budgeting In These Precarious Times • State & national economies are on the mend; stock market is rebounding and state revenues are rising • Tough decisions of the past two budget cycles mean the budget is beginning to return to balance • While economic and budget prospects are looking up, the 2004 session should not be seen as an opportunity to shift course • Lawmakers should approach 2004 with caution • FY 2004-05 budget is in deficit • Concentrate on closing the shortfall, build on balanced approach of last few years • Resist the temptation to make wholesale changes • The economy is currently burdened by a billion dollar increase • Be wary of additional taxes that will undermine the nascent recovery • Stay well within the constitutional spending cap

  3. Budgeting In These Precarious Times • FY 2001-02, the state had to bond about $220 million to extinguish its deficit • In FY 2002-03, the state will have bonded approximately $125 million; $100 million for the deficit and another $25 million in lag claims for the old State Administered General Assistance Program

  4. Budgeting In These Precarious Times • Stock market registered losses in 2000, 2001 and 2002 • Stock market registered a growth year in 2003 • Dow growing 25 percent; S&P 500 up 26 percent; Nasdaq up 51 percent • State revenues are slowly turning around

  5. Budgeting In These Precarious Times • FY 2001-02, the economic growth of all General Fund revenues were down 7.5 percent after growing over 7 percent the previous year • FY 2002-03, tax increases meant more revenue yet • Economic growth rates for most taxes were still falling • General Fund revenues grew a paltry 0.2 percent • FY 2003-04 General Fund revenues are expected to grow 2.4 percent. • Withholding is expected to rebound to 4 percent • Sales taxes are expected to grow 3 percent • Estimates and finals should grow 1 percent

  6. Budgeting In These Precarious Times • The spending cap – the taxpayers’ savior • FY 1990-91, the budget deficit was almost $1 billion, 14.5 percent • FY 2001-02, the registered gross deficit was over $800 million and as a percentage was less than half the FY 1990-01 percentage • The spending cap ensures a better budgetary position going into the recession • Prior to the adoption of the cap, FY 1987-88 through FY 1990-91 growth was almost 11 percent annually • Over the last 9 years, growth has been 4.4 percent • Governor Rowland remains steadfast in his commitment to defend the spending cap and the current statutory definitions • No good would come of tampering with the success of the spending cap

  7. Budgeting In These Precarious Times • Adopted FY 2004-05 budget closed structural gap closed: • About $850 million in tax increases • Net $1.65 billion in spending reductions, including about $300 million in layoff & early retirement savings • About $400 million in one-time revenues & other revenue enhancements • A $1 billion spending cap problem

  8. Budgeting In These Precarious Times • Be wary of further permanent tax increases • During the last two sessions, taxes have been raised on a permanent basis in excess of $900 million • The original 4.5 percent income tax has been raised to 5 percent, an increase to taxpayers of $446 million annually • Property tax credit has dropped from $500 to $350 and was eliminated for upper-income taxpayers, costing $112 million • Sales tax increases-clothing exemption reduced from $75 to $50

  9. Budgeting In These Precarious Times • Lawmakers should be wary of increasing taxes on businesses • Taxes for businesses have been increased over $100 million permanently in recent years • In 2002, tax credits were capped at 70 percent of pre-tax credit liability, costing businesses $30 million • Minimum levy of $250 was placed on S-corporations & LLCs at a cost of $28 million • Over 1,000 companies will pay about $30 million more because of the increase for combined reporting from $25,000 to $250,000 • Tightening the use of interest deductions will cost businesses $10 million • Businesses paying major surcharges for income years 2003 and 2004 -- costing them $150 million temporarily

  10. Budgeting In These Precarious Times • Bond raters watching Connecticut at this critical time • We must approach the adjusted budget cautiously • Moody’s has lowered the state’s rating • S&P and Fitch have held the AA rating • A lower bond rating would increase our debt costs considerably • Debt service is scheduled to increase dramatically to pay the deficit notes issued for FY 2001-02 as well as FY 2002-03 • Bond rating agencies review the adjusted budget • Are the revenue estimates reliable & conservative? • Moderate approach to spending growth? • Adherence to the spending cap? • Do one-time revenues and other fixes increase dramatically as a percentage of the budget?

  11. Liquidating the FY 2003-04 Deficit • Deficit currently projected at $41.1 million • Spending expected to be about $78 million higher • Department of Social Services, net deficiency of $30.33 million - lapse in the child care account and deficiencies in the Medicaid, SAGA and ConnPACE accounts • Department of Children and Families, deficiency of $20 million – due to staffing mandates of the consent decree and greater than anticipated caseloads • Eight other agencies – minor deficiencies totaling $16 million • ERIP saving less than predicted – General Fund $18.8 million less than the $153 million projected • Surplus adjustments cause a shortfall of $5.2 million • Governor implemented $12 million in rescissions in December

  12. Liquidating the FY 2003-04 Deficit • Appropriating the deficiency – permissible only if revenue is available • Revenue increases and proposed revenue increases will bring budget into balance by year’s end • $66 million in spending needs proposed to be appropriated • Room remains under the spending cap in FY 2004-05 to pay for the overruns • Revenues in the General Fund are up over the original budgeted estimate by about $37 million • Offsets part of excess expenditures • Corporate taxes estimated $83 million under budgeted amount • Income tax estimated $124 million over budgeted amount • All other revenues down a net of $4.3 million

  13. Liquidating the FY 2003-04 Deficit • Deficit mitigation plan • Implementing on April 1 increases in cigarette tax, other tobacco products, and alcohol tax to raise $35.4 million • Implementing on April 1 proposed bottle escheat program to raise $4.5 million • Retaining $2 million still scheduled to be deposited in the Biomedical Research Trust Fund • Appropriating in FY 2003-04 $11.7 million in TANF High Performance Bonus money and the $20 million originally intercepted for tourism, arts and culture – no net impact on the deficit or CATCH-F funding • Adopting Governor’s plan will mean extinguishing the deficit and depositing $800,000 in Rainy Day Fund

  14. The Economic Outlook • This recession was one of the mildest in recent memory • GDP and GSP, personal income and absolute number of jobs lost were better off statistically than in past recessions • Historic low interest rates and refinancings made up for lost disposable income • This recession is one of the longest in recent memory • While job losses were only a third of those lost in the 1990s, the recovery of jobs has consistently lagged behind economists’ predictions • Businesses have used high productivity as a hedge against external forces and continuing economic uncertainty • Since July 2003, only 2,600 jobs have been added in the state

  15. The Economic Outlook • What does the future hold? • A number of business and consumer measures demonstrate that job creation should be on its way • Supply Management Index is now is the high 60s • Index of Leading Indicators is charging • Even the Consumer Confidence Index is heading upward • Economist cautiously predict a stable recovery • Will not see the vigorous growth rates as in the mid-to-late 1990s • Economic growth will peak in FY 2003-04 and FY 2004-05 • More moderate growth in FY 2005-06 and FY 2006-07

  16. The Economic Outlook • National Outlook - Real GDP will hit 4.4 percent in FY 2003-04 and then drop into the 3 percent plus range - Personal income growth will grow and hit 6 percent in FY 2006-07 - Unemployment rate will not change in foreseeable future - However, consumer confidence could show some anxiety due to the fact that many have already refinanced their homes and maxed out their credit cards • Connecticut’s Outlook - Growth will be more moderate than the nation’s - State recovery usually lags the nation’s by up to six months - Growth in Gross State Product will be more sluggish than the nation in FY 2004-05, slightly better than the nation’s in FY 2005-06 and FY 2006-07 - Personal income growth will be lower than the nation’s – this will limit growth in income and sales tax receipts

  17. The FY 2004-05 Adjusted Budget • The enacted FY 2004-05 budget called for spending of $12.967 billion in the General Fund and $14.056 billion in all funds. It was $119.2 million below the spending cap • The adjusted General Fund budget Governor Rowland is recommending is $13.154 billion and $14.235 billion in all funds. It is projected to be under the spending cap by $58.6 million

  18. The FY 2004-05 Adjusted Budget • All funds growth, adjusted for the CATCH-F rebasing and the one-time expenditures in FY 2003-04, will be 4.6 percent, or 3.2 percent in real terms • Based on the same adjustments as above, General Fund growth from the current fiscal year would be 4.8 percent, or 3.4 percent in real terms

  19. The FY 2004-05 Adjusted Budget • On the spending side, the General Fund adjusted budget recommendation for FY 2004-05 makes several changes • Net technical adjustments added $94.1 million to the original budget • Reduction options removed $63.5 million from the originally adopted General Fund budget • Expansion options added $74.1 million to the originally adopted General Fund budget • The adjusted budget reflects the appropriation of $27.1 million for CATCH-F, which was originally budgeted as a $20 million revenue intercept • An addback of the $55 million extraordinary rescission lapse impacting municipal aid in the original adopted General Fund • All funds total spending increase from the adopted budget is $159 million adjusting for the CATCH-F $20 million revenue intercept • In total, General Fund spending is actually up a net of about $167 million adjusting for the CATCH-F $20 million revenue intercept

  20. The FY 2004-05 Adjusted Budget • On the revenue side, three major changes occurred • Net revenue estimates fell by $28.7 million. The corporate tax was revised downward, while the income tax was revised upward • Tax increases of $100.8 million limited to the sin tax areas • Delays in tax reductions, the escheats bottle proposal and all other net revenue increases account for $115 million • Actual adds to spending outweigh cuts • Actual tax increases and other revenue hikes exceed spending cuts almost 2 to 1 • The adjusted budget proposal has a budgetary balance of $500,000 and is just $58.6 million below the spending cap

  21. The FY 2004-05 Adjusted Budget • Prudent and realistic revenue forecasts are especially important in this budgetary climate. While the stock market is rebounding well from its recent lows, the uncertain future of job creation calls for caution in forecasting revenue growth • From an economic growth perspective, General Fund revenues will be up 4.4 percent in the coming fiscal year, from a 2.4 percent expected growth this fiscal year

  22. The FY 2004-05 Adjusted Budget • In total, the income tax is expected to generate $4.87 billion next fiscal year. This is up $75 million from the original budget estimate • On the withholding side, which represents about two-thirds of the income tax – the budget assumes a 5.5 percent increase – down from 6 percent in the original budget • As for the estimates and finals component of the income tax side, the budget projects a 5 percent increase, down from 8 percent in the original budget

  23. The FY 2004-05 Adjusted Budget • The Governor is proposing no tax increases in the area of the state’s second largest tax generator – the sales tax • In total, the sales tax is expected to generate $3.31 billion next fiscal year. This is up $36 million from the original budget estimate • The budget assumes an economic growth rate of 5.7 percent, up from 3.2 percent expected in the current fiscal year

  24. The FY 2004-05 Adjusted Budget • One-time revenues remain a concern • Given the magnitude of spending cuts and tax increases, eliminating the one-time revenues in the FY 2004-05 adopted budget was impractical • In FY 2003-04, the General Fund budget will include 4.6 percent of one-time revenues. • In FY 2004-05, despite tobacco securitization, one-time revenues will drop to 3.9 percent • One-time revenues that could continue amount to $130 million, which could drop one-time revenues to below 3 percent

  25. The FY 2004-05 Adjusted Budget • Tobacco securitization • Section 43 of PA 03-6 of the June 30 Special Session mandated that the State Treasurer and the Secretary of the OPM jointly develop a financing plan that would yield the state $300 million in general revenues for FY 2004-05. The Treasurer and OPM have begun an analysis of the options available. These options include • Securitization of a future revenue stream such as Tobacco Settlement revenues, lottery revenues, casino revenues, future tax receipts or unclaimed property receipts • Issuance of pension obligation bonds to reduce the state’s unfunded liability • Debt restructuring • Private placement of state debt or the tobacco revenue stream with the pension fund

  26. The FY 2004-05 Adjusted Budget • Tobacco securitization • Because of the uncertainty of this revenue stream over time, states or other jurisdictions that seek to sell tobacco bonds are required to pay a premium in the marketplace. • Typically, states only receive 30 and 40 percent of the value of the revenue stream and, more recently, have been required to dedicate other revenue streams as backing for the sale of the bonds should the payments from the tobacco settlement be reduced or eliminated • It is highly likely that the evidence of an improving economy that we are beginning to see will continue. If that is the case, it is probable that April tax collections will exceed our current estimates and the rollout of these collections into the next fiscal year will be significant • Governor Rowland strongly believes that these revenues, should they appear, ought to be directed to the task of restoring structural balance to the budget and avoiding the inevitable task of having to cut programs or raise taxes in the next biennium in order maintain this balance. • Accordingly, as part of his budget package, Governor Rowland is proposing legislation that would replace the current reliance upon $300 million of tobacco securitized revenue with any additional growth in our current revenue sources

  27. Tax Changes and Revenue Enhancements • Tax increases are deliberately not in areas that could damage today’s economic recovery • The income, sales and corporate taxes are not targeted because changes there could impact job creation, investment and consumer sentiment • Cigarette Tax • Increase by $.54 to $2.05 per pack to raise $32.8 million in current year and $93.7 million in FY 2004-05

  28. Tax Changes and Revenue Enhancements • Increasing Taxes on Other Tobacco Products • Increase tax on cigars and pipe and chewing tobacco from 20 percent to 30 percent of the wholesale price; snuff from 40 to 60 cents per ounce • Increase will raise $0.5 million in current year, $2.4 million FY 2004-05 • Increasing Alcohol Tax • Increase tax by 10 percent to raise $2.1 million in current year and $4.7 million in FY 2004-05

  29. Tax Changes and Revenue Enhancements • Delaying repeal of sales tax on newspapers/magazines • Adjusted budget proposes extending tax until July of 2005 to raise an additional $15 million in the next fiscal year • Total New Tax Increases • Proposed new taxes amount to just over $100 million - $94 million of that coming from the 54 cent per pack increase in the cigarette tax

  30. Tax Changes and Revenue Enhancements • Escheating Unclaimed Bottle Deposits • Unclaimed deposits would go to the state rather than distributors • Proposal would raise $4.5 million in current year; $20 million in FY 2004-05 • Streamlined Sales Tax Project • It is estimated that in FY 2003-04, Connecticut will lose some $280 million in sales taxes from internet and mail order transactions • Through a 2003 Executive Order, the Governor made Connecticut an active participant in the Streamlined Sales Tax Project • Model legislation to be passed this session with future implementation date • Change in Treatment of Non-Resident Partners/Members of Pass-Through Entities • Proposal is to capture income taxes currently going uncollected; it would generate an additional $8 million in collections in FY 2004-05

  31. Tax Changes and Revenue Enhancements • A Positive Tax Record • Notwithstanding recent tax increases, the Governor’s tenure is remarkable in terms of the depth and breadth of important tax decreases that total about $1 billion

  32. Tax Changes and Revenue Enhancements • A Positive Tax Record (cont.) • Lower marginal rate and property tax credit implemented for middle income families • Important sales tax exemptions to enhance manufacturers’ competitiveness • To fuel the economy and bring back jobs, the Governor has built a strong record on corporate tax reductions

  33. Education: Providing the Building Blocks of Success • Closing the Achievement Gap • Governor’s adjusted budget presents a strategy to assist schools designated as not making “Adequate Yearly Progress” under the federal No Child Left Behind program • The adjusted budget also assists pre-school children in those same districts to prepare them for success in school • Early Childhood Expansion • Cornerstone of program is to significantly expand full-day, full-year quality pre-school programs • Budget contains $14 million in new funding for 2,000 additional pre-school slots in the state’s Early Child Education program • For children already in school, an additional $1 million for expansion of Early Reading Success program in grades K – 3 and $1 million for summer school programs to help children become proficient students

  34. Education: Providing the Building Blocks of Success • School Improvement Grants • $75,000 will be targeted to each of the 16 schools designated as “in need of improvement” to help to improve academic performance, for a total of $1.2 million. State aid must be matched by $25,000 in local aid • Funding to Reduce Racial Isolation and Improve Urban Education • Magnet Schools: $5.9 million increase for FY 2004-05 to total $61.6 million • Charter Schools: $0.8 million increase for FY 2004-05 to total $17.8 million • OPEN Choice: $1.5 million increase for FY 2004-05 to total $10.6 million • Budget includes funding to satisfy the agreement reached in the Sheff v. O’Neill case

  35. Education: Providing the Building Blocks of Success • Expanding Choice • Provides $1.5 million for 500 Equal Opportunity Scholarships to non-public schools for students in 42 elementary and middle schools

  36. Education: Providing the Building Blocks of Success • Local Education Aid • Adjusted budget maintains municipal aid in adopted budget and increases it slightly for urban education programs • Governor Rowland eliminated the municipal aid rescission lapse to protect local school systems from mid-year aid cuts

  37. Education: Providing the Building Blocks of Success • Higher Education Operating Commitments • Original budget allowed flexibility in ERIP job refills and capped savings taken from block grants at 50 percent of total ERIP savings • Since 1995, the Governor has increased general and bond funding over $400 million (72 percent) to higher education’s constituent units

  38. Education: Providing the Building Blocks of Success • Higher Education Capital Funding • The Governor proposes no changes in the 21st Century UCONN program that commits $1.3 billion to the University and its regional campuses through FY 2014-15, including $300 million to refurbish the UCONN Health Center.

  39. Education: Providing the Building Blocks of Success • Higher Education Capital Funding (Cont.) • The General Assembly failed to pass a bond package for the CTCs and CSU for FY 2003-04 • Therefore, Governor Rowland is proposing a mini-bond package for February; the bulk of which will go to CSU and the CTCs for capital improvements • During the Governor’s tenure and through FY 2006-07, Capital funding for CSU is $849 million; for the CTCs it is $714 million • Important CTC consolidation projects include: • Three Rivers CTC - $75 million to consolidate at the Thames Valley campus • Housatonic CTC - $6 million to begin a $51 million expansion in Bridgeport • Capitol CTC - $6 million to purchase an additional 30,000 square feet

  40. Education: Providing the Building Blocks of Success • Total Education Commitments • In FY 2003-04, $862 million in higher and lower education bond authorizations are recommended or passed; in FY 2004-05 the recommendation is for $889 million

  41. Working Towards Real Choice for Long-Term Care • The Governor has implemented numerous initiatives to expand community options available to the elderly and disabled • Home care has more than doubled from 6,024 in 1994 to 13,580 in 2003 • The Governor has included a total of $190 million for alternatives to nursing homes in FY 2004-05

  42. Working Towards Real Choice for Long-Term Care • Expand Assisted Living Options • Increase Congregate Housing Units • $1.3 million to continue assisted living and other services in congregate housing • 95 units in Bridgeport, Danbury and New Haven over next 3 years • $2.5 million in new bond funds for a 50-person facility in Waterbury • Assisted living to be included in these units • Expand Assisted Living in HUD Complexes • $588,903 included to continue program • $50,000 in new funds for expanded enrollment, mainly in New Haven • Proposed development of 4th pilot for CHC clients • Continue Private Pay Pilot • Adjust Cap on Medicaid and State-Funded Pilots • Allow continued enrollment in both pilots up to 75 combined • Savings of $2.6 million assumed for FY 2004-05 • Freestanding Units • 219 of the 300 units should be coming on line in summer 2004 • $3 million included for rental subsidies and services in FY 2004-05 • Personal Care Assistance Waiver • $2.2 million in new funds are included in FY 2004-05 to expand enrollment from 498 to 700

  43. Working Towards Real Choice for Long-Term Care

  44. Offering Human Services, But Controlling Costs • The Governor’s budget does not unravel the recent changes to human services • Changes were necessary both to balance the budget and ensure the continuance of the safety net over the long term • Changes mirror strategies used in the private sector • Health care costs are still skyrocketing and account for 40-50 percent of state budget • Connecticut still offers some of the best services and programs to people in need • The Governor is making additional investments, especially in child care and DMR waiting list services

  45. Offering Human Services, But Controlling Costs

  46. Offering Human Services, But Controlling Costs • SAGA Changes • No changes to cash benefits • $8.5 million added to SAGA medical, primarily for pharmacy costs

  47. Offering Human Services, But Controlling Costs • Medicaid Restructuring • HIFA waiver to provide a range of plans tailored to the needs of various populations will save $5.6 million in FY 2005-05 • Broadest coverage would be similar to existing Medicaid benefits for LTC and special needs populations • Second band of coverage would be similar to that provided to children under HUSKY A • Commercial band provided for non-disabled, optional coverage groups in Medicaid and S-CHIP • The final band would be non-entitlement coverage for single adults similar to SAGA

  48. Offering Human Services, But Controlling Costs • Additional Medicaid Restructuring • Small Employer Health Insurance. As part of the HIFA waiver and restructuring concept, Governor Rowland has directed both DSS and OHCA to start the process of establishing a subsidy program as a way to improve access to health care while focusing on the need to reduce cost. The program would be a capped non-entitlement for up to 6,000 enrollees. Federal reimbursement could be up to 65 percent • Restructure managed care pharmacy, dental and behavioral health benefits. This restructuring, which will coincide with the anticipated October 2004 managed care contract renewal, will result in distinct pharmacy, dental and behavioral health services for the approximately 300,000 individuals enrolled in managed care under HUSKY

  49. Offering Human Services, But Controlling Costs • Enhanced Hospital Rates • Overall financial status of hospitals has weakened, but rates have remained constant • $4.8 million is added in FY 2004-05 for Medicaid rate increases, including current year changes • Beginning October 2004, rates will be revised to create a floor and hospitals with discharge rates below this level will receive increases • Minimum reimbursement per discharge will be $3,750 as of 10/04, $4,000 as of 10/05, and $4,250 as of 10/06

  50. Offering Human Services, But Controlling Costs • Enhanced Provider Rates • $9.8 million to fund a 2 percent increase for MCOs effective 10/04 • $3 million to fund a 2 percent increase for all CDHs effective 7/04 and a roll out of the rate adjustment for the Hospital for Special Care in the current fiscal year • $2 million to fund a 5 percent COLA for ICF/MRs effective 7/04 • $7.8 million to fund 1 percent increase for private providers effective 10/04

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