Governor Lamont’s Budget, Municipal Aid, and Property Taxes

By Bill Cibes

Following the maxim, “If you find yourself in a deep hole, stop digging,” Gov. Ned Lamont has proposed a biennial budget – his first since taking office – that provides for a stable, prudent future for the State of Connecticut.

In past years, as Lamont has observed, the state made promises it could not keep, including various tax cuts amounting to more than $1 billion scheduled to take effect in FY 2020 and later. The majority of Lamont’s gap-closing recommendations eliminate those unrealistic reductions – thereby enabling him to avoid making the budgetary hole deeper.

Those changes also make it possible for Lamont to adhere to his campaign promises not to increase the rates of the personal income tax and the sales tax. He does, however, recommend significantly broadening the base of the sales tax, primarily by taxing most personal and professional services purchased by households, including legal, accounting, interior design and real estate services. [Business-to-business transactions, on the other hand, would be exempt from base-broadening efforts so as to avoid penalizing business activities.] Expansion of the sales tax base, especially to personal services, essentially modernizes the sales tax to fit 21st century purchases. And it has the side benefit of increasing revenues by nearly $300 million in FY 2020 and $500 million in FY 2021.

Because the revenue side of the budget closes most of the deficit hole, it’s possible for the governor to stabilize the expenditure side, avoiding massive, disruptive cuts to Medicaid, services to children and families and persons with disabilities, public safety, environmental protection, corrections, judicial services, and higher education. And similar disruptive cuts in aid to municipalities are also averted.

Preventing such unsettling, destabilizing reductions in municipal aid is critical to those of us who advocate for property tax reform. We think there is a real need to rebalance the state and local revenue structure by reducing property taxes – which currently make up more than 40 percent of all taxes paid by Connecticut residents. And the disparity of property tax burdens is both horizontally (town vs. town) and vertically (rich vs. poor) inequitable.

Unfortunately, new initiatives to reduce property taxes were lamentably absent from the governor’s budget for this biennium. However, he has at least preserved the essence of most municipal aid programs, so that property tax reform in the future does not have to start from a deeper hole. Most statutory formula grants to towns from the general fund have been maintained at FY 2019 levels, and bonded grants for Town Aid Road (as the funding for towns to maintain and improve non-state roads is known) and the local capital improvement program have also been sustained at current levels.

Towns should also be pleased that proposals to shift significant costs of teacher pensions to municipalities have been rejected in favor of a more modest change.

Aid to Education

The budget allocates $17 million more in FY 2020 in Education Cost Sharing (ECS) aid, and an additional $22 million in FY 2021 over the FY 2019 level. The allocations generally follow the ECS formula adopted in 2017, except that reductions to wealthier school districts in future years are phased in more aggressively. And the method of counting students “in poverty” has been changed to be more accurate. In general, poorer towns receive slightly more in ECS funding than had been previously estimated. However, appropriations in FY 2020 for magnet schools, and for the “Open Choice” program (which is an effort to desegregate Hartford schools), have been reduced by $30 million and $12 million, respectively, from FY 2019 levels.

In addition, towns are for the first time asked to contribute to meet part of the “normal cost” [the actuarially computed cost of the portion of the projected pension benefits earned for a teacher in the current year] of pensions earned by teachers.

For towns that are not distressed municipalities, AND in which the average teacher salary is less than the statewide median teacher salary, the contribution would be equal to 25 percent of the normal cost. And if their average teacher pay is above the statewide median salary, these non-distressed municipalities would also pay an additional amount equal to the percentage by which their average salary exceeds the statewide median. For distressed municipalities, their base contribution would be 5 percent of the normal cost for their teachers. This new approach would be phased in over three years, with the total added cost to municipalities equal to about $24 million in FY 2020 and $49 million in FY 2021.

Although towns will have to shoulder this additional burden, this recommendation is much more moderate than proposals made during the last two years of Gov. Dannel Malloy’s administration. It also has the merit, as Lamont has said, that towns will have “skin in the game.” In other words, towns will share some of the responsibility for the normal cost of pensions based on teacher salaries that they will negotiate in the future. But they won’t be asked to pay for a portion of the unfunded service liability from the past.

Additionally, to respond to criticism of past practice, Lamont is recommending modification of Minimum Budget Requirements (MBR) when districts enter into cooperative arrangements for shared services and for school consolidation.

Non-educational aid to municipalities

Although Lamont did not recommend much-desired, increased funding for PILOT grants to municipalities for state-owned property and tax-exempt colleges and hospitals, he did maintain current levels of funding for those programs, and for most other non-educational aid programs, including the Mashantucket Pequot and Mohegan Fund grant, grants for municipal projects, municipal revenue sharing, and municipal stabilization.

He also proposed keeping in place current levels of bonding for the local capital improvement and Town Aid Road programs. There is, however, no funding for the Small Town Economic Assistance Program (STEAP).

Despite the fears of some who speculated that Lamont would propose a statewide property tax, either on all property or on motor vehicles, it was not included in the budget. Instead, he has recommended maintaining the current car tax cap at 45 mills, and maintaining the state reimbursement for local revenue lost as a result of that cap.

Overall, although the magnitude of the state’s budget crisis has prevented the governor from making much progress in diminishing property tax burdens, his recommendations have not made the situation worse. On balance, the impact on municipalities is pretty close to neutral.

And there may even be a glimmer of hope for property tax reform in the future. Although there does not appear to be much of an explanation in the budget documents, there is an enigmatic reference to a “new” property tax credit to start in FY 2023, for taxpayers whose property taxes exceed 6.5 percent of their adjusted gross income. This may be a reference to an income-adjusted “circuit breaker” to diminish vertical inequity, for which many have advocated.