Dannel P. Malloy GOVERNOR STATE OF CONNECTICUT March 8, 2016 The Honorable Martin M. Looney President Pro Tempore Legislative Office Building, Room 3300 Hartford, CT 06106 The Honorable Bob Duff Senate Majority Leader Legislative Office Building, Room 3300 Hartford, CT 06106 The Honorable Len Fasano Senate Minority Leader Legislative Office Building, Room 3400 Hartford, CT 06106 Dear Legislative Leaders, The Honorable Brendan Sharkey Speaker of the House Legislative Office Building, Room 4100 Hartford, CT 06106 The Honorable Joe Aresimowicz House Majority Leader Legislative Office Building, Room 4110 Hartford, CT 06106 The Honorable Themis Klarides House Minority Leader Legislative Office Building, Room 4200 Hartford, CT 06106 As you know, we are facing a revenue shortfall in the current fiscal year, likely in the range of $200 million. This is a shortfall from the assumed revenue projections that leaders of both parties agreed to in the fall budget meetings. Now, I want to solicit your input and the input of your caucus members on how we close that gap, end the fiscal year in balance, and continue to adapt to our new economic reality. These are difficult decisions. They are made more complicated by the fact that we are more than three- quarters of the way through the fiscal year. In other words, because most expenditures have already been made, we are more limited in what we can cut. I understand that you are opposed to delaying payments to hospitals. I recognize that, as part ofthe work we did this past fall, there was agreement that these payments would be made. As Secretary Barnes made clear in his letter to hospitals, our action was a delay, not a cancelation. The delay enables us to have a more holistic discussion about how we should collectively react to revenue shortfalls that occurred after our fall meetings. We need to act quickly. I ask that you work with your caucus members to develop specific recommendations on how we achieve savings in the current fiscal year. In order to address the projected deficit in a timely way your input is requested by this Monday, March 14. 210 CAPITOL AVENUE, HARTFORD, CONNECTICUT 06106 TEL (860)566-4840 - FAX (860)524-7396 governor. malloy@ct.gov As always, I am prepared to make proposals of my own in order to begin the conversation. Below are some areas which I believe we will be forced to explore together, given where we are in the fiscal year. I have included approximate savings which I believe while not desirable would be achievable for each: 0 Expedited reduction of the state workforce Forgone managerial increases, executive and judicial 0 Various rescissions: 0 Legislative, 5% 0 Judicial, 2% 0 Higher Ed, 1% 0 Private providers, 3% 0 Executive branch, all others - Eliminate revenue transferfrom FY16 to FY17 (S18M) - Reductions to non-ECS municipal aid This list totals Clearly we will need to go further, but my hope is to provide a context for our discussions, and also to make clearjust how stark our choices are especially if the full hospital payments are made (the state share ofwhich totals As you will note, the list above does not include cuts to planned hospital payments. I stand ready to issue those payments as you have requested, but we must also recognize what cuts will now be necessary in order to do that, and in order to keep our budget in balance. Finally, I have attached an article from this morning regarding a report by the Nelson A. Rockefeller Institute of Government. The report is yet another clear indicator that we are facing a new economic reality, especially here in Connecticut where our budget is highly dependent on the sources of revenue that are most dramatically falling short. As we make difficult decisions together about this current fiscal year and the next, I urge you to keep this new economic reality in mind. I look forward to your input and ideas. Sincerewl Dannel P. Malloy Governor State Tax Revenue Growth Significantly Slowed in Third Quarter, Report Says 3?25. a .. Tax revenue growth in the states has been much siower overall after the Great Recession than in the periods surrounding the two prior recessions and has slowed further in the third quarter of 2015, according to a March 7 Nelson A. Rockefeller Institute of Government report. The institute's latest report on state tax collections found that growth in the third quarter of 2015 was 3.8 percent year over year, compared with second quarter growth of 6.9 percent and first quarter growth of 5.1 percent. Preliminary figures for the fourth quarter of 2035 indicate further weakening to just 2.6 percent revenue growth, the report said. Weak forecasts for fiscal 203.6, fiscal 2017, and beyond remain in place, the report also said. Lucy Dadayan, coauthor of the report, told Tax there are several factors at play so it wasn't surprising that the third quarter numbers are soft. The weak stock market and low oil prices have had a big impact on states, particularly Alaska, New York, Massachusetts, and California, states that rely heavily on capital gains revenue, she said. "Given the lull in the oil crisis and weak stock market, there is no good news for states in terms of tax collections in the coming quarters," Daciayan said. Twelve states reported declines in overali state tax collections in the third quarter of 2015, the report said. More than halic of those states are oil- and mineral?dependent states. North Dakota experienced a nearly 32 percent decline in overail state tax collections, while Alaska had a 17 percent decline, the report said. Dadayan said there are several main reasons for weak tax revenue reiative to past recessions, including a larger drop in revenue at the start of the Great Recession, an overall slow economic recovery, and a reluctance on the part of state officials to increase taxes. Personal income tax collections have taken a strong hit. The median forecast for income tax growth is 4.6 percent for 2016 and 4.4 percent for 2017, compared with 7.8 percent in 2015. Personai income tax collections deciined by more than 50 percent from 14.4 percent growth in the second quarter of 2015 to 6.5 percent in the third quarter on a year?over~year basis, the report said. The personal income tax decline from the second to third quarter was almost inevitable because second quarter collections were unusually high, with April income tax returns up 20 percent, reflecting a strong 2014 stock market and federal tax changes, the report said. According to the report, 34 states reported growth in personal income tax collections in the third quarter, with eight states reporting double?digit growth. Nine states reported declines in personal income tax, with North Dakota and lilinois reporting the largest of 19 percent and nearly 17 percent, respectively, the report said.