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Harrisburg Sees Path to Restructuring Debts Without Bankruptcy Filing

July 24, 2013 by Leave a Comment

William B. Lynch, the state-appointed receiver of Harrisburg, said negotiators were “very close” to agreeing on a settlement to refinance hundreds of millions of dollars of debt that the city cannot pay. Most of the debt, $345 million, was issued in connection with a big trash-to-energy incinerator project that did not turn out as planned.

“All the stakeholders involved in the sale of the incinerator are in agreement,” Mr. Lynch said Wednesday in a statement. “While they realize this may be an imperfect solution, everyone understands a cooperative solution is most certainly in everybody’s best interests.”

At a news conference on Wednesday, the mayor, Linda D. Thompson, called the deal a turning point in the city’s tortured financial history. Bondholders will be paid in full by the bond insurers Assured Guaranty and Ambac, as well as by surrounding Dauphin County, which guaranteed some of Harrisburg’s debt. The county and the two insurers will then receive a stream of repayments over the years from the revenue of existing city parking garages, expected to be heavily used by state workers.

Some in Harrisburg, a city of about 50,000, said they still thought the city would have won a better deal in Chapter 9 municipal bankruptcy and pointed to lingering long-term problems.

“All the pain is on Harrisburg city residents,” said the city controller, Dan Miller. He said Chapter 9 bankruptcy would have forced bondholders and other financial creditors to share more of the pain of the restructuring, as Detroit is proposing to do. Bankruptcy would have also allowed Harrisburg to void expensive union contracts, Mr. Miller said.

But bankruptcy was put out of Harrisburg’s reach by the state. As Harrisburg’s debt woes loomed larger in 2011, the City Council sought expert legal advice and did file a petition with the Federal Bankruptcy Court. Pennsylvania promptly passed a law making Harrisburg ineligible for Chapter 9 bankruptcy, and the judge dismissed the city’s case. That left Harrisburg with far more limited forms of restructuring assistance available under state statutes.

Robert J. Philbin, the mayor’s chief of staff, said that course had helped Harrisburg steer clear of a legal showdown that could have done lasting damage.

“A rash of municipal bankruptcy filings across the country highlighted what the damage could be,” he said, citing losses in jobs, health benefits and pensions that have been dealt out in various forms in places like Vallejo, Stockton and San Bernardino in California; Central Falls, R.I.; and Prichard, Ala.

Avoiding bankruptcy is also thought to have kept municipal bond buyers relatively bullish on the debts of other Pennsylvania cities. After Detroit proposed, in bankruptcy, to put general obligation bonds on par with retiree health benefits — all would be cut to about 10 cents on the dollar — there were reports of other Michigan cities paying a penalty of about a half-percentage point on their debt.

Harrisburg’s new debt restructuring agreement rests primarily on the sale of the incinerator, to the Lancaster County Solid Waste Management Authority. It was selected as the sole bidder in June 2012 after two other potential buyers were rejected, Mr. Lynch said.

Cory Angell, a spokesman for the receiver, said that the incinerator would fetch about $130 million, but that the exact amount would depend on market conditions when the deal is made final, probably this fall. A spokeswoman for the buyer, Kathryn Sandoe, declined to confirm the price.

The restructuring also depends on a deal to lease some city parking garages to an outside vendor and have a new state borrowing authority issue new debt to replace existing parking-authority debt. The agreement anticipates big savings on garage operations, and some of the resulting profit will be used to pay back the bond guarantors. The city would get the garages back at the end of the lease, expected to last five or six decades. Mr. Angell declined to specify the amounts, saying they would become public in October, when the city must have the terms approved by a state court.

Mayor Thompson said these transactions would “permanently absolve the City of Harrisburg, and the Harrisburg Authority, from all future liability related to the incinerator.” The authority is the independent entity that issued the incinerator bonds.

Once the incinerator debt is resolved, Ms. Thompson said the city would work to eliminate its structural budget deficit. She said the budget was “stabilized” through 2016, thanks to new revenue sources she did not identify.

This month, the city raised about $2.7 million by auctioning off some 8,000 Wild West artifacts collected by a former mayor, Stephen Reed, who had planned to house them in a museum that never came to fruition.

In addition, the city is calling on its police officers, firefighters and other municipal workers to forgo scheduled pay increases and pay part of their health insurance premiums. Mr. Angell said the city’s branch of the Fraternal Order of Police had agreed to these concessions, but the firefighters’ union and the local chapter of the American Federation of State, County and Municipal Employees had yet to vote on the proposal.

Mr. Miller, the controller, said Harrisburg had been spending more than it could afford for years. “It’s no different from Detroit, in that it’s decades in the making.” he said. “I have not seen anything yet that shows how this plan is going to work. The numbers don’t add up.”

Article source: http://www.nytimes.com/2013/07/25/us/harrisburg-sees-path-to-restructuring-debts-without-bankruptcy-filing.html?partner=rss&emc=rss

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Inside Europe: U.S. and E.U. Hope to Eliminate the Atlantic as a Trade Barrier

February 18, 2013 by Leave a Comment

LONDON — Forthcoming trans-Atlantic trade talks might offer a fresh incentive for Europe to worry a bit less about protecting past economic gains and focus a bit more on securing sources of future prosperity.

The negotiations, announced last week and due to start in June, are also an important chance for the European Union to reinvigorate political ties with the United States as Washington pivots toward a rising Asia.

The talks will be tough. Successive attempts to pry open markets over the past 15 years made some progress but ultimately failed.

This time around, extensive consultations have convinced officials that an agreement can be forged at a lower political cost.

One reason is that agriculture, a constant thorn in the side of negotiators, is less of a bilateral bugbear than it was even two years ago thanks to changes in the global market for farm produce, said Fredrik Erixon, director of the European Center for International Political Economy, a research institute in Brussels.

What is more, the two sides are eager to tap into new sources of growth. The United States and European Union estimate that by 2027 a comprehensive pact could add 0.5 percent a year to the Union’s gross domestic product and 0.4 percent to U.S. output.

But the belief in Brussels and Washington that they will not have to cross too many negotiating red lines drawn by powerful vested interests will be quickly tested, Mr. Erixon said.

“It will become much clearer that you’re not going to get an agreement that can deliver short and medium-term economic gains or longer-term dynamic gains unless you’re willing to do supply-side reforms,” he said.

Indeed, Mr. Erixon said, the European Commission, the Union’s executive branch, sees the talks as an opportunity to try to push through some deep-seated changes to improve the economic performance of the 27-nation bloc.

Governments have shown a greater appetite for change in response to the global financial crisis, notably in pensions and labor markets. But Ben Noteboom, chief executive of Randstad, one of the world’s largest global recruitment companies, said he would give Europe an overall mark of less than 6 out of 10.

He said Europe had no choice but to keep up the momentum of change, given the challenges it faces from an aging population and, especially, the hollowing-out of medium-skill jobs because of technological change and competition from emerging markets.

“As a society, we must come up with answers to prevent that from becoming both a social and economic problem,” Mr. Noteboom said in an interview. “The question is whether we will do it fast enough. We don’t have a lot of time.”

The United States and Europe are considering a “21st century” agreement that as well as scrapping tariffs would sweep away many nontariff barriers, like differences in technical standards, that are annoying speed bumps in an age when goods that are produced around the globe cross borders at dizzying speed.

Yet earlier this month, the Union showed its 20th century face by concluding a budget for 2014-20 in which farm subsidies still gobble up by far the biggest share of spending. Agricultural handouts were cut, but France and other major farming nations thwarted attempts to shift a greater slice of E.U. spending toward steps to increase investment and competitiveness.

A similar problem is likely to be the Union’s reluctance to lower its guard against U.S. biotechnological food like genetically modified plants or beef from cattle that have been fed hormones.

So even if the good will exists to put such issues on the sidelines, agriculture still has the potential to poison the talks, said Philip Whyte with the Center for European Reform, a research institute in London.

Simon Evenett, a professor of international trade at St. Gallen University in Switzerland, agreed that a way forward would have to finesse differences over agriculture for Washington and Brussels to grasp what both see as the big prize — designing the next generation of business regulations and inducing the rest of the world, notably China, to sign on to them.

For example, jointly recognized rules on car safety or a single trans-Atlantic test for new drugs would cut costs for manufacturers and so should lower prices for consumers.

“That could have serious business payoffs,” Mr. Evenett said.

Richard Baldwin, a professor of international economics in Geneva, said the fear of being excluded from global standard-setting and regulatory harmonization was a main reason why this round of trade talks might succeed.

Washington is negotiating a separate free-trade pact focused on Asia, the Trans-Pacific Partnership, which, if successful, would form the template for rules on “behind-the-border barriers” to trade that are crucial for the smooth functioning of integrated global supply chains, Mr. Baldwin said. These include regulations, the movement of capital, intellectual property rights and competition policy, as well as rules on foreign investment and state-owned enterprises.

“If T.P.P. is the only game in town, the starting point for multilateralization of these rules will be the T.P.P. rules, which are basically being written by the U.S.,” Mr. Baldwin said in e-mailed comments. “These rules are not specifically anti-E.U., but they are naturally slanted to please U.S. business, not E.U. business models and practices.”

Thus, the Union sees a trans-Atlantic pact as a geopolitical counter-balance to America’s Pacific push, he added.

But no matter how solid the business and political case is for the so-called trans-Atlantic trade and investment partnership, Mr. Evenett said, selling an agreement to voters wary of globalization would not be easy.

“The benefits from trade reform are a bit like fitness training — not felt immediately and often accompanied by pain. This partnership will be no different,” he said.

Alan Wheatley is a Reuters correspondent.

Article source: http://www.nytimes.com/2013/02/19/business/global/us-and-eu-hope-to-eliminate-the-atlantic-as-a-trade-barrier.html?partner=rss&emc=rss

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Inside Europe: European Union’s Leverage Over Cyprus Is Ephemeral

February 4, 2013 by Leave a Comment

PARIS — For the first time since Cyprus joined the European Union nearly a decade ago, its partners have the leverage to press for a settlement of the island’s division of almost 40 years.

Yet there is no sign that Brussels is preparing to use its advantage to achieve a reunification that eluded negotiators when Cyprus joined the Union in 2004. Indeed, the most powerful member states, Germany and France, may be content to see the Cyprus stalemate continue rather than deal with the potential consequences of a resolution that would bring Turkey closer to E.U. membership.

The Republic of Cyprus, with its 800,000 Greek Cypriots, is broke. The country, one of the smallest economies in the euro zone, applied for financial aid from the Union and the International Monetary Fund last June after its banks were badly hurt by an E.U.-sanctioned write-down of Greek debt held by private investors.

The government says that without a bailout, it may run out of money in April. It needs about €17 billion, or $23 billion, from its euro zone partners, equivalent to the economic output of a whole year.

That ought to give Brussels leverage to push the Greek Cypriots into cooperating with the Turkish Cypriots in the north of the island to join in a loose federation of the kind proposed in 2004 by Kofi Annan, then the U.N. secretary general. At the time, the Turkish Cypriots voted in favor of the Annan plan, encouraged by Turkey.

Turkey invaded northern Cyprus in 1974 in response to a Greek-backed coup in Nicosia by Greek Cypriot hardliners seeking union with Athens. The island has been divided ever since. Turkey has about 30,000 troops in northern Cyprus. Under the Annan plan, most of them would have gone home by 2018.

But safe in the knowledge that they would be admitted to the Union no matter what, the Greek Cypriots rejected the Annan plan, and a week later Cyprus became an E.U. state. European officials, and especially Günter Verheugen, the E.U. enlargement commissioner at the time, felt betrayed.

“The understanding was quite clear when we gave Turkey candidate status in 1999 and even clearer when we concluded negotiations with Cyprus in 2002: The Greek Cypriots would not allow the peace plan to fail, and if it failed due to the Turkish Cypriots, then Cyprus could join,” Mr. Verheugen said.

“We came very close. The problem was that in the end, we didn’t have any leverage over the Greek Cypriots anymore since they knew they would join anyway,” added Mr. Verheugen, who is now honorary professor of European governance at the European University Viadrina in Germany.

The big losers were the Turkish Cypriots, who remain excluded from the Union and economically isolated. At the time, Brussels released some funds that had been pledged to the Turkish Cypriots for economic development and promised to allow them to export their produce directly to the Union. But the Greek Cypriots blocked direct trade with the Union. Turkey, in turn, refused to allow the Greek Cypriots direct access to its ports and airports.

At the least, the Union could use a bailout for Nicosia to try to secure direct trade access for the Turkish Cypriots, which might prompt the Turks to lift their own restrictions.

Yet some E.U. diplomats say it would be politically dangerous to apply diplomatic pressure by exploiting Cyprus’s economic plight. Any link could backfire and benefit hard-line nationalists on both sides, they warn. And skeptics say it suits Berlin and Paris just fine to keep the Cyprus problem in stalemate, because that prevents Turkey from advancing toward the Union’s door.

“Europe itself is divided on the Cyprus issue. There are several countries that have no interest whatsoever in solving the problem because Turkish accession would be moved forward,” said a former mediator on the island, who spoke on condition of anonymity because he is still involved in diplomacy.

Article source: http://www.nytimes.com/2013/02/05/business/global/european-unions-leverage-over-cyprus-is-ephemeral.html?partner=rss&emc=rss

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Tentative Deal Is Reached to Raise Taxes on the Wealthy

January 1, 2013 by Leave a Comment

While the Senate moved toward a vote on legislation to avoid the so-called fiscal cliff, the House was not going to consider any deal until Tuesday afternoon at the earliest, meaning that a combination of tax increases and spending cuts would go into effect as 2013 began. If Congress acts quickly and sends the legislation to President Obama, the economic impact could still be very limited.

Under the agreement, tax rates would jump to 39.6 percent from 35 percent for individual incomes over $400,000 and couples over $450,000, while tax deductions and credits would start phasing out on incomes as low as $250,000, a clear win for President Obama, who campaigned on higher taxes for the wealthy.

“Just last month Republicans in Congress said they would never agree to raise tax rates on the wealthiest Americans,” Mr. Obama said at a hastily arranged news briefing, with middle-income onlookers cheering behind him. “Obviously, the agreement that’s currently being discussed would raise those rates and raise them permanently.”

Democrats also secured a full year’s extension of unemployment insurance without strings attached and without offsetting spending cuts, a $30 billion cost.

As negotiators tied up the last points of dispute, officials said that the two top Democrats on Capitol Hill — Senator Harry Reid of Nevada and Representative Nancy Pelosi of California — had signed off on the agreement. In an effort to win over other Democrats uneasy with the proposal, Vice President Joseph R. Biden Jr., who had bargained directly with Republican leaders, traveled to the Capitol on Monday night for a 90-minute meeting with his former Senate colleagues.

“I feel very, very good,” Mr. Biden said after the meeting. “I think we’ll get a very good vote.”

In one final piece of the puzzle, negotiators agreed to put off $110 billion in across-the-board cuts to military and domestic programs for two months while broader deficit reduction talks continue. Those cuts begin to go into force on Wednesday, and that deadline, too, might be missed before Congress approves the legislation.

To secure votes, Mr. Reid also told Democrats the legislation would cancel a pending congressional pay raise — putting opponents in the politically difficult position of supporting a raise — and extend an expiring dairy policy that would have seen the price of milk double in some parts of the country.

Anticipating Senate approval of the deal, Speaker John A. Boehner late Monday said the House would “honor its commitment to consider the Senate agreement if it is passed. Decisions about whether the House will seek to accept or promptly amend the measure will not be made until House members — and the American people — have been able to review the legislation.”

The nature of the deal ensured that the running war between the White House and Congressional Republicans on spending and taxes would continue at least until the spring. Treasury Secretary Timothy F. Geithner formally notified Congress that the government reached its statutory borrowing limit on New Year’s Eve. Through some creative accounting tricks, the Treasury Department can put off action for perhaps two months, but Congress must act to keep the government from defaulting just when the “pause” on pending cuts is up. Then in late March, a law financing the government expires.

And the new deal does nothing to address the big issues that Mr. Obama and Mr. Boehner hoped to deal with in their failed “grand bargain” talks two weeks ago: booming entitlement spending and a tax code so complex that few defend it anymore.

Jennifer Steinhauer and Robert Pear contributed reporting.

Article source: http://www.nytimes.com/2013/01/01/us/politics/2-sides-in-talks-inch-closer-but-no-fiscal-deal-on-final-day.html?partner=rss&emc=rss

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Europe Agrees on Plan to Inject New Capital Into Banks

October 26, 2011 by Leave a Comment

In what the leaders described as an important first step, banks would be required to raise about $140 billion by the end of June — enough to increase their holdings of safe assets to 9 percent of their total capital. The percentage is regarded as crucial to assure investors of the banks’ financial health.

The leaders were having more trouble agreeing with the banks on the size of the loss investors will be asked to absorb on Greek debt, which economists agree will have to be written down if the country is to have any chance of restoring growth. Most plans under consideration called for write downs in the range of 50 percent, a leap from the 21 percent previously agreed upon.

Earlier on Wednesday German lawmakers overwhelmingly approved a measure to expand an emergency bailout fund to $1.4 trillion, more than double its current size of about $610 billion. The vote followed Chancellor Angela Merkel’s plea to lawmakers to overcome their aversion to risk and put the might of Germany, Europe’s strongest economy, firmly behind efforts to combat the crisis, which has unnerved financial markets far beyond Europe’s borders.

“The world is looking at Germany, whether we are strong enough to accept responsibility for the biggest crisis since World War II,” Mrs. Merkel said in an address to the Parliament in Berlin. “It would be irresponsible not to assume the risk.”

The $1.4 trillion figure is generally accepted as the likely target for negotiators here, but many questions remained about how the enlarged fund would be financed.

Europe does not face any hard deadline to forge a deal, as it did last month when it had to act to head off a Greek default, but its leaders would like to agree on a definitive plan to address the systemic aspects of the euro crisis rather than issuing vague proclamations as they have so often in the past.

The fear is that at some point, uncertainty surrounding the solvency of struggling countries like Greece and Portugal might infect larger economies like those of Spain and, especially, Italy, in turn raising questions about the solvency of the European banks that lent to them in large quantities. That, in turn, could ignite a panic like the one following the failure of Lehman Brothers, when financial institutions refuse to extend credit to one another for fear their counterparts might be insolvent.

The overall euro deal under discussion is complicated, weaving together the interrelated efforts to restructure Greek debt, inject new capital into Europe’s banks and expand the bailout fund so that it can ward off a financial panic in Italy — the euro zone’s third-largest economy — as well as in the relatively small economies of Greece and Portugal. Attention has focused on Italy because its moribund government seems incapable of responding to the crisis, which has undermined the markets’ faith in Europe’s capacity to solve its problems.

Mrs. Merkel and President Nicolas Sarkozy upbraided Italy’s prime minister, Silvio Berlusconi, on Sunday for failing to following through on his promises of budget cuts and various economic changes, But Mr. Berlusconi, hobbled by an internal power struggle, managed to bring only a “letter of intent” to Brussels outlining plans to implement the kind of economic changes that his counterparts want.

The Europeans also want Mr. Berlusconi to live up to his promises to do more to reduce Italy’s huge accumulated debt — about $2.65 trillion, or 120 percent of gross domestic product, among the highest in the developed world — and to promote economic growth in a largely stagnant economy. While Italy’s annual deficit is modest, the debt overhang means that speculation is driving up the cost of financing that debt, which if unchecked, could tear holes in the budget.

The current crisis has placed Mr. Berlusconi between two irreconcilable forces: his fellow European Union leaders and Umberto Bossi, the leader of the powerful Northern League, who holds the fate of the Berlusconi government in his hands and is bound to Mr. Berlusconi like an inoperable Siamese twin.

For months, Mr. Bossi had refused to back a plan to raise the retirement age to 67, relenting only on Tuesday for everything except seniority pensions, still leaving the government at risk of collapse on the issue. That change had been demanded by the European Union in return for its support.

The European Central Bank demanded various changes as the price for buying up Italian debt at a reasonable, nonmarket price. But as soon as the bank stepped in, Mr. Berlusconi failed to propose a convincing package of measures, let alone put them into effect, infuriating his European counterparts and the bank.

Steven Erlanger reported from Brussels and Rachel Donadio from Athens. Reporting was contributed Stephen Castle from Brussels, Jack Ewing from Frankfurt and Elisabetta Povoledo from Rome.

Article source: http://feeds.nytimes.com/click.phdo?i=ca04d1aecd48c28eea0c67781cc13f9a

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Room For Debate: A Europe Divided?

September 13, 2011 by Leave a Comment

Introduction

euro signHannelore Foerster/Bloomberg News A euro sign sculpture outside the European Central Bank headquarters in Frankfurt, Germany.

“If the euro fails, then Europe too will fail,” Chancellor Angela Merkel of Germany said in May 2010, as the continent faced the exploding debt crisis that rippled out of Greece. Today, with the problems only worsening, the Germans and other prosperous Europeans seem less likely to express such noble sentiments.

In his column on Monday, Paul Krugman criticized what he described as the moralizing streak of the Germans toward the less thrifty economies of Italy and Spain.

The Germans were wary of admitting the so-called Club Med countries into the euro zone in the first place, but with E.U. negotiators pressing Germany and other strong economies to cough up more of their money to pay the debts of the more profligate, the cultural differences and stereotypes are only becoming magnified.

Do these cultural differences threaten the future of the European Union?

 Read the Discussion »

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Topics: Europe, Germany, Greece

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Boeing Labor Battle Is Poised to Go Before Judge

June 14, 2011 by Leave a Comment

Boeing, the N.L.R.B. and the International Association of Machinists and Aerospace Workers local that initiated the case all still say they would like to find a way to settle. Appeals could grind on for years, clouding the future of Boeing’s $750 million Dreamliner assembly plant scheduled to start production in July in North Charleston, S.C. Negotiators and outside analysts said that any deal would most likely require Boeing to commit to adding some level of new production lines to its Puget Sound manufacturing hub in exchange for certain union concessions, like a no-strike pledge.

The labor board’s top lawyer says Boeing’s decision to move the operation to South Carolina constituted illegal retaliation against Boeing’s unionized workers in Washington for engaging in their legally protected right to strike, including a 58-day walkout in 2008.

Boeing has acknowledged that the fear of labor disruptions factored into its thinking, but it said the main reason for moving the line was South Carolina’s lower production costs. Starting pay at the South Carolina plant is $14 an hour, while starting pay in Washington is $15 an hour, rising to an average of $28 an hour.

The case has stirred a political firestorm. Republicans have joined business leaders in accusing the labor board of trying to sabotage right-to-work states as well as the fundamental right of corporate managers to decide how and where to run their businesses.

South Carolina’s governor, Nikki R. Haley, wants to make the dispute an issue in the presidential campaign, while Congressional Republicans have threatened to cut the labor board’s financing and have urged President Obama to withdraw the nomination of Lafe Solomon, the board’s acting general counsel, who brought the Boeing case.

“It is absurd, in this country that represents free enterprise, that one unaccountable, unelected, unconfirmed acting general counsel can threaten thousands of jobs,” said Senator Jim DeMint, Republican of South Carolina. “This is something you would expect in a third world country.”

Although the president appoints the board’s top officials, the agency operates independently. Several Republicans have accused President Obama of carrying water for organized labor by having the board bring the case. Mr. Solomon and Obama administration officials say the White House has had nothing to do with the dispute.

The White House has been largely silent about the case, although numerous Congressional Democrats have assailed Republicans for attacking an agency that they say is merely enforcing the law and protecting workers’ right to strike.

Mr. Solomon brought the case after the machinists’ union filed a complaint, arguing that the South Carolina plan was illegally taking jobs from Washington State. As a remedy, he wants Boeing to move the 1,000-employee production line, which will initially build three planes a month, to Washington.

Mr. Solomon said in an interview that he spent three months in settlement talks with both sides before the board filed the case, and that contacts continue intermittently. “Nothing would make me happier than to reach a settlement,” he said.

In a speech last week at a conference at the New York University School of Law, he added: “I felt and still feel these parties have a longstanding relationship with each other. They have a deep past together and have a deep future together, and it would be advantageous to all if a settlement could be worked out.”

Many legal specialists say the N.L.R.B. and the machinists’ union have a good chance of winning before the administrative law judge in Seattle and in the next stage of the legal process, an appeal to the Democrat-dominated, five-seat labor board in the District of Columbia. The case before the law judge is expected to last weeks as the board and Boeing spar over which documents to turn over to the other side.

Boeing and some legal specialists say the company is likely to win in the federal circuit court that would hear appeals after that.

But no one wants the case to drag on for years.

Article source: http://feeds.nytimes.com/click.phdo?i=7549f85edc78338f63345a0bf9d3efb3

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Bucking Trend, Connecticut Budget Deal Raises Taxes, Gasoline Excepted

May 3, 2011 by Leave a Comment

Driving against traffic in an antitax era, Connecticut lawmakers appear poised to approve a two-year, $40.2 billion budget that includes $1.5 billion in increased taxes on income, corporations and an array of purchases and services, from yachts to yoga classes.

Budget negotiators reached an agreement over the weekend on a deal that came together after they decided, in the face of soaring gasoline prices, to drop a tax increase of 3 cents a gallon that Gov. Dannel P. Malloy proposed in mid-February. The agreement went to the State Senate for a possible vote on Monday and is scheduled to go to the House of Representatives on Tuesday.

With Democrats in control of the governor’s mansion and both houses of the legislature, Connecticut appears on track to have a budget months earlier than has been the rule under the divided government of the past two decades.

Mr. Malloy and Democratic leaders said their plan spread the fiscal pain around, with both tax increases and spending cuts, and tried to put government on a sustainable path in a state with the highest rate of debt per capita in the country. Republicans said the proposal was a reckless throwback to an era of government overreach and profligate spending.

The budget would raise the general sales tax to 6.35 percent from 6 percent, and remove exemptions for many goods and services, including clothing and footwear less than $50, yoga instruction and smoke cessation products. It would impose new taxes on luxury items like plastic surgery, pet grooming and spa services.

As officials in nearby states — including New York, New Jersey and Massachusetts — have become conspicuous converts to the current antitax, antigovernment fever, Mr. Malloy and Connecticut Democrats are striking a more anomalous course, betting that residents will accept the short-term pain of tax increases if they see a long-term gain of stable government services and fiscal policy.

First, though, the state has to navigate what could be a tumultuous week, as lawmakers take up the budget before they know the outcome of high-stakes negotiations that have been going on for almost two months between the governor and the state’s public-employee unions over the $1 billion in annual cuts needed to make the plan work.

If Mr. Malloy and the unions come to an agreement by Friday, it would provide the cost savings needed to balance the budget and complete the process at a breakneck pace. If they do not, the result is likely to be widespread layoffs and a messy spate of spending cuts after the budget has already been passed.

The governor’s approach is “a very different path than most other states,” said Roy Occhiogrosso, senior adviser to Mr. Malloy. “It has not just the rhetoric of what the governor says are shared sacrifices, but the reality of it as well. The value of it is that it gets you quickly to a place where the state’s finances are stabilized, and it’s done in a responsible and humane fashion.”

Republicans proposed a budget that they said was balanced without any tax increases. Mr. Malloy, they said, is flying in the face of public sentiment in Connecticut and across the country in pushing through a major tax increase, and trying to do it so quickly.

“The haste is simply about trying to pass the largest tax increase in Connecticut history in the hopes that people either won’t notice it or will forget about it sooner rather than later,” said Christopher C. Healy, chairman of the state Republican Party. “And now you’ve got the perfect cover of the great news of the disappearance from this earth of Osama bin Laden. The Democrats have long relied on the public’s being either oblivious or resigned to their fate, so they figure the earlier they get a tax hike on the books, the better.”

Mr. Malloy is counting on an agreement with the unions and a restructuring that will cut the number of state agencies to 57 from 81. Although the cuts remain uncertain, the tax increases are quite clear.

They extend from human pleasures (a new 3 percent “cabaret tax” on establishments that offer live music, dancing or other entertainment while serving alcohol) to nonhuman ones (pet boarding and obedience classes) and even to life’s aftermath (the cremation certificate fee increases to $150 from $40). One viewed as particularly problematic is the so-called “Amazon tax,” requiring certain remote sellers with no physical presence in Connecticut to collect sales taxes. The state’s Department of Revenue Services said it was probably unenforceable.

The budget would increase marginal tax rates on incomes over $100,000 for joint filers, $50,000 for single filers and married people filing separately, and $80,000 for heads of households.

Still, as a product of hard times, the budget agreement could be complicated by the degree to which times at the moment are not quite as hard as they have been. Officials said last week that the surplus for the current year was growing by $300 million, and the revenue estimates for the next fiscal year are up by $282 million. That is good news for the state, but uncertain tidings for the budget. Republicans are already saying the surpluses are evidence that the tax increases are excessive, and unions are likely to argue that the $1 billion in proposed cuts is now more than what is needed.

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