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A CT budget crisis is ‘on the horizon,’ legislators warn

Sens. Martin M. Looney and Gary A. Winfield say the state's spending cap is pushing the CT budget into crisis.
Sens. Martin M. Looney and Gary A. Winfield say the state's spending cap is pushing the CT budget into crisis.

While legislative leaders remain hopeful that lawmakers will adopt a new state budget later this week, there’s a growing recognition at the Capitol that it will be an unfinished document — with more loose ends even than past budgets.

Painful spending choices built into the second year of the biennial package involving higher education and transportation have many worried.

More importantly, while progressives have been warning that a defective spending cap system has government services in crisis, moderates and conservatives are pushing harder in the other direction, demanding more cost-cutting reforms than ever before.

Has the spending cap driven CT’s budget into crisis?

A state budget crisis, driven in part by the spending cap, “is on the horizon and not too far distant,” said Senate President Pro Tem Martin. M. Looney, D-New Haven. “We have current needs and demands that are not readily accommodated.”

Sen. Gary Winfield, another progressive Democrat from New Haven, was more blunt about the cap and other oft-hailed “fiscal guardrails” that have constrained spending considerably since 2017.

“Guardrails are supposed to keep people from going overboard,” he wrote in a Facebook post last week. “A lot of folks in the water right now though.”

The crisis, Looney says, is an inflexible cap system that can respond neither to unusual events — a once-in-a-century pandemic or a 40-year-high in the national inflation rate — nor to long-term trends coming to a head.

State education, health care and social service systems were underfunded gradually for years or even decades as state government struggled with sluggish economic growth and budget deficits for much of the 2000s and 2010s.

The cap tried to keep spending growth in line with the growth in personal income or inflation. But what has happened, historically, is a few cost drivers — employee wages and benefits, required contributions to public sector pensions — grow faster than personal income and inflation. Everything else, like social services, health care and aid to towns, is lucky if it stays flat year over year.

Factor in the recent economic damage caused by the pandemic and by surging inflation, and too many core programs need a dramatic infusion of cash at once.

Public colleges and universities top that list for many. Others point to the nonprofit network that delivers the bulk of state-sponsored social services to the disabled, abused children, patients struggling with mental illness and addiction, and prison inmates preparing to re-enter society. Striking group home workers and their nonprofit employers have become allies, attending each other’s rallies and blaming Lamont and other fiscal moderates and conservatives in the legislature.

State agency staffing is at its lowest point in decades, while overtime expenses are on the rise. And still others say local education and child care aren’t far behind on the crisis meter.

Looney insists the impending budget crisis would have arrived two years ago had Congress not awarded Connecticut $2.8 billion in pandemic relief through the American Rescue Plan Act.

Those funds, which will be exhausted by 2025, have allowed Gov. Ned Lamont and legislators to cover far more than emergency expenses created by the coronavirus pandemic. They’ve also pumped hundreds of millions of dollars — often utilizing funds outside of spending cap — into existing core programs.

And while the cap — according to critics — is strangling vital programs, state government is setting surplus records, achieving windfalls that were unheard of even five years ago.

Since 2018, Connecticut has amassed a $3.3 billion rainy day fund, the legal maximum equal to 15% of the General Fund.

More importantly, it’s used another $5.8 billion in surpluses to pay down pension debt in the past three years.

Last June, Connecticut closed the 2021-22 fiscal year an unprecedented $4.3 billion in the black, a surplus equal to one-fifth of the General Fund. This year it’s on pace for a $2.95 billion cushion, which would be the second-largest in state history.

Governor, House speaker say things aren’t as bad as critics contend

Lamont and House Speaker Matt Ritter, D-Hartford, have tried to urge lawmakers to keep perspective.

Connecticut entered this year with more than $88 billion in unfunded pension and retiree health care obligations and bonded debt — making it one of the most indebted states, per capita, in the nation.

Those burdens, created by inadequate savings over several generations — from the late 1930s until 2010 — created a legacy of debt projected to haunt Connecticut well into the 2040s.

The next state budget is expected to feature one of the largest state tax cuts in Connecticut history, including the first income tax rate reduction since the mid-1990s. That’s a very different narrative, Lamont noted recently, compared to the prior decade.

In the decade immediately following the recession of 2008 and 2009, state finances were plagued with frequent deficits and major tax hikes in 2009, 2011 and 2015.

“It was always ‘How much more do we have to cut? How much taxes do we have to raise?’ And often [legislators] had to come back halfway through the year and do it all over again,” Lamont said. “We’ve come a long way.”

Ritter told reporters last week that leaders are aware that while most key programs are getting a funding boost in the new budget, “We know it’s not enough.”

But the speaker said the increases in the new budget — unlike many in past decades — are sustainable and won’t have to be retracted if the economy slips.

“We’ve just got to keep working it through,” he added.

But some of Ritter’s fellow Democrats say, despite the rosy descriptions from some leaders, funding really isn’t increasing at all.

Higher education cuts could happen next year

Though enrollment has shrunk at public colleges and universities since the pandemic, the state also has propped up their budgets with hundreds of millions of dollars from federal pandemic grants or from the budget surplus.

And while the Lamont administration argues colleges and universities should have prepared more to be weaned off these dollars, education advocates say the funds were given largely to cover regular operating costs. In other words, why should state officials assume funds used to cover payroll, or to make more class sections open, won’t be needed a year or two from now?

Sources say the next state budget will include enough funds to maintain current services at state colleges and universities in the fiscal year beginning July 1. But in the second year of the biennium, 2024-25, there will be a big savings target built in.

Advocates for higher education predict it will lead to layoffs and fewer course offerings.

“I don’t think the administration or anybody else believes you can find hundreds of millions of dollars in [annual] savings in higher education budgets,” said Rep. Greg Haddad, D-Mansfield, who co-chairs the Higher Education and Employment Advancement Committee and whose district includes the University of Connecticut’s main campus in Storrs.

“I’m panicked about what’s going to happen a year or two from now,” he added.

A boost for nonprofits, but not what they asked for

The nonprofit social services network is expected to get a 2.5% to 3.5% increase in state funding next fiscal year in the next budget.

That translates into $50 million to $70 million extra. The industry estimates that its annual payments from the state have failed to keep pace with inflation for decades, effectively down $480 million since 2007 once adjusted for the Consumer Price Index.

The state’s largest health care workers union, New England Health Care Employees Union SEIU 1199NE, announced last week that 1,700 group home workers had gone on strike.

They took their argument directly to Lamont over the Memorial Day weekend and estimated an additional $400 million is needed to ensure workers — who generally earn $17 to $18 per hour — can receive a contract that will gradually boost them to $25.

Has CT’s spending cap been flawed for decades?

Critics of the cap say there’s more to their argument than simply stating needs exist and Connecticut has the money to pay for it.

The spending cap, they say, has a checkered past and is protected more by political fear and public perception than by a track record of success.

The cap initially was enacted in 1991 to complement — and to temper outage — against the newly adopted state income tax.

It certainly wasn’t the product of exhaustive study, Looney said. No state agency or panel tried to calculate how much core programs — education, health care, municipal aid, transportation — would grow over the coming decades. Nor did they determine whether a cap that largely tracked the growth in personal income — occasionally allowing larger growth in periods of high inflation — would be sufficient.

“Obviously there was some discussion of that, but not a rigorous analysis,” he said. “They needed a companion piece [to the income tax] to vote on to answer the objections people were raising.”

Besides, some escape valves were built into the system.

Aid to distressed cities and towns, about two-thirds of all municipal grants, were cap exempt. So were any programs mandated by a federal judge and debt service on bonding.

Lawmakers also stipulated they could legally exceed the cap, if the governor declared a budget emergency and if 60% of the House and Senate agreed.

One year later, in 1992, voters overwhelmingly agreed the cap should be part of the state Constitution. But the legislature never wrote the language for a constitutional cap, and for many years lawmakers assumed the statutory cap of 1991 — by default — carried the legal weight of a constitutional provision.

But by the late 1990s, the cap became a challenge when Republican Gov. John G. Rowland and a Democratic-controlled legislature wanted to spend big surpluses late in the fiscal year.

Together they legally exceeded the cap five times, spending much of the money on tax rebates and on smaller capital projects in legislators’ home districts.

And in 2005 and in 2007, Republican Gov. M. Jodi Rell and Democratic lawmakers broke new ground again.

For the first time, they adopted a budget that legally exceeded the cap from its first day.

The 2005 exception was done to help secure major new federal aid for nursing homes and community-based social services.

In 2007 they shattered the cap by a record-setting $690 million in the first year. This was done to launch two major initiatives: Rell’s proposal to dramatically boost local education aid and a Democratic push to expand health care access for the poor.

When Democratic Gov. Dannel P. Malloy took office in 2011 and inherited the largest budget deficit in state history, legally exceeding the cap was a political nonstarter. But Malloy still had to work around that limit several times.

He and legislators redirected nearly $80 million annually from charter schools to cities and towns — which then forwarded the funds to the charter schools. Since state aid to poor municipalities is cap exempt, almost 60% — about $45 million — moved outside of the cap.

They borrowed nearly $90 million annually for municipal aid increases, taking advantage of the cap exemption for bonding.

By 2015, then-Attorney General George Jepsen had said the cap exemption for borrowing also logically should extend to state payments into the pension funds — effectively another form of debt payment.

And late in 2015, Jepsen opined that the constitutional cap effectively didn’t exist. Though voters had adopted an amendment mandating a cap, lawmakers never wrote a cap definition into the constitution. All that existed was the 1991 statutory cap, which could be revised or repealed by a simple majority of the legislature.

And when majority Democrats struggled for eight months without reaching agreement on a new state budget in 2017, Republicans agreed to develop a bipartisan plan.

But they insisted it include a new, more stringent cap. No longer would billions of dollars in annual aid to poor cities and towns be exempt. Payments to the state employees’ pension would be back under the cap by 2023, and payments to the teachers’ pension would be covered by 2027.

Accompanying the cap was a new budget control mechanism, one that would force the state to save hundreds of millions of dollars annually — and some years more than $1 billion — in quarterly income and business tax receipts.

Democrats, desperate to adopt a budget that already was months overdue, agreed and approved the plan in late October 2017.

Connecticut Voices for Children, a progressive policy group from New Haven, has long argued that rising pension contributions have sapped resources for decades from education, health care, and social services.

Emily Byrne, executive director of Connecticut Voices, said the 2017 cap “was designed to create austerity budgets and is doing just that.”

Candelora: CT can’t return to big tax hikes of the 2010s

But House Minority Leader Vincent J. Candelora, R-North Branford, noted this cap — like the 1991 version — does include an escape hatch. It allows the legislature and governor to legally exceed the cap or re-write its rules if 60% of both chambers agree.

But most legislators aren’t ready to do that, Candelora said, because they remember the huge tax hikes that Connecticut’s legacy of debt helped to force in the last decade.

And if progressives want to discuss how the cap is creating a budget crisis, he added, they first have to show they made every effort possible to eliminate wasteful spending.

That includes challenging a higher education system with shrinking enrollment to find efficiencies, he said. Republicans also want to find ways to cut costs in the public transit accounts that support rail and bus services, one of the fastest-growing elements of the budget’s Special Transportation Fund.

Cutting costs isn’t easy, Candelora said, but the alternatives can be worse, particularly in the transportation arena.

If spending can’t be cut in this area, he added, two years from now, “you’re going to be having the tolls debate all over again.”

The Lamont administration also questioned why, if some legislators fear a spending cap-induced budget crisis is on the horizon, the cap and other budget guardrails were recently renewed.

“The fiscal guardrails, which were extended unanimously in February by both chambers, have been essential to insulating Connecticut’s state budget against deficits and resulting cuts and tax increases, an issue that other states are currently dealing with,” said Chris Collibee, Lamont’s budget spokesman.

But Rep. Josh Elliott, D-Hamden, a progressive who heads the new Tax Equity Caucus, said many legislators who had to vote for steep tax hikes last decade to keep the government running still haven’t recovered from the political black eye, but they know the current system doesn’t work.

“I think there is still some residual collective trauma from teetering on the brink,” he said.

Elliott added that most legislators also know the more rigid spending cap and other guardrails were likely an overreaction to Connecticut’s decades of fiscal irresponsibility — and the extreme exposure it received in the 2010s as taxes shot up. But it’s unfair, he said, to expect one generation of taxpayers to starve all other programs to try to solve a problem that many generations created.

“If it took 40 years to put the weight on, it might take more than 40 years to take the weight off,” he said.

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