State government refuses to live within its means — and all of us pay the price
If you thought the $1 billion state budget deficit of fiscal 2008-09 was scary, brace yourself for the sequel to this horror flick: State budget officials predict Connecticut will face a shortfall of at least $3.2 billion in 2011-12.
“It’s about as bad as it could get,” says Pete Gioia, economist and director of research for the Connecticut Business & Industry Association (CBIA). Worse yet, “If anything, that estimate is a best-case scenario. The towns are in the soup, too, not only because of the state’s problems but also because [property values are plummeting]. There are no easy answers on this; there is just a lot of pain.”
Throughout 2009, estimates from state officials about expected deficits have grown larger and larger, fueling a sustained battle over the two-year budget, which took effect two months late, in September, without Gov. M. Jodi Rell’s signature. It purportedly closed a projected $8.5 billion deficit over the two-year period from fiscal 2009 to fiscal 2011, using a patchwork of federal stimulus funds, state “Rainy Day” funds, new borrowing, tax increases and spending cuts.
In mid-November, the governor’s budget office and the state Office of Fiscal Analysis issued the 2011-12 forecast, noting that’s when the bill will start coming due on money state legislators borrowed to balance the current $37.6 billion biennial budget. At the same time, federal stimulus money will be gone, the Rainy Day fund will be depleted, and it will be costlier to borrow more money, because Moody’s Investor Services and Fitch both recently downgraded the state’s future bond issues, noting already-high levels of state debt.
That will leave spending cuts and tax increases as the only two ways to address new budget shortfalls when the 2011 legislature tackles the next biennial budget. Geary Maher, director of the Office of Fiscal Analysis, says if no other steps are taken before then, the state would have to either cut spending or raise taxes by about 18 percent.
“We’re in a world of hurt,” said Robert Genuario, the state’s budget chief, when he unveiled the forecast November 18.
This year, lawmakers increased the state income tax rate to 6.5 percent from 5 percent on couples making more than $1 million and single filers earning $500,000 a year. However, the state has lost an estimated 12,200 millionaires between 2007 and 2009, according to Phoenix Marketing International, from 95,000 to 82,800 millionaires. Lawmakers also added a 10-percent tax surcharge for three years on large companies and boosted cigarette taxes to $3 a pack from $2.
Since the budget passed in September, the state has rolled up another $385 million in current deficits, and the economic news has been unremittingly negative: Unemployment hit 8.8 percent statewide in October, home foreclosures and loan delinquencies set new records in the third quarter, and personal income is expected to drop a record 4.0 percent statewide this year.
“Things look really grim,” says Fred Carstensen, director of the Connecticut Center for Economic Analysis at the University of Connecticut. “The state is in very deep trouble, and we need to change the trajectory that we are on. Economic development has got to be the No. 1 issue.”
Carstensen charges that this year’s legislative session “was entirely about sustaining state government and not at all about sustaining the state’s economy. There appear to be very few legislative leaders who understand the situation that we are in.”
In a November 20 report, the Connecticut Center for Economic Analysis says that even if the national economy posts a strong recovery from the recession over the next couple of years, Connecticut will see only modest job growth and is unlikely to get back more than half of the jobs lost, a number that stands at 85,000 but is expected to reach 100,000 next year.
The report shows that government gained the most jobs in Connecticut between 2002 and 2008, with 35,000 people added to government payrolls, 31,000 of them in local government. By contrast, the hardest-hit sector over the time period was manufacturing, which lost 50,000 jobs.
Since the national recession began in November 2007, Connecticut’s jobless rate has soared from 4.6 percent to 8.8 percent. The UConn report says state lawmakers need to craft “creative, even radical” new policies to invigorate Connecticut’s economy.
Gioia agrees. “There has to be real restructuring,” he says. “The towns must restructure their budgets and the state has to do the same, to look at what they can live with over the long term.”
Families, individuals and businesses already have been taking creative measures to cope with the economic downturn, and state and municipal governments must now do so, Gioia says.
“There is no family in Connecticut that hasn’t had to readjust their own personal spending, and I don’t know of any business that hasn’t made some adjustments,” he says. Moreover, raising taxes further will only hurt the economy more. “The more they raise taxes, the less investment we will see and the less likely we’ll see individuals or companies relocate to this state, further prolonging recovery and stifling new job opportunities,” notes Gioia.
The state must restructure its spending to avoid further downgrades in the state’s bond rating, which drives up the cost of borrowing, Gioia says. “State bondholders happen to be the people who live in the state who are invested in pension funds,” he says. “It will devalue those investments, and this is Grandma that is going to get hit, not some fat cat on Wall Street.”
Norwalk State Rep. Lawrence Cafero (R-142), the House Republican leader, has been sounding the alarm on state spending for months and seized on the new deficit forecasts to push for further spending cuts.
“We are continuing to lose businesses and jobs, revenues are plummeting, and Moody’s said the state of Connecticut is on the wrong path,” Cafero says. “The state borrowed too much, and its tax stream is based on a volatile income stream, and that is wealthy individuals. We are in deep trouble, and it requires immediate action.”
Cafero and other Republicans charge Democrats, who hold a 2-1 supermajority in Hartford, with failing to cut spending sufficiently and relying too heavily on borrowing to close the current deficit. “This is a real fiscal crisis, and it is time to get serious, it is time to cut spending,” Cafero says. “We need a commitment on the part of the Democratic Party to take corrective action immediately with regard to this budget.”
Democrats, however, say they did mandate $211 million in spending cuts, many of which have not been carried out by the Rell administration, according to Senate Majority Leader Martin M. Looney, (D-11) of New Haven.
“We did cut a great deal in the current budget, in administration of managed care and in the state bureaucracy, but the governor has not been willing to make the cuts,” Looney says.
Rell says she has withheld funds from several state agencies and that other cuts, for instance those that affect private contractors, will take time to implement. She also says some of the Democrats’ budget cuts are not practical, such as a requirement to sell off $50 million in state assets. She says the Democrats built a budget on “false assumptions.”
Looney acknowledges that further spending cuts will be necessary unless lawmakers can agree on ways to raise more revenue through further tax increases.
“Because the economy is continuing to decline, all of our major revenue sources are falling short,” he says. “We only have two tools left: cutting expenditures or raising taxes.”
Looney points out that state lawmakers have largely been able to shield Connecticut’s cities and towns, which receive 23 percent of their revenue from state aid, from major cuts. “That’s the largest single area that hasn’t seen significant cuts,” Looney says. “If the state continues to be in deficit, and we have to cut municipal aid, that will only shift the burden onto local property taxes.”
Kevin Maloney, spokesman for the Connecticut Conference of Municipalities in New Haven, agrees, saying that cuts in state aid to cities and towns would only worsen the state’s budget woes.
“The property tax is already the largest tax in Connecticut,” Maloney says. “Local officials have probably done a better job than anyone else at paring budgets and not increasing taxes. Cities and towns have gone through layoffs, spending freezes, freezing benefit packages, and they are moving in the direction of trying to share services with neighboring towns.”
Faced with a ballooning budget deficit for the current year, however, Rell on November 24 proposed several new cost-saving measures including a 3.0-percent, $84 million immediate reduction in aid to cities and towns, which would total about $2.8 billion. She also announced the cancellation of a 0.5-percent cut in the state sales tax that had been scheduled for January 1, a move that will reduce the deficit by roughly $130 million.
Donald L. Klepper-Smith, a New Haven economist who chairs the Governor’s Council of Economic Advisors, puts the state’s economic picture into a long-term perspective.
“From 1987 to 2009, personal income grew 172 percent, but state spending grew 283 percent,” he says. “The key really is jobs. Jobs are linked to income, which is linked to consumer spending, consumer confidence and tax revenue. Unfortunately, Connecticut consumers are not going to be in a position to lead a robust expansion any time soon.”
Job growth will be slow to moderate because Connecticut is facing structural problems related to globalization and outsourcing, Klepper-Smith says, adding that those problems will continue to dampen Connecticut’s growth prospects.
“You can’t tax your way to fiscal health,” he says. “If we’re going to resolve these deficit problems we need to look at the spending side. We’re going to have to do what every Connecticut household has done over the last two years, which is to start living within our means. It’s a simple concept but it’s lost on many. Yet it’s clear that living beyond our means has led to increasing costs, a lower standard of living and an uncompetitive business environment.”
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