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Fix The Cap, And Budget Will Follow

February 26, 2007

Voters may have approved Connecticut's constitutional spending cap by a wide margin, but certainly weren't consulted when the definitions under which the cap operates were adopted. With 16 years' experience, we now understand that these definitions, included in a 1991 statute, thwart the cap's goal of keeping Connecticut's spending consistent with growth in our state economy - and also has encouraged budget gimmicks, increased borrowing, cost shifting to towns and future generations, and a reluctance to seek new federal funds. It's time to repair these definitions.

The two definitions that most merit rewriting are "increase in personal income growth" and the budget "base."

Rather than using a measure of personal income growth that reflects current growth, the statutory cap uses a five-year average. Most states with caps use a much shorter average. Personal income also is defined in a way that excludes capital gains income, understating Connecticut's total personal income.

The state's budget "base" is defined as the amount appropriated in any year, rather than the amount that the cap would have allowed to be expended in that year or even the amount spent, counting surplus funds.

Together, these definitions cause public spending to consistently lag growth in the state economy. In times of recession, reduced state revenues result in state spending below what the cap allows, which reduces the budget base for spending cap calculations in subsequent years.

As the economy improves and state revenues increase, the cap's allowable growth rate actually declines for a time; the slow growth in personal income in the recession years is included in the five-year average, perpetuating the recession's impact long after it's ended. This year, for example, the five-year average includes the recession years of 2002 and 2003, resulting in only 3.31 percent allowed growth - the lowest rate since the cap was passed.

So, the state budget growth is curtailed in times of recession. Then, when the economy recovers, services can't be restored because an artificially low spending growth rate is applied to a depressed budget base.

Indeed, Connecticut's total state and local spending has declined as a share of Connecticut's economy - from 9.8 percent of state GDP in 1994 to about 8.75 percent in 2003 (fourth lowest among all states). If spending now were the same share of our GDP as in 1994, Connecticut's state and local spending would be about $1.76 billion greater.

The cap's definitions have spawned an increase in spending that is "off-cap," leading to less budget accountability and some greater long-term costs.

For example, because debt payments are not counted under the cap, Connecticut has relied increasingly on bond funds - its credit card - for current operating expenses as well as capital projects. We now rank as the fourth highest in state debt as a share of personal income, and third highest in per capita state debt. As bonded debt has increased, so has debt service. If debt service now were roughly comparable to 1990 (when 5.4 percent of spending was for debt service), there would be an additional $964 million available for other state expenditures.

We're increasingly using special, non-lapsing budget accounts funded with revenues directly deposited to the accounts. Since funds from these accounts are not "appropriated," but are distributed by a statutory formula, this spending is outside the cap. This maneuver also avoids annual legislative scrutiny of the use of these funds, reducing budget transparency and accountability. There are more than 50 such off-budget accounts; the latest example is the Citizens' Election Fund.

These and other measures to evade cap constraints have long-term adverse consequences to the state.

Connecticut now has a choice: To continue with the ill-considered 1991 statutory definitions that are creating these problems or to amend the definitions to better serve the goals of the spending cap. Three modest mid-course corrections are:

Replace the five-year average of personal income growth with a more current and comprehensive measure of personal income growth.

Define the budget base to be the spending that the cap would allow in a given year (or, alternatively, a true total of all spending in that year, including surplus and carry-forward funds).

Exclude new federal funds from the cap in their first year (but add them to the budget base) to eliminate the current disincentive to seek new federal funds.

These re-definitions would implement what the voters intended - ensuring that Connecticut's spending keeps pace with its economy, while reducing the use of gimmicks that undermine the integrity of our state budget.

Shelley Geballe is president of Connecticut Voices For Children, a statewide research and policy group.

Reprinted with permission of the Hartford Courant. To view other stories on this topic, search the Hartford Courant Archives at http://www.courant.com/archives.
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