Resizing state government for tough economic times

by Pete Gioia
CBIA Economist

(Feb. 4, 2009) Gov. Rell today presented a new two-year budget proposal that recognizes Connecticut is in the grips of a severe recession that has dramatically changed the state's economy and requires bold action and "doing more with less."

She proposed a smaller, more affordable and more responsive state government that will eliminate redundancies but still focus on meeting core needs of the people of the state. Her proposal includes no tax increases, maintains funding for municipalities and education and keeps the most important state programs intact.

Her "back to basics" package calls for spending of $18.8 billion in fiscal year 2009-10 -- less than this year's budget -- and $19.5 billion in SFY2010-11. The first year of the budget it is $647 million below the state's spending cap, and $185 million below the cap in the second year.

Aiming for "an affordable government," the governor's plan eliminates or consolidates 23 state commissions and agencies, such as the Commission on Aging. This would result in the elimination of 400 state employee jobs; the governor also included eliminating the authorization for 448 vacant positions. Together these represent a cut of 1.8% of all state employee positions.

She also wants to cancel $389 million of general obligation bonds, mostly for earmark projects, in order to reduce the state's long-term debt. And she is proposing state employee concessions of $295 million, which must be negotiated with the state employee unions.

To help close the huge budget gaps in the current fiscal year and in the next two, the governor plans to use the state's entire $1.4 billion “Rainy Day” fund as well as an anticipated $2.02 billion in federal stimulus dollars from Congress and the Obama Administration.

Using those one-time or short-term funds is a key part of her plan -- but has to work in tandem with reducing the size of state government. Otherwise, Connecticut will again face unsustainable state spending and huge deficits at the end of the 2010-2011 fiscal years.

Maintains levels

The governor proposes maintaining funding levels in:

• Municipal school aid
• Preschool education
• Husky A program, Charter Oak and SAGA health plans
• Medicaid rates

Help for municipalities

She is proposing the repeal or modification of state and municipal mandates, and wants to provide incentives for municipalities to cooperate on regional delivery of services. Gov. Rell also is calling for suspending binding arbitration for two years and then limiting it to salaries and benefits only.

Other major changes:

• Creation of an Office of Accountability to help target and eliminate waste and inefficiency in state agencies as well as other fiscal accountability tasks.
• Creation of a new Middle College system by merging Connecticut's technical high schools with community colleges and the Office of Workforce Competitiveness.
• Merging Connecticut Development Authority and Connecticut Innovations Inc. into a new Department –the Connecticut Economic Innovations Authority
• Adding an FDR-style government jobs program
• Asking for cost-sharing, fees-added eligibility requirements, means testing and co-pays in many social services programs –such as ConnPACE pharmacy program.

More

The budget proposal calls for increases in several licenses, permits and fees (mostly by 25%) to add $172 million to state coffers over the biennium. She also would cap the film industry tax credit at $30 million annually in the budget.

The budget also calls for securitizing part of the Energy Conservation and Load Management Funds, unless the state's revenue picture improves.

Fiscal meltdown

The national recession and meltdown of the financial services industry in 2008 is producing permanent damage to the state’s revenue stream, particularly income tax revenue. Currently, half the state’s income tax revenue comes from 70,000 taxpayers, many of whom are — or were — employed in the financial services or whose wealth is tied to the industry. High salaries are declining, bonuses and capital gains income are vanishing, and jobs that are being lost may not come back for quite a while, if ever.

This fiscal year, the state is facing a budget gap of close to $1 billion, with tax receipts having fallen $1.5 billion from initial projections.

The state lost 29,300 jobs in 2008, and indications are the pace of job loss is accelerating in early 2009. The combination of cyclical and structural economic crises has already affected more than 88% of our residents according to a recent Zogby Poll.

Connecticut is not alone in facing enormous budget deficits. Our neighbors Rhode Island, New York and New Jersey face bigger challenges. Many of the Governor’s difficult decisions are similar to severe cuts and other changes many states are introducing. Massachusetts has already substantially cut social service and state entitlement programs. Massachusetts and New York, among others, are proposing tax increases, whilestill others, such as Colorado, are actually cutting taxes at the same time that they are making big program cuts.

While the governor’s plan does rely on use of one time or short term funds such as the budget reserve funds, the federal stimulus and securitization, it anticipates solid economic recovery in SFY2011-12. This would begin again to generate good tax revenue from profitable businesses, employee raises, and substantial employment creation.

It is vital that legislative leaders adhere to the basic premises of the governor's budget proposal– that the economy and recovery are job one, that structural change must mean smaller government, that better service must be supplied through a more efficient delivery of services. CBIA urges the General Assembly to take up these tenets as it proceeds with budget deliberations.

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