What Drives State Government Spending?

Connecticut state government spending jumped 153% in the last 20 years, from $7.9 billion to $20 billion today. What’s driving that incredible growth, which far outpaced increases in population, inflation, and household income?
State employee retiree health benefits led the big-ticket items, growing an incredible 981% over the last two decades. Or, in dollar terms, rising $580 million to $640 million.
State employee pension costs experienced the second-largest percentage jump, from $130 million to today’s $900 million, a 583% increase.
The costs of servicing state borrowing (interest and principal payments on bonds) rose 204%, from $780 million to $2.3 billion.
Medicaid spending increased 180%, from $1.65 billion to $4.63 billion. The cost of operating the state’s prison system went from $250 million 20 years ago to $700 million today, a 178% increase.
By comparison, the state’ s population only increased by 300,000 people, or 9%. Median household income rose just 59% (from $40,841 to $64,831), failing to keep pace with the 66% growth of inflation.
Priority areas suffer
And while these big ticket items grew at a faster rate than the overall state budget (which jumped 153%), spending on critical priority areas such as education and infrastructure had much lower growth rates over the same period of time.
When state spending continues to rise, it also drains dollars from our economy and discourages job creation and private sector investment.
Much of the increase in spending is a response to the greater needs for vital, safety-net social services stretched thin by the poor economy. Healthcare costs for the state’s at-risk and aging population also rose dramatically.
However, spending also soared because of a series of agreements made during those two decades guaranteeing generous retirement benefits for state employees.
Unsustainable
Those benefits created significant–and arguably unsustainable–long-term obligations for Connecticut taxpayers. The state’s inability to fund these long-term commitments compounds the current budget crisis.
The state has an estimated $63.9 billion in total long-term obligations, mainly state employee and teacher pensions and state retiree healthcare benefits.
CBIA’s report on state spending, Turning the Tide: Fiscal Policy Changes, Best Practices and Ideas That Work, illustrates how spending policies are as much to blame for the state’s current budget woes as the slow economic recovery.
The report looks at a number of solutions, including recommendations from various state commissions and ideas adopted as best practices in states around the country.
Solutions
Those recommended solutions directly address the major growth areas in state spending, and include:

• Continuing to streamline state government. Recommendations include the adoption of lean techniques and other efficiency strategies, using performance-based budgeting in all state agencies and programs, upgrading the state’s information technology system, and modifying union rules to allow redeployment of employees based on priorities.
• Developing more home-based, long-term healthcare programs. Proposals include providing home-based care when appropriate, shifting more Medicaid recipients to high-quality community-based programs, expanding the use of nonprofit agencies for services, and staffing increases for the state’s fraud prevention and control units.
• Reforming the corrections system. The report calls for an expansion of nonprofit programs, reforming corrections officer job classifications and work rules, implementing Connecticut Sentencing Commission recidivism reduction recommendations, overhauling medical retirement benefits, and engaging the business community in re-entry programs.
• Expanding the use of quality nonprofit agencies. Proposals include requiring state agencies to use results based accountability for assessing existing programs and services, streamlining current contracting procedures and cutting red tape, and allowing health and human services clients to more readily access community or home-based care.
• Modifying state employee healthcare and retiree benefits. Major reforms include capping annual pension payouts at $100,000, eliminating the use of overtime in calculating pensions, increasing medical co-pays for future retirees, raising the retirement age from 62 to 65, and eliminating post-retirement medical coverage for new employees while switching them to 401(k)-style retirement plans.

Policy changes
Comprehensive policy changes are needed to control spending, develop fiscal discipline, and make government more efficient. That’s the most viable economic development strategy we have as a state.
Lawmakers face some tough decisions. But they also have the opportunity to address our fiscal challenges, restore business confidence in the state, and get people back to work.
If lawmakers fail to resolve the cycle of budget deficits, if state government continues to spend beyond taxpayers’ means, then the state’s economic future is at risk.