Economy’s ‘New Normal’ Cries Out for New State Budget Approach

Connecticut’s recovery is beginning, but the recession’s impact continues because of deep structural changes that have resulted in a “new normal” for our economy and a new reality for state budgeting.
Members of the Governor’s Economic Advisers agree on those points as well as this one: State government has to change the way it operates, because we can’t afford it not to.
While recovery is under way, it’s likely that the 100,000 jobs we’ve lost will not come back soon, perhaps not until the end of 2014. It’s significant that many jobs that do “return” actually won’t be the same high-paying jobs we’ve lost.
The recession wreaked havoc on certain industries, such as financial services, which traditionally have been major bulwarks of Connecticut’s economy. In the recovery, new jobs may be lower-paying, more service-oriented jobs.
Then there’s our graying population, among the oldest in the U.S. Residents age 65 and above are expected to increase by 40% over the next 15 years in Connecticut. This will put a heavy burden on long-term health care and other public services and further weaken state tax revenue as more residents retire.
The “new normal” is that our economy won’t be as robust in terms of the incomes and tax revenue we have come to expect in Connecticut, at least for the foreseeable future.
Consequently, policymakers can’t afford to budget based on how our economy used to perform, nor by assuming that it will bounce back soon.
The wrenching changes to our economy now require similar structural changes in how the state provides government services. How can we continue providing sustainable state services in the face of weak job growth, lower incomes, and an older population?
Something has to change—fundamentally. Responsible, long-term solutions that will cost taxpayers less and maintain or even improve state services are needed. Here are five ways to make state government more efficient and cost-effective:
1. Adopt Lean practices to streamline government processes and improve quality.
2. Rebalance the way long-term care is delivered.
3. Reform prison and corrections practices.
4. Change mode of service delivery for community living arrangements.
5. Reopen and renegotiate compensation contracts for state employees.
Lean to streamline
Senate Bill 467 is a good start toward improving the way state government operates. This forward-looking proposal calls for all state agencies to adopt the Lean business practices that Connecticut businesses have used to streamline, cut costs, and stay competitive.
Implementing Lean, along with results-based accountability (RBA), will help the state provide better quality services at lower cost. Policymakers should start with the biggest and most costly agencies, such as the Department of Transportation.
Long-term care
A comprehensive report by Blum Shapiro to the Connecticut Regional Institute for the 21st Century calls for the state to rebalance long-term care away from expensive institutional care and toward less costly home care.
We should let residents choose their care, and surveys show that people overwhelmingly favor staying in their homes rather than going to traditional institutions.
If Connecticut’s system operated as Oregon’s already does, we could potentially see annual savings of $600 million. Even moderate efforts to rebalance the system might save $100 million per year in the near term.
Prison reform
Prison expenses are a major part of Connecticut’s budget and another area for prudent savings. Using innovative practices and focusing on preparing state inmates for successful re-entry into society could make it possible to close more facilities and reduce the rate of prison recidivism.
We should:

• Expand alternatives to incarceration for nonviolent offenders (cost: between $15,000 and $18,000 per person per year, versus $32,000 to $40,000 in prison), as called for in SB-475.
• Develop character-based prison options similar to Florida’s, which have a 7% recidivism rate over three years, vs. Connecticut’s 67%.
• Explore best practices in other states to reduce recidivism and implement pilots as soon as possible.

Nonprofit community providers
House Bill 5245 calls for the state to switch to nonprofit providers for all community services, and that’s a good thing because there is a dramatic cost difference between community-living-arrangement services provided by not-for-profit organizations and by state-employees.
One study showed that state-employee-provided services were 2.7 times as expensive as nonprofit-provided services, with no discernable difference in quality.
State employee compensation Public-sector employees are compensated 45% more per hour than private sector workers, says the U.S. Bureau of Labor Statistics. This equates to hourly average compensation of $39.66 per state and local government worker compared with $27.42 per private sector worker.
Unionized jobs in the public sector continue to increase, with “much higher average wages and benefits than nonunionized public sector workers” (Cato Tax and Budget Bulletin, “Public Sector Unions” and Wall Street Journal, March 26, 2010).
We must find ways to reassess or renegotiate compensation contracts for state employees. Controlling state spending and making government work better will help avoid harmful tax increases that hurt families, businesses, and the state’s economy.
Addressing some of these areas now could produce much-needed economic dividends as Connecticut seeks to recover from the recession. — Pete Gioia
Pete Gioia is a CBIA vice president and economist. He may be reached at 860.244.1945 or pete.gioia@cbia.com.