How We Got Here

A Spending Problem

While Connecticut has not experienced significant changes in population or private-sector job growth over the past 20 years, the cost of state government has grown dramatically.

Since 1992, Connecticut’s population has increased by 9% while state spending has grown by more than 153%, despite the state’s spending cap.

Index: Full Report (pdf) | Streamline State Government | Rebalance Healthcare | Reform Corrections | Modify State Employee Benefits | Expand Use of Nonprofits

Long-Term Spending

Spending for state employee retiree health benefits has grown an unfathomable 981% since 1992; debt service (paying off state borrowing) has increased 204%; Medicaid spending is up 180%; state employee pensions, 583%; and spending on the state’s corrections system has increased 178%.

While these big-ticket items are growing at a faster rate than the overall budget, other areas of state spending vital to Connecticut’s economic viability and quality of life have seen disinvestment by the state.

When state spending continues to rise, it also drains dollars from our economy and
discourages job creation and business investment in the state.

Structural Problem

To be sure, much of the rise in state spending is a response to greater needs for vital, safety-net social services that have been stretched by a poor economy. Healthcare costs also have risen dramatically for the at-risk and aging population served by the state.

Costs have also risen, however, because of agreements made over time to guarantee generous retirement benefits for state employees. These guaranteed benefits have created significant and arguably unsustainable long-term obligations for state taxpayers. Compounding the budget crisis is the fact that the state has failed to adequately fund its long-term commitments, chiefly for state employee and teachers’ pensions and state employee retirement healthcare.

Connecticut has an estimated $63.9 billion in overall long-term obligations. This figure is an improvement over 2010’s long-term obligation valuation of $73.1 billion, due in part to
concessions negotiated with state employee unions.

However, the lower debt total heavily relies on optimism and estimation. The large drop in OPEB liability (other than pension employee benefits) is in part due to a simple change in the discount rate used to calculate obligations; that is, some of the “savings” came from using different assumptions on the rate of return of the state’s invested pension fund, while the balance came from changes negotiated with the state employee unions.

Though the governor and legislature should be credited for taking steps in the right direction, it is likely that the state still has not yet been put on a sustainable path that will
consistently lower the baseline in the coming years.

Much more can and needs to be done to bring these benefits and obligations in line with our ability to afford them.

Other Critical Factors

• The state’s income tax has become more volatile and hits small businesses (who pay their business taxes through the tax) particularly hard; this has hurt our economy.
• The recession substantially changed the state’s income tax structure, for example, hitting the financial services industry—a traditionally large source of income tax
• revenue—particularly hard; many of those jobs, incomes and bonuses did not return.
• Connecticut’s population continues to gray, with more baby boomers heading toward retirement and out of the workforce. This demographic migration will strain the state’s income-producing population to pay the cost of state government.
• A federal budget sequestration would have a profound impact on Connecticut’s finances if a solution is not worked out by Congress before the deadline.

Under sequestration, non-defense discretionary spending could see across-the-board cuts to the tune of $38 billion, forcing Connecticut to do without grants and state aid that it usually relies on to finance priorities such as education and social programs. For example, both Title I money for disadvantaged children and special education funding for states would be cut by over $1 billion. Large portions of educational spending are mandatory as well; when federal funding does not come, the money must be found elsewhere in the budget, leading to further cuts in other areas.

Federal aid for state social programs would also be significantly cut, seeing state spending on items like the WIC (women, infants, and children) Program, and energy assistance programs drastically reduced.

Policy Changes

Policymakers must create a state budget and develop long-term solutions that will keep spending within taxpayers’ means and restore responsible fiscal policy. State government must become more effective, more accountable, and more affordable.

Several major studies by the Thomas Commission, Harper-Hall Commission, Connecticut Institute for the 21st Century, Commission on Nonprofit Health and Human Services, and others have identified practical solutions for making state government work leaner and better at less cost.

Governor Malloy has committed his administration to finding ways to streamline state government. The state also is beginning to address the largest cost-driving areas of state spending, such as state employee and teacher retirement benefits, the corrections system, medical care, and long-term healthcare.

The overriding need is to act decisively to restore greater fiscal responsibility and scale back the cost and scope of state government. Ideas are at hand; the question is whether policymakers will have the political will to implement them.