Why Connecticut Has a Spending Cap (and Must Protect It)

02.14.2013
Issues & Policies

The first thing you have to know about the state’s constitutional spending cap is that over its 20-year history it hasn’t stopped the state budget from growing, but it has slowed it down.

In fact, since the cap was put in place in 1992, state spending has increased 153%, outpacing Connecticut’s population growth and the inflation rate.

More to the point is trying to imagine where we’d be without the cap. And why we need to protect it.

Big trouble

Connecticut was in big trouble in the late 1980s. “Black Monday” hit in October 1987, signaling the end of a bullish economy. And when the Berlin Wall came down in 1989-90, it was great political news that nonetheless caused a major reduction in defense spending—a cornerstone of Connecticut’s economy.

Meanwhile, Connecticut was in the midst of a major spending binge. Double-digit percentage increases in state spending were routine in the 1980s—with an average growth rate of 11% during the decade.

Massive state program expansions fueled spending hikes, produced a mountain of state liabilities, and created the state’s first billion-dollar budget deficits in the early 1990s.

Business confidence, the economy, jobs, and the state’s finances were all, like the Berlin Wall, falling down.

‘Enough!’

Part of then Gov. Lowell Weicker’s response to the crisis was to propose a broad-based income tax, the state’s first. Opposition from both sides of the political aisle was fierce, to say the least.

And saying they had had enough, taxpayers demanded a way to keep state spending within their ability to pay for it.

A compromise was reached in which the income tax came in with major strings attached—a spending cap along with other spending controls that included biennial budgeting, mandatory five-year revenue forecasting, the governor’s rescission authority, and reorganizations within state government.

“The cap was intended to be tough and designed to give future governors and the legislature fits in managing to stay within it,” says Pete Gioia, CBIA economist.

“It was pain for pain, quid pro quo—taxpayers would have to face an income tax but policymakers would forever be forced to control state spending.”

Loud and clear

In a very loud statement, more than 81% of Connecticut residents voted for the spending cap in 1992 in the deal that included the income tax.

The cap ties state spending to the growth in personal income in Connecticut—as determined by the greater of the current of rate of inflation or five-year average of the annual personal income growth for the state (as compiled by the federal Bureau of Economic Analysis).

Some called it “the taxpayers’ savior.”

Confidence Boost

The cap and the tightened controls helped put Connecticut back on a sounder fiscal foundation, restrained the growth of state spending, and over the years even produced periodic surpluses that were used for significant state projects.

Best of all, Connecticut’s individual taxpayers and businesses were right on the money—the cap restored business confidence in the state and produced a renewal of economic growth and job creation.

Back then, everybody recognized the crisis and realized they had to respond. It was a very tumultuous time that riveted the attention of taxpayers and policymakers.

This year, Connecticut faces another multibillion-dollar state budget deficit as revenues continue to drop. A struggling economy and changing state tax base have made even the current rate of state spending unaffordable for taxpayers.

While it has helped apply the brakes, the cap hasn’t stopped the budget, or state government programs, from growing. We again face a fiscal crisis.

Yet the response from some policymakers is not to address state spending, but to explore ways to circumvent the cap.

The cap can be exceeded, and has been, if the governor declares an emergency or the existence of extraordinary circumstances and if a minimum of three-fifths of each chamber of the General Assembly agrees.

It can also be modified with the same three-fifths legislative agreement.

To Exempt or Not to Exempt

The governor’s budget proposes to modify the cap to allow for new requirements the state is facing under the Affordable Care Act. That’s the kind of exception that was envisioned, and exempted, when the cap was adopted.

However, the governor also wants to exempt certain spending on state debt, for teachers’ and state employees’ retirement accounts.

But that’s not what the cap’s creators envisioned.

“There was a lot of debate over what was to be in and what was to be out of the cap as it was being developed,” says Gioia. “An area discussed and explicitly not excluded was state employee and teacher pensions and other-than-pension retirement benefits.

That’s because, he explains, “the crafters of the cap knew this could become a problem—at the time, the administration had just negotiated with the unions to forego two pension payments so that his budget could balance.

“Legislators did not want to reward or encourage this kind of budgeting in the future, so they made sure it came in under the cap,” says Gioia.

Keep the Cap

Ultimately, the answer isn’t to lift, limit, or modify the cap. State spending, once again, must be reduced and state government made more effective, efficient, and affordable.

There are many ways to accomplish that and CBIA has offered some that would address Connecticut’s long-term fiscal health and viability in its Turning the Tide report.

The governor’s message was the first step in a long budget-approval process. Over the next few months, the legislature and administration will negotiate the content of the final budget before bringing it to a vote later in the session.

CBIA is urging the General Assembly to enact further spending cuts, take immediate steps toward resolving the current budget deficit and address the state’s long term fiscal obligations.

Lawmakers should also pursue policies that will grow the state’s economy.

There’s no better economic development tool than making the changes needed to control spending, demonstrate fiscal discipline, and make government more efficient.

For more information, contact CBIA’s Pete Gioia at 860.244.1945 or pete.gioia@cbia.com.

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