Another state budget crisis means another push for fiscal reform

It’s too late for the state to avoid having to deal with the largest budget deficit in Connecticut history when the next legislature and governor take office in January.

But while that problem is inevitable, some state officials are trying to build some new fiscal guardrails into Connecticut’s budget system to at least reduce the likelihood of another multi-billion-dollar deficit down the road.

And while they acknowledge that government has jumped the rails before, proponents remain hopeful things will be different this time around.

“Government is going to change, whether it is this year or next year. It has to,” said state Comptroller Nancy Wyman, who proposed several measures embraced by the legislature’s Appropriations Committee.

Chief among them is a bill that would increase the maximum savings allowed in state government’s emergency reserve, commonly known as the Rainy Day Fund.

The state currently has authority to reserve an amount equal to 10 percent of annual General Fund spending. The General Fund comprises the bulk of state government’s operating expenses, roughly $17.4 billion out of this fiscal year’s $18.64 billion overall budget. Wyman’s proposal would boost that to 15 percent.

Connecticut politicians boasted two years ago when the Rainy Day Fund reached a record-setting $1.38 billion. But that amount didn’t represent the maximum allowable savings, being equal to roughly 8 percent of annual operating expenses.

Lawmakers and Gov. M. Jodi Rell emptied that reserve completely in the budget adopted last September, assigning those dollars to compensate for declining tax revenues and prop up spending this fiscal year and next.

Wyman tried to get legislators to boost the reserve limit to 15 percent seven years ago, when state government last was mired in deficit and the maximum was set at 5 percent.

Then the Rainy Day Fund, which had been filled to its limit with just under $600 million, was exhausted 10 months into the 2001-02 fiscal year, and state government borrowed $219.2 million. More importantly, Connecticut entered the worst fiscal year of that recession, 2002-03, with no cushion, and borrowed another $97.7 million despite an across-the-board income tax hike.

“Some ideas take years and each time you bring them back you get more people interested,” the comptroller said, noting that national economic experts recommend a reserve of as much as 18-20 percent to guard against a three-year economic downturn.

A second proposal from Wyman that the Appropriations Committee supports would create a special savings account to prepare for an oddity in the calendar.

State government pays its employees every two weeks, creating 26 annual pay periods. But every 11 years, there is a 27th payroll. Based on the current budget, that costs about $109 million, according to a report from the legislature’s Office of Fiscal Analysis.

In good fiscal times this has not been a problem, as legislators and governors routinely have drawn the funds from budget surpluses. But what happens when the bill comes due when the state is out of money, as it appears will happen in 2011-12? Legislative analysts are projecting a $3.88 billion deficit, the largest in state history, for the fiscal year that begins 15 months from now.

The committee approved a bill that requires state government to create a new account and contribute annual installments equal to 1/11th of the projected cost of an extra payday.

“I think it just makes common sense,” Rep. John Geragosian, D-New Britain, co-chairman of the Appropriations Committee said. “We know we have that obligation. Why not plan for it?”

But not all proposals designed to avoid future fiscal crises are accepted by the legislature, and some that have been have not worked as promised.

Rell’s proposal to increase her authority to order budget cuts unilaterally when the state faces budget deficits was rejected by the appropriations panel.

The governor already is empowered to reduce certain accounts by up to 5 percent without legislative approval, though debt service, municipal aid and employees’ salaries and benefits effectively are exempt. Rell’s proposal would have increased the limit to 15 percent provided the deficit equaled at least 5 percent of the General Fund.

“The chief executive of our state must have the tools to help restore equilibrium,” Office of Policy and Management Secretary Robert L. Genuario, Rell’s budget director, testified before the committee last month, calling the measure “a modest but necessary change.”

But Geragosian said “the governor already has great powers to put the brakes on the budget.”

The 1991 General Assembly tried to temper outrage over enactment of the state income tax by drafting a statutory spending cap, a provision which voters would add as the 28th Amendment to the state Constitution one year later.

But the cap, which is supposed to keep spending increases in line with the annual growth in personal income, can be circumvented easily if the legislature and governor see eye-to-eye.

If the governor signs a declaration of fiscal “exigency” the legislature can expend dollars in excess of the cap with a 60 percent vote of approval in both chambers.

This declaration of a compelling need to exceed the cap became routine over the last decade under Rell and her predecessor, John G. Rowland. Tens, and in some years hundreds, of millions of dollars were spent legally in excess of the limit, often on small community and regional “pork barrel” projects.

Rowland’s declarations in 1998 and 1999 were issued, in part, to allow funding of $100 million in income tax rebate checks each year. In June 2001, 12 months before state government would be over $200 million in deficit, Rowland and the legislature legally exceeded spending cap limits by more than $600 million.

Rell and the legislature broke through the cap for three consecutive years, from 2005 through 2007.

And of the $6 billion in gross surpluses accrued in the first 17 years since the income tax’s enactment, less than one-third was deposited into the Rainy Day Fund, Wyman said.

For example, though state government deposited $270 million in the reserve following the 2006-07 fiscal year, it actually had a record-setting $1.06 billion preliminary surplus it could have saved.

“The problem is that every time we have had a surplus, we have broken through the spending cap,” said Wyman, who also proposed a requirement that at least 1 percent of any projected surpluses identified monthly by her office immediately be deposited into the budget reserve.

That requirement was rejected by the committee.

“People might think this is all a waste of time, but I don’t mind trying to get the right kind of fiscal management in this state,” Wyman added. “Pretty soon the people in this building are going to be looking for every good idea they can get. Hopefully this terrible time will leave the legislature with a different viewpoint.