Dueling state budget forecasts: There’s no escaping fiscal realities

The General Assembly’s Appropriations and Finance Committees recently met to hear annual budget forecasts from both the governor’s budget office (OPM) and the legislature’s nonpartisan budget office (OFA). Certain disparities between their projections were striking.

While both agencies project substantial deficits for the next biennium, their projections differ by a vastly greater margin than ever before. The nonpartisan OFA projects a $2.3 billion deficit for the period, while OPM projects just over $1 billion. Similarly, OFA shows the budget exceeding the state spending cap every year through 2018, while OPM shows the budget under the cap every year except 2016.

Why the difference?  OFA used a “current services” methodology, which assumes that the same services will be provided from one year to the next, along with any actions already scheduled or required by law — in other words, it assumes no policy changes. Both offices have used this method consistently for almost a decade.

OPM, however, for the first time, used a methodology it calls “current practices.” Essentially, this isn’t a methodology, but an arbitrary accounting change that assumes that certain policy changes made in recent years will be made again, regardless of the composition of the administration.

Two items accounted for most of the gap. First, OPM didn’t take inflation into account in estimating future expenditures. Second, OPM assumed the state wouldn’t fully fund certain statutory grants, including education funding to towns.

The net effect? This makes prospects for the next biennium appear vastly improved. It makes meaningful year-to-year comparisons impossible. And it could blindside the legislature in its efforts during the next session to make informed budgetary adjustments for the remainder of the current biennium. This doesn’t inspire faith in the administration’s transparency or willingness to give the legislature an objective picture of the state’s finances.

That said, the two reports nevertheless concur in painting a grim picture of Connecticut’s financial future, with no end in sight to the state’s severe fiscal problems:

  • The state’s largest ever tax increase has not revived its economy. While Connecticut will likely show a small surplus in fiscal 2014 and 2015, it faces tremendous deficits in fiscal 2016, 2017 and 2018, the three years following the next gubernatorial election, whichever forecast you choose. OFA predicts successive annual deficits of $1.1 billion, $1.2 billion and $1.4 billion for the period; OPM predicts $612 million, $432 million and $376 million successive annual deficits.

 

  • The near-term surplus isn’t structural. Instead, it stems from postponing debt repayments, borrowing to pay operating expenses and a one-time influx of $750 million in non-recurring revenues.

 

  • Debt service payments will reach record highs in the next few years. Historically, they have represented 8 percent to 8.5 percent of total spending, but during the next biennium, they will constitute about 12 percent of the budget.

  • Long-term debt, which totals more than $65 billion, is less than 50 percent funded.

  • Retirement and health care costs for state employees are projected to increase by 33 percent, from $2.4 billion in fiscal 2013 to $3.2 billion in 2018. Growth in retirement costs will more than double that of the Consumer Price Index.

  • All of these factors are threats to Connecticut’s credit quality, which continues to be the lowest among the New England states.

 

Against the backdrop of the state’s financial troubles, it was disturbing to see OPM’s presentation state, as it did last year, that “Connecticut’s fiscal future will largely be determined by forces outside the control of state leaders,” citing national and global economic factors that affect revenues in every state. It is not now, and it was not then, appropriate to consign Connecticut’s fiscal future to the hands of fate by relying on revenues. We have the proof that this doesn’t work.

Instead, state leaders have a responsibility to take the bull by the horns by acknowledging taxpayers’ inability to fund a government bursting at the seams and by forcing the state to live within the means of those it serves.

Policy decisions that reduce spending and borrowing are well within state government’s control, and the General Assembly can make those decisions by working collaboratively to protect Connecticut’s financial future. Other states have become stronger than the forces besieging them. Connecticut must do the same.

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