As analysts outlined a grim picture Wednesday that could include further cuts to state social services and reversing recent enhancements in local aid and transportation, one key lawmaker insisted officials must discuss raising revenue in 2017.
Though it is premature to target specific measures — such as tax increases, fee hikes or tolls — Rep. Toni E. Walker, D-New Haven, said trying to offset surging debt costs in the next state budget solely with cuts “is going to be devastating” to Connecticut.
“I believe there are things out there that we need to look at, that we have turned up our nose to” over the past year, she said. “We have to look now, and we have to look at who is suffering in this state.”
Walker, a New Haven Democrat who co-chairs the Appropriations Committee, made her comments after a three-hour briefing on budget trends by executive and legislative branch analysts.
Retirement benefits, payments on bonded debt and Medicaid represent about half of a nearly $18 billion General Fund. But contractual requirements and federal entitlement rules mean these “fixed costs” will surge between $900 million and $1.1 billion next fiscal year.
Analysts also recently downgraded revenue expectations for next year by almost $200 million.
Gov. Dannel P. Malloy has said he wants to avoid major tax hikes, which means finding enough cuts to offset both this “fixed cost” growth and likely revenue erosion, a task that could approach $1.3 billion.
But Walker noted that even if Connecticut were to survive such an exercise, analysts project retirement benefit costs — which make up the bulk of the problem — are on pace to skyrocket through the early-to-mid 2030s.
“There are some who believe we can get through all of this with austerity,” said Walker, who has served in the House since 2001 and led Appropriations since 2011. “But they haven’t seen what an austerity budget would mean.”
Walker continued that members of her panel and of the Finance, Revenue and Bonding Committee are seeing now that “social services and other programs that were devastated in the last budget could be eliminated in the next one.”
Education, health care, town aid get squeezed
To prove the “devastation,” Walker pointed to the math.
If retirement benefits, other debt costs and Medicaid eat up a little more than half of the General Fund, that leaves about $8.4 billion to cover everything else.
Taking as much as $1.1 billion out of that $8.4 billion – to offset spiking debt costs – would represent an average cut of 13 percent.
But there are other costs in that $8.4 billion that also aren’t easy to avoid, such as contractually required salaries and health care for current state employees.
Walker said she fears the budget axe would fall heaviest — probably as much as 20 percent — on local education, other municipal aid, social services and public colleges and universities.
Office of Policy and Management Secretary Ben Barnes did not suggest specific cuts, but neither would he rule out reductions to any program or service.
Just 18 months ago Malloy and legislators hailed a “historic and transformative” plan to dedicate sales tax receipts to enhance transportation and to bolster cities and towns. The latter included a plan to cap property taxes on motor vehicles.
Rep. Ezequiel Santiago, D-Bridgeport, asked Barnes whether the nearly $500 million owed these initiatives next year might be sacrificed to offset the $1.3 billion in “fixed cost” growth.
“That’s an interesting question,” Barnes replied. “We have a big challenge. … There is clearly the possibility for adjusting that to affect a portion of the problem that we face.
“The landmark new state revenue sharing grant from the state sales tax was enacted to provide significant property relief for residential and business taxpayers.,” the Connecticut Conference of Municipalities wrote in a statement. “It addresses towns’ long-held need to lessen the over-reliance on Connecticut’s largest and most regressive tax – the property tax. Any cutbacks in these grants would only increase the bill sent to property taxpayers next fiscal year. It would further dismantle one of the most progressive and responsible state aid programs in recent memory, before it has a chance to really work for municipalities.”
Malloy must submit his next budget proposal to legislators on Feb. 8.
Sen. Mae Flexer, D-Killingly, similarly was given no assurances when she asked Barnes about the hundreds of millions of dollars Connecticut spends annually on social services that are not backed with federal Medicaid dollars.
Retirement benefit cost growth hard to slow down
Sen. L. Scott Frantz of Greenwich, ranking GOP senator on the Finance, Revenue and Bonding Committee, urged Barnes to investigate all options to reduce — or at least slow the growth — in Connecticut’s retirement benefit costs.
The Greenwich lawmaker noted that as these costs surge, state revenue growth since the last recession ended six years ago has been modest.
“I see this as a collision course eventually set to explode,” Frantz said.
According to Neil Ayers, director of the legislature’s nonpartisan Office of Fiscal Analysis, Connecticut’s high-paying jobs — particularly those in financial services and insurance — have not recovered fully from the last recession.
In the last five years before the Great Recession, from 2003 to 2007, the cumulative adjusted gross income Connecticut filers reported on their federal income tax rose by 10.7 percent, according to OFA.
But during the first five years after the recession, from 2010 through 2014, it rose by 4.1 percent.
Connecticut’s income growth has slowed as debt costs have begun to accelerate considerably.
“They’ve basically diverged in a troubling manner,” Ayers said.
Connecticut can take steps to mitigate the rapid growth in retirement benefit costs, but Barnes said there is no easy solution, noting that the problem stems from inadequate savings habits that go back seven decades.
For example, about 82 percent of next year’s $1.3 billion contribution owed to the state employees’ pension fund is to compensate for the mistakes of the past, Barnes said.
“We could fire all of our employees. We could get out of the pension business entirely,” Barnes said. “We would still have to pay that 82 percent.
The governor’s staff is in talks with state employee unions to see if Connecticut can defer a portion of those payments. This would reduce the spike somewhat, but also would mean the state would have to make larger payments in the late 2030s and into the 2040s.
Restructuring also would increase the overall cost to the state, since it would leave less pension contribution money available for investment over the next two decades.