Democrats on the Appropriations Committee lined up Thursday behind Gov. Dannel P. Malloy’s proposal to place more state expenditures outside Connecticut’s constitutional spending cap, while Republicans criticized the changes as evidence of deteriorating state finances.

At a public hearing, Democrats said that the cap’s history is repeatedly marked by exceptions that prove this budget-regulating mechanism simply doesn’t work. The Democratic governor’s proposals represent a more honest approach to the cap and would help meet pension obligations.

“The spending cap was put in place for a reason,” Sen. Robert Kane of Watertown, ranking GOP senator on the committee, told Malloy’s budget director, Benjamin Barnes. “How can we go back to the taxpayers and say what we are doing is fair?”

The 1991 legislature enacted the cap to temper public outrage over the new state income tax. It is supposed to keep spending increases in line with the annual growth in personal income, taking an average of the prior five years.

Voters added the cap as the 28th Amendment to the state Constitution in 1992, but its provisions still are defined in state law.

“It wasn’t a close vote, it was overwhelming,” Rep. Gail Lavielle, R-Wilton, told Barnes, noting that it was ratified by a 4-1 ratio.

Residents and businesses, who faced more than $1.5 billion in new state taxes last year to help close a deficit, might find it difficult to understand poking new holes in the cap system, she added.

What Malloy has asked lawmakers to do is to carve out three new exemptions to the cap:

  • Supplemental contributions to the state employees’ and teachers’ pension funds;
  • Savings to cover long-term retiree health care obligations;
  • Savings to continue the conversion of state finances to Generally Accepted Accounting Principles. The Malloy administration estimated in its fiscal accountability report in mid-November that state government would need another $1.7 billion in its coffers to cover all its obligations under GAAP rules. The state is scheduled to begin making payments to eliminate that differential in 2013-14.

Republicans argued that while it is laudable to increase savings to address long-neglected, long-term responsibilities, the governor’s proposal still involves moving hundreds of millions of dollars outside of the cap.

“It takes our eye off of the real problem: We’re still spending money at a greater rate than we are taking it in,” said Rep. Craig Miner of Litchfield, the ranking House Republican on Appropriations.

The $20.7 billion budget Malloy proposed in February for the fiscal year that begins July 1 is projected to be $424 million in deficit, and $650 million over the cap in the 2013-14 fiscal year.

But Barnes said the administration is aware of the fiscal challenges it faces 12 months from now and will propose further spending cuts at that time.

“We will propose a budget that complies with the spending cap and all of the other rules,” he said. “I don’t believe that [deficit projection] is a sign that we have a dramatic problem in 2014.”

Meanwhile, Democrats on the committee quickly endorsed Malloy’s proposal, arguing the new exemptions were proposed for the right reason: to encourage savings and to meet fiscal obligations.

Connecticut ranks among the worst of all states in terms of unfunded pension and retiree health care obligations, which exceed $47 billion. Malloy pledged during the 2010 campaign to tackle the unfunded liabilities.

The governor unveiled a plan in January to dramatically accelerate payments into the state employee pension fund starting next fiscal year. The concessions package Malloy negotiated with employee unions last summer not only expands worker contributions toward retiree health care, but calls for the state to match those payments into a long-term savings account starting in 2016.

The current cap system does exempt certain categories of municipal aid as well as spending to comply with federal court orders.

But Rep. Tom Reynolds, D-Ledyard, noted that it also exempts payments on bonded debt. This is a loophole that too often has encouraged past governors and legislatures to borrow for items and programs that should have been covered in the operating budget, simply adding to the cost, he said. “It incentivizes bad behavior,” he said.

Both Reynolds and Rep. Toni Walker, D-New Haven, also noted that Malloy’s predecessors, Republicans M. Jodi Rell and John G. Rowland, routinely cooperated with Democratic-controlled legislatures to exceed the cap in eight out of 12 fiscal years.

The cap can be circumvented easily if the General Assembly 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.

In most cases, extra spending was authorized either to cover cost overruns in agencies or to spend tens — or in some years hundreds — of millions of potential surplus dollars on “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.

Rell moved even further away from the cap system than Rowland did.

In her first full year in office 2005, Rell agreed to waive the cap before the fiscal year even began, signing a budget that spent $630 million more than normally allowed — a first in spending cap history.

Two years later she did it again, approving $690 million in extra spending. But this time it was the GOP governor, and not legislative Democrats, who first proposed exceeding the cap. Rell made her offer in the February 2007 budget plan she offered lawmakers.

Rell defended both exceptions, noting that part of the added state spending leveraged additional federal aid for nursing homes and other social services.

“If we are unable to honor the cap even in good years, that tells me the cap is unworkable,” Reynolds said, praising Malloy for seeking to mend the cap rather than abandon it.

“I understand the requirement for us to always be conscious that we are spending the taxpayers’ money, that we don’t have the freedom to do whatever we want,” Walker, the committee’s House chairwoman, said. “But we have gone through the cap so many times, obviously it is not working.”

Keith has spent most of his 31 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut’s transportation and social services networks. He has been the state finances reporter at CT Mirror since it launched in 2010. Prior to joining CT Mirror Keith was State Capitol bureau chief for The Journal Inquirer of Manchester, a reporter for the Day of New London, and a former contributing writer to The New York Times. Keith is a graduate of and a former journalism instructor at the University of Connecticut.

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