Though taxes and spending cuts dominate the debate over Connecticut’s budget deficit, the constitutional cap on spending is waiting in the wings for its turn.

And the 23-year-old cap – which has effectively begun to squeeze resources for education, transportation and other priorities –could also be a political thorn next year in the side of Gov. Dannel P. Malloy and his fellow Democrats in the General Assembly’s majority.

“The state has some extremely important commitments out there to children as well as to its [retired workers,]” said Wade Gibson, director of fiscal policy for Connecticut Voices for Children, a New Haven-based, social services advocacy group. “But the spending cap is broken and that’s a real problem.”

Squeezing children out of the budget

The 1991 General Assembly tried to temper outrage over enactment of the state income tax by drafting a statutory spending cap. Voters would add the cap requirement to the state Constitution one year later by adopting the 28th Amendment.

The cap is supposed to keep most state spending increases in line with the annual growth in personal income or inflation.

And in the years after the cap’s creation, state budgets have begun to feel intensifying pressure from two areas:

  • Dramatically increasing required contributions to pension and retirement health care plans for public-sector employees stemming from decades of inadequate savings by past governors and legislatures.
  • Surging demand from the poor for state-subsidized health care and other social services.

When the cap was first created, nearly 40 percent of the budget’s general fund was spent on children, Gibson said, adding this includes elementary, secondary and higher education; school readiness programs; and health care.

Now that ratio is about 30 percent as funding to cover the state’s legal obligations consistently eats up most of the allowed budget growth under the cap system.

And while increased payments from Washington have relieved some of the fiscal pressures tied to services for the poor in recent years, Gov. Dannel P. Malloy has challenged Connecticut at the same time to ramp up its contributions to keep from defaulting on retirement obligations to the public sector.

“The irony is that, at a time when we have such challenges with basic balance in state and local government finances, that now, this decade is the one in which we have chosen to address . . . 50 years of pension under-funding,” Office of Policy and Management Secretary Benjamin Barnes, Malloy’s budget director, said in a recent media briefing. “We are trying to restore some structural balance in state finance at the same time we are trying to make up for some past sins.”

Getting around the cap

Further complicating matters is one of the big exemptions to the spending cap. While most segments of the budget are not exempt from this annual limit, aid to poor cities and towns, new programs created to comply with federal court orders, and debt payments on state bonding, are exempt.

And it’s the last exemption that critics say has encouraged some bad habits.

State bonding traditionally is reserved for capital projects, and not to cover operating expenses. But since debt service is exempt from the cap, it creates a temptation to borrow more for operating costs.

This, in turn, drives up the state’s annual debt service costs – an obligation that must be met – leaving less room in the overall budget for other priorities, such as education.

If the governor and legislature agree, they can exceed the cap legally.

Malloy’s predecessor, Gov. M. Jodi Rell, took advantage of the latter option twice.

Rell, a Republican, cooperated with Democratic-controlled legislatures to approve a $244 million exception to the spending cap before the 2005-06 fiscal year began in order to spend additional federal aid for nursing homes.

And in the 2007-09 biennial budget, Rell and lawmakers gave permission to exceed the cap by $497 million in the first year, and by $691 million in the second. That was done to accommodate major increases in municipal education grants to towns and in payments to health care providers who treat Medicaid patients.

By 2009, Connecticut plunged into a recession, and the cap — temporarily – posed no problem. That’s because tax receipts plummeted and state officials lacked the resources to spend in excess of the cap.

But as the economy has gradually improved, the cap has again become an issue.

Malloy, who has tried to distance himself from his GOP predecessor’s fiscal policies, has refused to legally exceed the cap.

But the governor and legislature have employed a number of one-time maneuvers that have enabled them to solve small spending cap problems without officially exceeding it.

For example, payments to charter schools were funneled through city and town governments starting in 2012. And since payments to poor communities don’t count against the cap – even if that city is merely receiving the payment and then passing in on to a charter school – Malloy and the legislature gained almost $50 million in spending cap room.

Adopted spending would have burst the cap by more than $400 million last fiscal year had the governor and legislature not used an accounting maneuver to effectively stop counting – for cap calculation purposes – more than $2.2 billion in federal funds spent annually on Medicaid.

‘Intercepting’ revenues before they are subject to the cap

Malloy frustrated his GOP critics last February when he proposed using a controversial revenue loophole to send $60 million to the state’s merged public college and university system — outside of cap rules.

What the governor proposed commonly is known in fiscal analyst circles as an “intercept.”

The cap system technically applies only to tax receipts and other revenues assigned to the state budget. Malloy asked lawmakers to “intercept” $60 million of those revenues – which meant that before the money “arrived” in the state treasury, it would have been assigned to a new purpose outside of the budget.

Effectively, there would have been no difference in how the money was spent, but the expenditure wouldn’t be counted for spending cap purposes. Traditionally though, state payments to cover higher education costs have been included within the budget.

The legislature ultimately decided not to adopt the “intercept” proposal.

GOP insists it won’t budge

And now the legislature’s nonpartisan Office of Fiscal Analysis projects that, to maintain current services, spending next fiscal year must exceed the cap by $590 million.

Republicans legislative leaders charge the most recent steps taken to avoid bursting the cap were fiscal gimmicks that violated the spirit of the constitutional amendment – if not the letter of the law.

And as the cap challenges grow in size, they add, it won’t be possible for Democrats to employ gimmicks in low-profile fashion and avoid public scrutiny.

“I think we need to respect the cap,” said new Senate Minority Leader Len Fasano, R-North Haven. “That was a deal we made when we adopted the income tax, and I don’t think the people are too happy with the (budget) status quo.”

In addition, Fasano and his new House counterpart, Rep. Themis Klarides, R-Derby, say both parties need to accept that keeping spending below the cap is inevitable – since legally exceeding it is all-but-politically impossible.

Two steps must be taken to spend in excess of the cap:

  • The governor must sign a declaration of “fiscal exigency,” essentially declaring a budget emergency.
  • And 60 percent of legislators in both the House and Senate must agree.

And after the most recent elections, Democrats – though they still hold majorities in both chambers – can’t reach the 60 percent-mark in either on their own.

Democrats control 21 out of 36 seats in the Senate, one shy of 60 percent. In the House, Democrats come up four seats shy, holding 87 out of 151.

Klarides said that while she hasn’t polled her caucus yet on the spending cap, “I cannot imagine there would be any circumstance where [exceeding the cap] would be acceptable to them.

“We’ve been dealing with excuses and loopholes for too many years.”

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Keith M. PhaneufState Budget Reporter

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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