When it comes to state finances, the constitutional spending cap has been the elephant in the room for the past decade.
But the leaders of the legislature’s Appropriations Committee took the first step Monday to force a debate on a budget mechanism that increasingly promotes fiscal maneuvering, hefty borrowing, secrecy, and forfeiture of federal dollars.
“It’s like this fictitious instrument that is always used as a talking point,” said Rep. Toni Walker, D-New Haven, House chair of the committee. “We’ve got to really examine what is the purpose of the spending cap, and is it really serving the people of Connecticut the way we need it to?”
“We don’t need to eradicate the spending cap,” added Sen. Beth Bye, D-West Hartford, the committee’s other co-chair. “But the way it works right now, people are encouraged to move things off the budget, and the budget then becomes less transparent. I think our budget and the next phase is going to lead to an honest conversation about this.”
The Democrat-controlled committee stunned the Capitol on Monday when it unveiled a $40.5 billion, two-year plan that moved billions of dollars in spending for pensions and other retirement benefit costs out from under the cap — for the first time since the spending control was established in 1991.
Recalculating the cap
More importantly, the committee’s proposal also broke from how the cap traditionally is recalculated when expenses are moved outside of the budget — a maneuver that likely added more than $1 billion in cap room in the first year of the two-year plan.
Without benefit of those changes, the committee’s proposal, according to the legislature’s nonpartisan Office of Fiscal Analysis, exceeds the cap by $328 million in 2015-16 and by $263 million in 2016-17.
But after the committee took a different interpretation of state law governing the spending cap, it not only had shoe-horned the spending under the cap, but reported that the overall plan fell a whopping $1.5 billion under the constitutional limit in the first year, and $74 million in the second.
How did things change?
First off, the panel dramatically broadened the definition of debt.
Since the cap began as a statutory limitation in 1991 — it became a constitutional amendment in 1992 — “notes or other evidences of indebtedness” have been exempt from the cap.
But that language from the amendment always has been interpreted to mean principal and interest payments on bonded or “hard” debt.
Though contractually required contributions to worker pension plans and savings for retirement health care programs also are considered debt, what is commonly called “soft” debt never has been exempted from the cap.
But the Appropriations Committee did more than simply broaden the definition of the cap. It also broke new ground in calculating the spending limit.
Under cap rules, the state tallies all capped spending from the current year and multiples that total by the average growth in personal income or inflation — whichever is larger. In other words, the more spent this year under the cap, the more room becomes available under the cap next year.
But if an area of spending — such as pension payments — is going to be cap-exempt next year, then, under cap rules, this year’s pension payments shouldn’t be used to calculate available cap room in the next budget. But in the committee plan, they were used.
Bye and Walker acknowledged there could be disagreement about their legal interpretations, and that these would be discussed over the coming weeks as lawmakers negotiate a final budget plan with the Malloy administration.
But some Republicans argued the cap system is not broken.
“The more accurate statement would be the cap doesn’t work for their (Democrats’) purposes,” said House Minority Leader Themis Klarides, R-Derby.
Republicans last week proposed seeking more concessions from state employee unions to avoid tax hikes and deep cuts to social services, and Klarides added she hopes this idea gets bipartisan consideration. “I certainly hope they (Democrats) would understand the answer isn’t just to say ‘this spending cap doesn’t work for us.’”
“We made a promise to the taxpayers that we would be thoughtful and judicious with our spending if we are going to tax income,” said Rep. Melissa Ziobron of EastHaddam, the ranking GOP representative on appropriations. “That’s what we have to have.”
A political double standard about the cap?
Walker and Bye expressed frustration earlier this spring as both Malloy — a fellow Democrat — and leaders of the legislature’s Republican minority, publicly professed their concern that the committee would attempt to circumvent the cap.
But since 2011, Malloy has proposed or signed into law more than $500 million dollars in fiscal maneuvers to shift spending out from under the cap.
And the top two Republicans in the legislature — Klarides and Senate Minority Leader Len Fasano of North Haven — joined nearly all other Republicans in 2007 in voting for a budget that legally exceeded the cap by almost $700 million, largely to increase municipal aid.
In fact, four of the past five two-year budget cycles have begun with legislators and governors either legally exceeding the cap, or using other gimmicks to move hundreds of millions in spending outside of the budget — and therefore outside of cap jurisdiction.
“To keep telling us we’re being irresponsible because we’re not living within the constraints of the cap is so false,” Walker added. “As soon as we get through this session we are really going to look into this” cap system.
Cap system collides with state’s poor savings habits
Drafted in 1991 to temper voter outrage over the state income tax enacted that same year, the spending cap is part of a larger problem that is squeezing key government services.
But the cap system, which was supposed to keep spending increases in line with personal income growth, has been unable to keep pace with required payments for worker retirement benefits. After failing to save properly for decades, Connecticut began to feel the weight of its long-term obligations badly by the mid-2000s.
For example, the cap allows less than 3 percent overall spending growth next fiscal year. But the payments to the state employees’ pension and retirement health care programs jump 13 percent and 18 percent, respectively.
And this conflict between the cap and the state’s long-term obligations has begun to take its toll in budget decisions. Rather than revise the cap or live within it, legislatures and governors have done neither, according to critics on both the left and the right.
When the cap was first created, nearly 40 percent of the budget’s general fund was spent on children, including elementary, secondary and higher education, school readiness programs, and health care. That’s according to Connecticut Voices for Children, a New Haven-based public policy and social services advocacy group.
Now that ratio is about 30 percent.
Cap gimmicks increase costs, weaken transparency
At various times in its history, the cap also has encouraged Connecticut officials to effectively return federal aid to Washington.
In 2011, Connecticut paid $400 million to hospitals in order to secure $200 million in federal Medicaid payments. And since then, federal reimbursement rates have risen from 50 to 70 percent.
But despite that added incentive the state’s payments to hospitals have fallen steadily and now stand at $96 million, yielding just $67 million in federal aid, instead of the $280 million the state could be receiving.
Because the cap long has exempted principal and interest payments on bonding, Republican lawmakers have complained that state government increasingly has borrowed to cover operating costs — and to avoid the cap.
A conservative fiscal policy group, the Yankee Institute issued a brief this week warning officials that the state was at risk of legal action because of its poor track record in adhering to the cap.
Carol Platt Liebau, institute president, chastised the Appropriations Committee for its plan Monday.
“The lawmakers who came up with this budget should be ashamed that they’re playing tricks with the people’s money,” she said. “Connecticut families can’t balance their budgets by declaring that they’re moving their expenses off their budget; our legislature shouldn’t be able to do that either.”
The state also has used fiscal maneuvers deemed “intercepts” to redirect state revenues to one of hundreds of off-budget accounts, also to steer clear of the cap.
“People are encouraged to put things off budget and the budget becomes less transparent,” Bye said. “I think our budget and the next phase (of budget negotiations) are going to lead to a conversation about the cap.”