A legacy of debt: Squeeze on state’s priorities only getting tighter

A legacy of debt / Second in a series

Squeeze on state’s priorities only getting tighter

by Keith M. Phaneuf

Much of the focus on state government’s surging retirement benefit costs has been on their likely impact on programs and taxes over the next two decades.

And while that effect probably will be huge, those costs already have sapped significant funding from key priorities, particularly since the last recession ended seven years ago.

Recent efforts to rebuild Connecticut’s aging and clogged transportation network have bogged down, and Gov. Dannel P. Malloy’s latest 30-year initiative is in jeopardy as well.

Connecticut’s health care and social safety net, hailed by some but criticized by others as too generous, has sustained cuts.

Public colleges and universities, the beneficiaries of major capital investments, have seen their operating support dwindle, and students now pay considerably more than they did just six years ago.

Gov. Dannel P. Malloy delivers his State of the State speech this month

And while all of these areas are likely targets for deeper cuts, aid to local communities — long-shielded as a firewall against property tax increases — is the next candidate for the chopping block.

A major test will come this spring as state officials grapple with $3 billion in projected deficits in the next two-year budget, while also weighing whether to help Hartford as the capital city seeks to avoid financial insolvency.

“The truth is, we simply can’t afford to continue doing everything we’ve done in the past,” Malloy told legislators on Jan. 4 during his annual State of the State Address. “Cuts in specific areas, or outright eliminations, should not be taken to mean that certain work is not valued. It simply means that we can no longer afford to do it all, and that our spending must be focused on the very core, essential services for our residents.”

Some argue Connecticut has been cutting back to its core services for some time, and future cuts will be more painful than many realize.

Transportation backlog grows

Though Malloy began his second term in January 2015 announcing big plans for Connecticut’s transportation network, the state’s highways, bridges and railways already had been feeling the budget squeeze for many years.

“The cost of inaction far outweighs the cost of action,” the governor said. “To move our state forward, we must make our infrastructure best-in-class.”

“The truth is, we simply can’t afford to continue doing everything we’ve done in the past.”

— Dannel P. Malloy
Democratic governor of Connecticut

For example, when Malloy made his pitch to replace the Hartford viaduct, the aging, elevated section of Interstate 84 that stretches across the capital city, he released an analysis showing the $3.4 billion cost would trigger more than three times that amount in long-term economic activity.

“You can’t have a world-class economy without a world-class transportation system,” said Durham economist Don Klepper-Smith with DataCore Partners, who also was chief economic advisor to the Rell administration. “The two go hand-in-hand.”

The message is not new. Despite plenty of arguments along those lines, Connecticut has amassed a huge backlog of approved transportation borrowing that has not actually been done — translating into billions of dollars that haven’t actually been spent — particularly since the last recession.

The state borrows for its transportation program by selling bonds to investors on Wall Street. This first must be approved by the legislature and then by the State Bond Commission.

But the funds aren’t borrowed until the administration is ready to launch projects. And if governors and legislatures don’t budget enough money for Department of Transportation staff — and to cover the debt service on the bonds — the borrowing backlog piles up fast.

In December 2010, just before Gov. M. Jodi Rell left office, the legislature began receiving reports on approved-yet-unissued bonding. At that point almost $1.7 billion in commission-approved transportation bonding had yet to be borrowed and spent.

Since then that backlog has nearly doubled. According to the latest monthly report on cash flow and bonding from state Treasurer Denise L. Nappier, issued on Jan. 3, the backlog stands at more than $3.1 billion.

And while Malloy insisted his track record on transportation is much better than that of his predecessors, the $600 million in transportation bonding issued during the last fiscal year of his first term matched the amount issued during Rell’s last year in office.

This represents an even bigger problem since each dollar of state transportation bonding typically is matched — once it is spent — by $3 or $4 of federal grant money.

So a cut to the Special Transportation Fund within the state budget — which pays off the principal and interest on transportation bonding — ultimately can postpone the investment of huge sums of state and federal money on infrastructure projects.

Don Shubert, a transportation advocate and president of the Connecticut Construction Industries Association, has been warning Malloy and other state officials for years that this multiplier effect is threatening the state’s economic future.

“Due to ConnDOT’s inability to develop projects, the department has had no choice [other] than to set aside hundreds of millions of dollars of available state and federal funding, knowing the funding would not be used for years to come,” Shubert wrote in a warning letter to Malloy back in October 2013.

Fuel tax dollars siphoned away

While transportation investments were bogging down, big fuel tax increases imposed between 2005 and 2007 produced a lot of revenue — much of which was spent outside of transportation.

Connecticut imposes two state fuel taxes to go along with the 18.4 cent federal levy:

  • A flat, 25-cents-per-gallon retail charge is imposed when motorists fill up.
  • And an 8.1 percent wholesale tax when the fuel is delivered to the gas station. Another surcharge effectively raises that tax to 8.81 percent. Gasoline station owners have long conceded that they pass the full cost of that wholesale tax — currently 15 cents per gallon — on to motorists.

Rell and the legislature approved a series of wholesale tax increases in 2005 to replace an aging fleet of commuter rail cars and fund other strategic rail and highway projects.

Lawmakers expected that the wholesale tax, which raised about $180 million per year in 2005, would be worth an extra $100 million by 2014. But the tax needed just one year to surpass that growth target. While the state’s coffers were swimming in revenue from a wholesale tax that already had doubled its anticipated growth, officials found other uses for that money.

Rell had sought to raise the income tax in 2007 to increase education aid to cities and towns, but she ran into heavy opposition from her fellow Republicans. She abandoned the income tax hike, but the extra education aid survived. And fuel tax receipts, which transportation advocates assumed would be dedicated primarily to highway, bridge and rail work, were given a new purpose.

Procedurally, that switch is relatively easy for state officials to accomplish.

On paper, transportation has its own special fund separate from the rest of the budget. But legislatures and governors routinely transfer resources back-and-forth between the Special Transportation Fund and the rest of the budget.

Malloy’s big transportation plan is bogging down

Malloy called for all of this to change in February 2015 when he unveiled a 30-year, $100 billion program to rebuild Connecticut’s transportation system.

Traffic congestion on I-95

The $100 billion investment Malloy seeks is an omnibus figure that reflects both existing transportation operating and capital funds — both from state and federal sources — as well as projected growth in spending over three decades.

The key to making it all work, though, is having enough funds in the budget — in the Special Transportation Fund in particular — to cover debt payments on all new state transportation bonds.

The governor’s solution to that funding challenge was two-fold:

  • A portion of state sales tax receipts would be the key to funding the first five fiscal years, from 2016 through 2020.
  • A long-range funding plan, covering 2021 through 2045, would be crafted by a gubernatorial study panel.

But at the same time sales tax receipts were being dedicated to transportation, Malloy and legislators also agreed to cancel the transfer of other General Fund revenues that previously had been shared by transportation.

Adding up the pluses and minuses meant the transportation fund wouldn’t come out ahead until this fiscal year, when it was supposed to receive an $80 million bump. And the first year of major assistance would be 2018, when the program would get $205 million in transfers from the General Fund.

That plan, approved in the spring of 2015, lasted one year.

By May of 2016, legislators were pressing the governor to scale back transportation funding to help close a $1 billion deficit in the General Fund without tax increases. Malloy agreed to reduce the $80 million transfer planned for this fiscal year to $30 million.

“There are no sacred cows in this budget,” Sen. Beth Bye, D-West Hartford, co-chairwoman of the Appropriations Committee last year, said when the budget deal was made. “There couldn’t be.”

“There are no sacred cows in this budget…There couldn’t be.”

— Beth Bye
State senator from West Hartford

The legislature’s nonpartisan Office of Fiscal Analysis projects the Special Transportation Fund will run $46 million in deficit in the fiscal year beginning July 1, 2018 — just 2 1/2 years into the 30-year transportation program.

Meanwhile, the governor’s study panel recommended several options to fund the final 25 years of the transportation program, including restoring tolls to highways, increasing gasoline taxes and boosting sales taxes. These options could raise an estimated $42 billion over the next 30 years, the panel reported.

But the governor has said he wouldn’t consider proposing any of those things until legislators endorse a state constitutional amendment to secure all of those revenues for transportation only.

Legislators have balked at endorsing this “lockbox,” noting that — with big deficits projected for the overall state budget on the horizon — this only would place more pressure on other budget programs not shielded by a constitutional amendment.

College students pay the price

While transportation projects have bogged down, that has not been the case with the building programs at Connecticut’s public universities and community colleges.

The University of Connecticut, the state universities and the community colleges, have benefited tremendously from billions of dollars the state has borrowed since the mid-1990s to rebuild, expand and modernize their aging campuses.

But because those investments were bonded – put on the state’s credit card – their impact on the budget was limited only to growth in the debt service line item.

And it came with a trade-off — a major drop in annual state support for college and university operations.

State funding represented 44 percent of the University of Connecticut’s operating grant in 1990. By 2000 it was down below 35 percent and now stands at 26 percent.

The state university system’s share has fallen from 55 percent to 25 percent since 1990.

And community colleges, which got two-thirds of their operating funds in 1990, now receive 35 percent.

Students and faculty rally outside the state Capitol against potential budget cuts to public colleges and universities last week.

The universities and colleges replaced most of that lost state assistance with more tuition and fee revenue. And while the capital projects meant they could enroll more students, the expectation among state officials also was that colleges and universities would begin charging more for a better educational experience.

Higher education officials insist that they’ve given student financial aid higher priority in recent years and that Connecticut’s schools remain competitive with comparable state schools.

Still, since the last recession ended, state operating support has not grown at all while college and university budgets have.

The result: students and their families have seen their costs rise dramatically.

Tuition and mandatory fees for in-state students at UConn in 2017 are 26 percent higher than they were in 2010. At the state universities tuition and fees have grown by 33 percent over this period, while those at the community colleges are up 30 percent.

Shrinking Children’s Budget

The force of Connecticut’s surging debt costs also can be seen in programs aimed at children: education, health care and social services.

The state long has offered social services and health care programs that outstrip those of most other states — an example of excess to some state officials, a point of pride to others.

Connecticut Voices for Children, a New Haven-based progressive policy group, annually tracks expenditures in “the children’s budget” — programs in education, health care and social services aimed at minors.

And the first clear trend, according to Connecticut Voices, is that children no longer hold the pre-eminent place in the state budget.

In 1992, the first fiscal year Connecticut implemented the new state income tax, the children’s budget composed nearly 40 percent of the General Fund.

Twenty-five years later, despite income tax hikes in 2003, 2009, 2011 and 2015, the children’s budget has dropped steadily to a 29.5 percent share.

“It is time for the state to embrace a strategic budget framework: one that makes smart investments to help advance a more inclusive, shared prosperity in the decades ahead,” said Ellen Shemitz, executive director of Connecticut Voices for Children. “… In order to assure access to a quality public education for every child in our state, we need to question the status quo.”

School bus outside the state Capitol

Critics of the “Children’s Budget” analysis say it is possible for spending to increase in programs affecting children, even if its share of the overall budget shrinks.

And since 2000, the Department of Education budget, including the Education Cost Sharing grant program to local school districts, has grown by 3.8 percent per year.

Health care, social services face leaner times

But outside of investments in early childhood care and K-12 education,  the rest of the “children’s budget” has fallen on leaner times. The health and hospitals component of the state budget has grown by just over 1 percent per year since 2000 as Connecticut officials gradually decided state government couldn’t be as generous as in the past.

Advocates for the developmentally disabled and their families say state government is losing ground in its efforts to help this group.

The controversial waiting list of developmentally disabled citizens needing residential placements — involving more than 2,000 people, — is 33 percent longer than it was about 15 years ago.

State officials decided two years ago Connecticut no longer could afford to offer the most favorable income eligibility standards in the country when it came to Medicaid health insurance for low-income parents, and as a result in 20,000 to 25,000 lost coverage.

Rep. Toni E. Walker, who has been House chairwoman of the Appropriations Committee since 2011, said too many forget because of Connecticut’s great wealth that it also has some of the most severe pockets of poverty in the nation. And the need in these cities, the New Haven Democrat said, is growing.

“There are some who believe we can get through all of this with austerity… But they haven’t seen what an austerity budget would mean.”

— Toni Walker
State representative from New Haven and the house chairwoman of the Appropriations Committee

“There are some who believe we can get through all of this with austerity,” said Walker. “But they haven’t seen what an austerity budget would mean.”

A provider tax on hospitals, established in 2012 primarily as a technical maneuver to qualify for more federal health care funding, once collected $350 million per year from the industry while returning $400 million to hospitals.

Five years later hospitals are paying in $556 million and receiving $164.3 million in state assistance.

When Malloy and lawmakers launched the hospital provider tax, the federal government sent Connecticut 50 cents for every $1 of tax proceeds re-invested in hospitals. Even as state payments back to hospitals have shrunk, the federal reimbursement rate has grown to an average of 70 percent under the Affordable Care Act. Were Connecticut returning all tax dollars to the hospital industry, it would be eligible for about $270 million in additional funds from Washington, D.C.

The industry says the impact can be seen clearly in terms of staffing. Connecticut hospitals have lost more than 1,300 jobs to layoffs and another 1,700 to attrition, according to the Connecticut Hospital Association.

Backus Hospital in Norwich, which still sees patients who overdosed on a daily basis

Connecticut also recently shifted a wide array of social service programs for which it receives no major federal assistance out of the General Fund and into a specialized fund supported with an annual assessment on the insurance industry.

So while the affected programs — needle exchanges, AIDS services, a breast and cervical cancer detection and treatment program for uninsured women, X-ray screening and tuberculosis care, and a venereal disease control program — technically still are in the budget, the cost now is being passed onto the public through higher insurance premiums.

Citing recent cuts to child care and rental assistance programs, Betty Gallo, a veteran lobbyist and social services advocate, said this will cost state government more money in the long run.

“If there’s no day care, they don’t go to work,” she said. “If they don’t go to work, they end up on unemployment compensation or end up being supported by the state in some other way.”

A similar problem occurs, Gallo said, when rental assistance programs are cut. “You can almost guarantee some of those people are going to lose their housing,” she said, adding this can cost the state even more money in Medicaid, or even in the prison budget. “There are all kinds of costs that make homelessness a very expensive proposition. … People are losing their nutrition, they’re losing their homes, they’re losing their day care, they’re losing their independence. It really doesn’t make any sense.”

Connecticut has adopted a plan to match up all homeless families and individuals with some form of housing by 2020. But advocates have questioned whether the state would achieve that goal given the direction social services funding is headed.

Cities and towns are in the crosshairs

If there were one segment of the budget largely immune to the problems caused by surging retirement benefit costs, it was municipal aid.

Less than two years ago, the Democratic majorities in the House and Senate were touting a “historic and transformative” plan to share sales tax dollars with cities and towns as never before.

State government would deposit the revenue raised by one-half of 1 percent of the sales tax rate every year starting in 2018 — and lesser amounts in 2016 and 2017 — into a new Municipal Revenue Sharing Fund.

But even as they promised these funds, legislators disregarded warnings by nonpartisan analysts that state finances were on pace for a deficit in 2018 more than double the new sales tax money earmarked for municipalities that year.

Cities and towns were supposed to share $246 million this fiscal year. But as legislators and Malloy struggled to close that $1 billion General Fund deficit without raising taxes, they reduced the revenue-sharing to $185 million.

To help pay for the revenue-sharing, they cut other municipal grants by about $100 million from the original 2016-17 budget.

Further compounding matters, the state has promised cities and towns roughly $300 million next fiscal year — when nonpartisan analysts say finances will run $1.42 billion in deficit unless adjusted — and have set aside no sales tax receipts yet to pay it.

“Any cutbacks in these grants would only increase the bill sent to property taxpayers next fiscal year,” the Connecticut Conference of Municipalities wrote in a statement. “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.

Ridgefield First Selectman Rudy Marconi may have captured the frustration of many local officials about the yo-yoing sales tax funds — which were accompanied by a controversial new spending cap on municipal budgets — during a CCM press conference to protest planned cuts to local aid.

“Get rid of that (sales tax) money, get rid of the cap, and just leave us alone,” Marconi said.

Malloy, who has shielded local aid from cuts for most of his tenure as governor, offered municipal leaders no assurances last month that they would be spared in the next state budget.

With respect to cash balance, “you’re all in substantially better shape than we are,” Malloy told the annual meeting of the Connecticut Council of Small Towns on Jan. 11.

“I know we’re in this together, and it’s a tough situation to be in together, the governor said, adding that state government definitely has a role to play in assisting cities and towns. “But from time to time we have to re-examine what that role is.”

Will Hartford face bankruptcy?

Meanwhile, Hartford Mayor Luke Bronin still hopes there’s enough room in the state budget to help the capital city avoid bankruptcy — a prospect that Bronin warned last year is very real.

This city budget is $22.6 million in deficit, a shortfall of about 8 percent. And the gap balloons to $50 million, or almost 20 percent of total expenses, in 2017-18.

Compounding matters, Hartford not only has Connecticut’s highest property tax rate — at 74.29 mills or $74.29 for every $1,000 of assessed property value — but 51 percent of its property value is exempt from taxation. That includes hospitals, universities, an airport, a trash-to-energy plant, and numerous state offices and facilities.

Bronin, who began visiting neighboring communities this winter to rally support for the capital city, has been very direct in his assessment of the problem: Hartford cannot avoid fiscal insolvency on its own.

And if Hartford is allowed to slip into bankruptcy, the fiscal health of the region — and perhaps Connecticut’s other urban centers — is at risk as well, he said.

“If this fiscal climate doesn’t prove we need to do things differently, I don’t know what will,” Bronin said.

“If this fiscal climate doesn’t prove we need to do things differently, I don’t know what will.”

— Luke Bronin
mayor of Hartford

Wall Street has begun to echo Bronin’s arguments.

When a Hartford Superior Court judge ruled this fall that Connecticut’s method of funding local schools was irrational and unconstitutional, a major credit rating agency quickly applauded.

Moody’s Investors Service issued a statement saying an overhaul of the system — which almost certainly would increase funding for urban centers — would improve the credit standing of the state’s poorest cities.

S&P Global Ratings, another major rating agency, issued a report in October warning that Connecticut’s state budget woes and “dim economic growth” could make it more costly for its cities and towns to get credit.

However, Malloy and many legislators say they are opposed to increasing taxes to close the $1.4 billion deficit in state finances next fiscal year. Closing that gap without major new revenue, according to Malloy budget chief Ben Barnes, almost certainly means reducing overall municipal aid.

Under that scenario, the only way to boost assistance for Hartford and other needy cities would be to convince most legislators to cut aid — significantly — for their own towns.

“Ultimately it is going to be the legislature’s unenviable task to figure out how to close that gap,” Bronin said. “But I don’t see how they are going to get through that without more revenue.”

Tomorrow: Can Connecticut get to fiscal health without tax increases?

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