There is still time left before the end of this legislative session — and prior to the “locking in” of the new bond covenants — for lawmakers to restore legislative oversight and review the budget guardrails that were sidestepped by the “E-Cert” process on February 9.
The budget controls enacted in 2017 deserve praise for producing a positive budget outlook based on fully funding the Rainy Day Fund and paying down future debt. But their unnecessary lack of flexibility has caused distortions in the state budget and produced inequitable underfunding of current needs even during this period of robust budget surpluses.
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We urge lawmakers to amend the budget guardrail system to build in flexibility safeguards that could lead to legislative adjustments in response to changing budgetary needs or economic conditions.
To be sure, we are NOT recommending that lawmakers turn back the clock and terminate all of the budget controls. Rather, we propose a legislative re-examination before the current re-enactment is locked in to determine whether revisions are needed to improve budget operations, tax fairness and policy equity.
It should not be forgotten that the original justifications for adopting the volatility cap and other controls to build up Connecticut’s Rainy Day Funds have been extraordinarily successful. By one recent measure, Connecticut had $5.59 billion in its RDF at the end of 2022, the fifth most robust RDF in the country, according to the PEW Foundation. Similarly, billions of “surplus surplus” funds have been intercepted to pay down unfunded debt during 2021-23 even after the state had budgeted its required regular contribution,, known as the “Actuarily Determined Employer Contribution” or ADEC.
Thus, it is time for legislators to carry out what has not been done previously: submit the budget guardrails to an on-going and data-driven comprehensive review that the Bond Lock has effectively blocked during the past five years. Unfortunately the “E-Cert” procedure used on February 9 shielded the guardrails from a thorough review prior to their readoption.
Here is our recommended plan for a comprehensive review:
First, we petition lawmakers to create a meaningful ad hoc legislative process to substitute for the normal bill review procedures that were skipped on February 9. This could include a joint informational forum held by the Finance and Appropriations Committees with commentary from the nonpartisan Offices of Fiscal Analysis and Legislative Research and invited fiscal experts.
The benefit of holding even a truncated legislative review is that if lawmakers re-examine and decide to adjust the budget controls, there would still be time to enact changes by a majority vote as long as they can be voted on prior to July 1 when the new Bond Lock will become operative.
As we have noted previously, PEW and the other leading state fiscal resource centers highly recommend ongoing review of automatic budget controls.
Second, we urge that the renewed 5-to-10-year duration of the bond lock be deferred or suspended for at least one year to provide sufficient time for further legislative evaluation and expert review. Although we oppose any extension of the Bond Lock, a covenant of only one-year duration while the fiscal re-evaluation is taking place is preferable to an unamendable 5-to-10 year covenant.
If action to defer the bond lock is not taken prior to July 1, another opportunity may not come until 2028 at the earliest– and perhaps not until 2033. The purpose of the legislative review is to review revisions and improvements to the budget guardrails. But unless the bond lock is suspended (or abolished) no changes could be made.
Third, we call on the General Assembly to establish a statutory Budget Controls Review Commission prior to enactment of a new biennial budget. The commission would evaluate and report on the impact of the major budget ‘guardrails’ on the state budget and economy, funding for state programs and services, pension debt obligations, local government operations, and state and local tax burdens.
The study questions approved by the Finance Committee in 2018 but not enacted into law still need to be answered regarding the legality and use of Connecticut’s bond covenant as a mechanism to control state spending and borrowing.
We advocate that Connecticut adopt a regular review similar to the Utah process described by the PEW report that requires the executive and legislative fiscal agencies to produce a volatility study every three years “to measure the changes in all major revenue streams, identify the key factors influencing fluctuations, and present clear policy recommendations to mitigate future risk.”
The commission would make recommendations and report back to the legislature and Governor on whether to restructure the budget controls or revise any individual element of the guardrails. Membership of this review commission should include the Finance and Appropriations Committee chairs and ranking members; appointments by legislative leadership and the Governor’s office, representatives from organizations specializing in state and local public finance, such as the PEW Foundation, National Conference of State Legislatures, and National League of Cities; analysts from Office of Fiscal Analysis and Office of Policy and Management; and local government representatives from relevant interest groups, such as Connecticut Conference of Municipalities and the Connecticut Association of Boards of Education.
Fourth, revise the guardrails to make funding of property tax grants a priority comparable to prepayment of pension debt.
We urge a major reordering of priorities for use of the “surplus surplus.” As advocates for property tax reform and relief, we recommend that the General Assembly and Gov. Lamont elevate property tax reduction to the same preferred status under revised budget controls that is now accorded to unfunded debt prepayment.
For a state that has always enjoyed one of the highest per capita income ranks in the country, Connecticut’s fiscal status often attracts national attention for two budget anomalies: it has had one of the highest unfunded pension liabilities and it suffers from one of the highest property tax burdens.
The budget guardrails deserve credit for making an impressive start addressing the first problem by fully funding the state’s Rainy Day Fund and sequestering “excess surplus” funds to pay down the state’s massive unfunded pension liability.
But the guardrail system has failed to address the state’s “highest in the nation” property tax burden and indeed may have worsened it by locking the state into retreating from fully funding municipal grant programs that provide critically important property tax relief.
The property tax deserves renewed legislative attention. Most of the proposals for using surplus funds for tax reduction have focused on cutting the personal income tax, which accounts for 32.4% of Connecticut’s overall state-local tax burden. But the property tax accounts for 43.2% of the overall state-local tax burden and is a much more regressive tax than the income tax because it is not based on ability to pay.
According to an analysis of the 2022 Tax Incidence Report done by Connecticut Voices for Children, “The property tax is still the most unfair component of Connecticut’s tax system, and it increased the most (between 2011 and 2019) for working-class and lower-middle-class families.”
We recommend setting up a statutory Property Taxpayers Relief “Excess Surplus” Fund to receive a substantial percentage of “excess surplus” funds to supplement the appropriated grant amounts. Its goal would be to fully fund key property tax-related grants, including PILOT, Excess Cost and ECS. The new process to fund these grants should be established in the same manner as the volatility cap and budget reserve fund now intercept “excess surplus” to fund debt payments as a supplement to the customary appropriated line-items.
Dedicating a portion of the “surplus surplus” to property tax relief would make the implementation of the budget guardrails more equitable because it would reduce the weight of prior debt on taxpayers while reserving more of the benefit of their tax payments for services they need and have been promised in statute.
It is important to emphasize that using “surplus surplus” revenue to fund property tax reduction grants would not diminish in any way the deposits going into the Rainy Day Fund pursuant to the current guardrail law because the amount of “surplus surplus” is calculated only after the RDF has been filled to its statutory maximum.
By reopening the budget guardrails to include surplus funding for municipal tax reduction grants, Connecticut for the first time in its recent history would be equipped to tackle both of its major fiscal liabilities of unfunded pension debt and underfunding of municipal property tax grants.
Alex Knopp is the principal author of this analysis on behalf of the following members of the Property Tax Working Group of 1,000 Friends of Connecticut. (Knopp is a former State Representative, Mayor of Norwalk and Visiting Clinical Lecturer at Yale Law School.):
- Bill Cibes, former State Representative, Secretary of Office of Policy & Management and Chancellor of the Connecticut State University System
- Michele Jacklin, former Hartford Courant Political Columnist, Trinity College Media Director and Co-Chair, CT Council on Freedom of Information.
- Jefferson Davis, former State Representative and First Selectman of Pomfret.
- Sue Merrow, former First Selectman of East Haddam and Chair, CT Council on Environmental Quality.
- Albert Ilg, former Town Manager, City of Windsor and Interim City Manager of Hartford.
- Chip Beckett, former Glastonbury Town Council member.