Letter from Hartford- Op-ed

In this season of Santa, the news from Hartford is as welcome as coal in the stocking. But, nevertheless, here is an overview of Connecticut’s fiscal crisis, down to the Governor’s recent deficit mitigation plan.

By way of recap, last August we adopted a 2010-2011 biennial budget totaling something over $38 billion. This budget spends modestly more than in the previous biennium. To balance the budget required a net tax increase of $950 million, fee increases totaling $206 million, new borrowing of $2.5 billion, all of the rainy day fund, and a variety of one-time revenue measures. About $1billion of the new borrowing went to satisfy the ghost of deficits past, in particular the lingering shortfall from FY 2009.

But the fix didn’t hold. Revenues continued to fall.  As of the middle of November, the Office of Fiscal Analysis projected a new general fund deficit of $386 million for this fiscal year, 2010. The Office of Policy and Management now has projected a $337 million gap. State Comptroller Nancy Wyman had an even gloomier message, projecting a $624 million deficit for the current year. The lower numbers assume that the sales tax will not drop from 6 percent to 5.5 percent on January 1. That reduction depended on projected revenue from the tax not falling more than 1 percent. It has and the sales tax will stay the same.

The problem overall is two-fold. We continue to spend more than we can afford. Since a crisis nearly 20 years ago produced the income tax, state spending has doubled while the population has remained essentially stable. Second, the current recession on top the long-term absence of job growth has cut tax revenues. For example, the Comptroller’s office reported that estimated quarterly payments of the state income tax were off 29 percent in September. Since the income tax makes up over 40 percent of our total revenue, the significance is obvious. The sales tax, our second biggest revenue source at 21 percent, also is yielding much less as people have had to cut their spending.

Perhaps more troubling, the future is not looking good either. Even though we can expect to return at some point to an annual revenue growth averaging around 6 percent, official estimates place the budget deficit in the billions for fiscal years 2012, 2013 and 2014. During
2009 Connecticut is believed to have lost 100,000 jobs and more than half that many small businesses have failed. It may take 5-10 years just to get back to where we were when the storm hit. Further, from what we already can expect, the health care bill that emerges from Congress likely will dump billions on the states in terms of increased Medicaid costs. With Medicaid among Connecticut’s fastest growing costs and now consuming over 20 percent of the entire budget, the consequences to our state may be devastating.

Noting the long-term view, the rating agencies took another look at Connecticut debt. While not downgrading our bond rating now, the outlook was dropped to negative, citing excessive borrowing, over-reliance on taxing a limited number of wealthy taxpayers, and use of one-time devices to balance the budget. Determined to kill the messenger, the Connecticut Attorney General has announced that he is suing the rating agencies.

What to do. As required by law, Governor Rell has proposed a deficit mitigation plan to erase what she concludes is a current deficit of $470 million. Some reductions can be accomplished by executive action.
The rest must pass the Legislature. The cuts are tough and without doubt will cause pain. They will be particularly painful because we have recklessly allowed expectations to build beyond our ability to deliver.

The numbers are not Democrat or Republican numbers. They are just numbers. A solution is the responsibility of both parties, but especially Democrats because they control two-thirds of the Legislature. There are options.  For example, aggressive consolidation of agencies is possible along with use of volunteers for advocacy commissions. In any case, we need to return to session without delay and deal with reality. This may be the season for Santa, but at least in the world of public finance, there is no Santa Claus.