Where does the CT budget crisis come from? (II) : 20th century spending in a new economy

Last week we gave a brief overview of the fiscal challenges that Connecticut is facing, with a focus on the revenue side. We concluded that although Connecticut is not really a high-tax, big spending state if we take into account its wealth, we do raise revenue in very ineffective, outdated ways. The state has a sales tax riddled with loopholes, an income tax that leaves a lot of income untaxed, business taxes that penalize the service economy, and a property tax that steers development out of urban areas while undertaxing wealth. If we want to get Connecticut out of the current state of endless fiscal crisis, tax reform is both necessary and long overdue.

Of course, revenue is only half of the equation when talking about the budget – spending also plays an equal part. As with revenue, Connecticut has some spending practices that are both inefficient and outdated, creating a state and local government structure that is often not up to current challenges. In many areas, we just spend money in a lousy way. Continue reading

Where does the budget crisis come from? A 20th century budget in a 21st century economy

Connecticut has been in a fiscal crisis pretty much non-stop for the past eight years. It is likely that the state would have started looking at red ink before that, but the real estate and financial bubble of the 2000s masked the underlying reality. For close to a decade, and probably for longer, our state has been constantly on the edge of a fiscal chasm, with the General Assembly muddling through with a mix of tax increases and spending cuts.

The thing is, this is not really normal. Connecticut is one of the wealthiest states in the wealthiest country in the world. Even if the state´s economy hasn´t fully recovered, unemployment is relatively low, growth is weak but not anemic and labor productivity is still high. We have an economy in a mild slowdown enough to produce a shortfall that could be sorted out with some tweaks. Instead, we have a Groundhog Day of budget deficits. Continue reading

First look: public pensions in Connecticut

We will be hearing about pensions, pension reform and how pension liabilities are taking over the state budget during the year, so it might be worth having a look at how things look right now.

Truth is, the Connecticut public pension system is a mess. For many years the state had the habit of balancing the budget by not putting money into the pension fund while giving early retirement incentives to many state workers. This went on for more than a decade, leaving a gaping hole in the system.

To the legislature and Malloy´s credit, the state stopped doing this a few years ago, finally starting to put money back in the fund. The problem is, however, that under the current payment and amortization schedule (let’s pretend we understand we know what that means for a second) the state has to make a huge financial effort to plug that gap, and even more worrisome, we have to set aside more and more money every year.

How much? The figures come from this study from the Comptroller’s office – in 2016 Connecticut’s contribution to its pension fund was about $1.5 billion. This will climb to about $1.8 billion in 2017, $2 billion in 2019 and will keep climbing non-stop all the way to 2032, when it will get close to $4 billion. Adjusting for inflation the numbers get a bit less daunting (up to $2.5 billion), but the problem remains – in a roughly $20 billion budget, the pensions are indeed a problem.

This is not sustainable, so we will be hearing more reform proposals in the coming weeks. Kevin Lembo, the Comptroller, just presented his ( PPT ), giving a good outlook of what we can expect to see. His proposal tweaks the amortization method and extends its schedule (translation: changes how inflation is calculated and adds more years to pay for the liabilities) to change the payment structure. The result would be a payment of $1.5B in 2016, $2B in 2017, $2.15B in 2018 and then remain pretty much flat in nominal terms until 2032 (that is, dropping, inflation-adjusted), where they would drop to $1.5 billion.

If you stopped reading halfway through the previous paragraph, I understand completely: this is not exactly fun. It also is really important for the fiscal health of our state in the long run, so we will try to do our best to explain what is going on. Public pensions might not be our agenda, but they greatly affect the rest of the budget, so we will keep track.

Bad news on the budget front

We discussed the budget cuts and how revenue was coming below target in early February. Well, bad news: it is getting worse.

  • budgetcalculatorWe thought we were facing a $570 million deficit in 2017. Wrong. Current projections, after the most up to date revenue numbers, points a $911 million deficit.
  • It gets worse – for the current year (FY2016, ending this June) we are back tohaving a deficit – $266 million, to be exact.
  • Actually, it is even worse than that if you look at the next biennium (FY2018-19, after the election), with $2 billion a year deficits.

You can find more information here, here and here; the OFA projections are available here. Most of the money comes in April, so the numbers may improve, but it does not seem to be trending that way.

So – we are really going to see a budget battle now. Stay tuned.

The 2016 session: budget adjustments – a first look

The Connecticut General Assembly is in session, and the budget hearings have begun. With the state facing a deficit north of $570 million in the coming fiscal year, legislators are again scrambling to find ways to balance the budget.
There seems to be very little appetite so far for any kind of tax increases, so Governor Malloy and legislators are talking about cuts – and these cuts are being discussed, right now, at multiple Appropriations Committee hearings at the Capitol. You can find the calendar here; today the committee will hear about higher education. Tomorrow at 4 pm they will host the hearing for human services which may be of most interest to you
There are two things to bear in mind about the budget revisions proposed by Governor Malloy, one about process, one about where the cuts will fall. Both are important, and deserve some attention.

a. Where are the cuts?

The cuts for fiscal year 2017 add up to $570 million. The departments that are facing the worst cuts are the Department of Social Services ($61 million), Department of Developmental Services ($55 million) and from addiction and mental health services ($71 million).
This by itself would be worrisome, but it goes beyond that. According to the CT Community Nonprofit Alliance´s analysis, 72% of the cuts ($408 million) come from non-profit providers. Consequently, many core services offered by these providers will again face an uphill battle meeting the needs of low-income families in the state with diminishing resources.
The slow economic recovery has left many families behind. The budget is asking them again to bear the brunt of the state fiscal woes.

b. How are the cuts being introduced?

Governor Malloy has decided to consolidate most line items in the budget under a generic “agency operations” heading. After that, his proposal states that spending will be cut 5.75%, but without specifying exactly from where.
This is a problem. Instead of the traditional budget breakdown of proposed reductions with specific explanations of what line items are facing cuts, this proposal just offers an agency-wide spending level, and gives the authority to each agency head to decide where to cut. The result is a budget that imposes harsh spending cuts but is lacking in transparency, with no information on what programs will be eliminated.
This is not acceptable. Transparency is an essential for accountability.  The Governor´s budget proposal shifts the responsibility and decision making for crucial spending decisions from an open, public process at the General Assembly towards one with no public participation, no open hearings and limited accountability. The only way to make those decisions and introduce real, needed changes to the state budget is through an open, accountable and transparent budget process, not by delegating authority to the executive branch.

What is next? How can I get involved?

Right now we encourage you to reach out to your legislators, even more so ifthey are on Appropriations. If you are able, we strongly encourage you to submit testimony to the committee, specially if you are involved in a program that is facing cuts. The message is simple:
  •  We should not balance the budget on the backs of those that have not participated in the economic recovery.
  • We need a transparent budget process, not cuts decided behind closed doors within each agency.
Feel free to give us a call if you have questions or need a hand drafting testimony, setting up a meeting with a legislator or preparing talking points. We will be happy to help.

Poverty and the safety net – and the danger from federal cuts

CAHS and the Coalition on Human needs are releasing a report today on the the new census data, and the potential impact that some upcoming federal cuts can have in low income residents in the state.
  • In Connecticut, 10.8 percent of people were poor in 2014 – roughly the same as in 2013.
  • The child poverty rate also remains stuck, with 14.9 percent of Connecticut children living in poverty in 2014 – roughly the same as in 2013, as well.
Poverty in Connecticut disproportionately affects people of color:EITC cuts
  •  Nearly 21 percent of African Americans and 26.5 percent of Latinos in Connecticut are poor. In contrast, poverty for non-Hispanic whites is 6.1 percent.
  •  Nearly 15 percent of Connecticut children are growing up in poverty, and the statistics are worse for children of color: 30.5 percent of African American children and 33.4 percent of Latino children in Connecticut are poor.
The new Census Bureau findings add to the mounting evidence that programs like low-income tax credits, the Supplemental Nutrition Assistance Program (SNAP, formerly known as food stamps), and subsidized housing reduce poverty now and improve children’s chances of gaining economic security in the future.   The Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) lifted 69,000 Connecticut residents, including 35,000 children, out of poverty each year, on average, during 2011 to 2013.
Sequester budget cuts, however, are threatening this safety net:
  • Congress will cut 1,010 existing housing choice vouchers in Connecticut alone, although today 1 in 4 low income renters in the state pay more than half of their income in rent.
  • Cuts to the Earned Income Tax Credit and Child Tax Credit could push146,000 Connecticut residents, including 63,000 children, into or deeper into poverty.
You can find more details on the proposed cuts by downloading the full report here.

The Finance Committee budget- revenue and tax reform

Wednesday we talked about the spending side of the budget; where money is going and which programs were cut. Yesterday the Finance Committee released the other half, revenue, or where the money is coming from to pay for all those services.
For the second time in a row, we have a budget proposal that includes quite a bit of good news.

1. The budget: revenue overview
Let´s start with the obvious: new revenue means taxes. The Finance Committee budget brings in more money, so it is taxing more stuff, and they are doing this in a pretty smart way that deserves some attention.

First, let´s see where the new revenues are coming from (PDF):

Revenue sources

If you look at this numbers, you will immediately see that this is a lot of money – more than the amount the Appropriations budget actually calls for. There are two main reasons for that.

First, some of the new revenue raised will not go to the state coffers, but to municipalities. Paired with the new revenue package, the Committee passed S.B. 1, a fairly ambitious property tax reform bill. This proposal includes some clever ideas on property taxes, and instructs that part of the sales tax money will go to municipalities. More on this below.

Second, because the sales tax will cover more services and products, the state will actually lower the rate.This will leave enough room to cover the additional spending on the Appropriations side while avoiding some of the impact from the tax increase.

To sum up, the total new revenues add up to just shy of one billion. Of that money, $294 million would go to municipalities, and $253 are used to lower the overall sales tax rate. With Appropriations adding $289 million in spending, the budget actually ends up having a small surplus.
Now let´s look at the numbers with some detail.
2. The budget: the sales tax

So let´s take a closer look at the sales tax: what are the exact changes included in the Finance proposal?

The Finance Committee proposal is based on broadening the tax base.

In non-jargon, the current sales tax is far from comprehensive: there are a lot of products that are not taxed (they are exempt), and services are only taxed if included explicitly in legislation. The Finance Committee´s plan eliminates quite a few exemptions (some of them were already included in the Governor´s budget proposal) and adds to the list of taxable services. This is similar to the recommendations offered by CT Voices in their March revenue proposal.

What exemptions are eliminated?

The two big items are clothing and footwear under $50 (raising $137 M) and computer and data processing (raising $162 M).

What services are now taxed?

The list is fairly long – you can find it here. The ones that raise the most revenue are engineering services, public accountants and consulting services. Most of the changes are items that really never made much sense to be tax exempt, like interior designers, golf courses, country clubs and direct mail advertising,

All in all, it does add up to a good amount of money: $322 Million.

What will be the sales tax rate now?

By the end of the year, 5.85% for the state portion of the sales tax; 0.5% for municipalities. The state rate would be reduced to 5.35% in 2016, leaving the combined rate at 5.85% next year.

Are these changes regressive?

The sales tax is indeed fairly regressive, however the slightly lower rate actually should favor lower income households. The services added and most exemptions do not affect poor families all that much, although the clothing exemption does. It is too early to tell how this will impact families without running some numbers.

The municipal .5%, however, will be used to lower another tax that it is really regressive: car taxes. More on that in a bit.
3. Other taxes: income and capital gains

The changes on income and capital gains are a bit more straightforward: just a slight increase in rates.

Income tax:

The top marginal rate (for individuals making more than $500,000 a year or couples filling jointly making more than $1,000,000) will go up from 6.7% to 6.99%. Note this is the marginal rate – that is, for each dollar that an individual makes over $500,000 he would pay about 6.99 cents instead of 6.7. The top tax rate will still be well below New York, New Jersey and Massachusetts, so we are still competitive in this regard.

Although small, the change raises significant amounts of money: $102.4 Million.

Capital gains:

Taxpayers in the highest income bracket (more than $500,000 for individuals, $1,000,000 for couples) will pay a 2% additional tax on all capital gains. This will put Connecticut in line with New York for top earners, and still below New Jersey.

The new supplemental tax would raise $167.6 million.
4. Other taxes: odds and ends

There are quite a few minor changes in the Finance proposal, the most relevant being tweaks on the hospital tax, closing some loopholes by introducing combined reporting for corporations (basically preventing businesses from claiming that they made profits in another state), the elimination of the business entity tax and Keno.

Yes, Keno again. It really does not raise that much revenue ($13.6 M in the first year, $30 M in the second), but it is again in there, somehow.
5. Property tax reform: S.B. 1 and the sales tax

We have been talking about property taxes quite a bit for the past few weeks. The current system is not only terribly regressive but steers investment away from poorer cities.This has been an area that the FESC wanted to address.

The Finance Committee is tackling this issue with S.B.1, adding a few very interesting tweaks. We mentioned that the sales tax now has a 0.5% portion that goes to municipalities; this bill actually details how the money would be used. It has four main components:

Motor vehicle tax changes:

The car tax is now capped at a mill rate of 29.36. There are 57 municipalities with taxes above that threshold – part of the money from the sales tax will be used to compensate them for the lost revenue.

This change would limit (but not close completely) the gigantic disparities in rates that the same car can pay if registered in a different town, a very positive reform.

Changes to PILOT grants:

PILOT stands for “payment in lieu of taxes”. This is a grant that compensates towns with a lot of non-taxable property (state buildings, non profits hospitals, etc.) for the loss of revenue. S.B.1 tweaks the formula to give priority to the towns with the most non-taxable property. They also happen to be the poorest cities, so it is also a positive change.

Regional revenue sharing:

An idea we have described earlier, although with 20% of new commercial/industrial revenue growth shared instead of the 40% of the original bill. It is a bit less effective, but still a very good reform.

Regional program incentives:

About 10% of the funds coming from the sales tax would be used to establish cooperative regional programs to create efficiencies and reduce costs.

All in all, these are good changes – maybe a bit less ambitious than the bill that came out of the Planning Committee, but positive changes nonetheless. The car tax change will represent a hefty tax cut to city residents and many inner ring suburbs, PILOT will dedicate more resources to poor towns, the revenue sharing will help balance growth and regionalization incentives can help reduce the costs of providing municipal services.

The bill has strong support from the leadership, so it has a good chance to make it to the floor. If you have not talked with your legislators about property tax reform, it is time to start.
6. What´s next?

Still a long way to go until the budget is done. The Finance package includes quite a few big ideas, so once it gets to the floor, expect some back and forth discussion.

What it is important to do now is to contact your legislators in the Finance Committee and thank them for their efforts. This is a very difficult budget that needed some tough budget choices. The budget includes new revenue and some significant reforms on how we pay education (remember- that´s what property taxes are for!) in the state. Our legislators made the hard choices, and they deserve some recognition.

We had some very good news in the budget process this week. We are not done yet, but we are moving the needle – things are going in the right direction. Stay tuned, as there is more to come.

The Appropriations budget – quick notes

1. The budget: a general overview

budgetcalculatorThe Governor´s budget proposal included $590 million in spending cuts. As you probably recall, many of them were painful, with some deep cuts to programs like Husky A and education. The Appropriations budget (HB 6824, for those looking for it), in comparison, would spend $470 million more than the Governors proposal – that is, it only has $120 million in cuts.

The result is a budget that although it still includes quite a few cuts (and no inflation adjustments) it does much more to preserve essential services. Appropriations deserve a good deal of praise for this document; if you legislators sits in the committee, you should give them a call and thank them for their efforts. It still is a tough budget year, but the committee members have stepped up in many ways to make things better.

Of course, there is something that needs some discussion: the spending cap. Appropriations considers that long term payments to the state´s many pension funds (teachers, state workers…) should be consider debt, not spending, and consequently should not be counted as spending under the spending cap. The CT Mirror has an excellent overview on this subject here. We support the actions that the committee has taken in this regard; pension obligations are debt, and should be considered as such.

For a good bird´s eye view of what is on the budget, the Mirror has an excellent tracker – you can find it here. With all that said, let´s have a look at the changes that are relevant to our agenda.
2. The budget: social programs

There are quite a few very positive changes in this area – I will list the most relevant ones, both from the perspective of how many low income families are affected and based on our agenda.

Health:

The most important change is, by far, the restoration of funding for Husky A parents and pregnant women. Under the Governor´s proposal, parents of kids in households between 138% and 200% of the federal poverty line would have lost coverage and be shifted to the health exchange. Pregnant women would be forced to the Access Health CT website, as well. All in all, 34,000 people would have had their coverage severely reduced.

The Appropriations budget proposal reverses these changes ($44 million), and also reduces some of the cuts in Medicaid reimbursement rates ($27 M). Both are welcome changes.

Workforce:

Funding is partially restored for Cradle to Career and STRIVE. Cuts remain on I-BEST funding (although part of it would be redirected through other line items) and Youth Service Prevention Grants.
3. The budget: Education

A lot of good news in this area, as well. We have not looked at the funding streams for K-12 in the municipal side of things, but many programs are back on the budget, and there is even room for some very pleasant surprises.

Two Generation Strategies:

CAHS has been talking about two-gen strategies a lot for the past few months, working with many of our FESC and Early Childhood Alliance partners on this area (more information on these programs here).

The budget includes $2 million to launch pilot programs in several communities, following the recommendations of the state task force.

We will be talking a lot more about two-gen strategies in the coming weeks, so stay tuned!

Early Childhood:

The budget includes $5 million of additional funding for full year school readiness. It also partially restores several key programs:
-Community plans for early childhood ($712,000)
-Head Start Link ($720,000)
-Children Trust Fund, including Help Me Grow and Family School Connection ($882,000)
-Early literacy ($142,000)

K-12 Education:

Some changes here, as well, although not everything is additional funding. Charter and magnet schools actually lost some money ($7.7 and $3 million, respectively); some programs did not get restored, like Wrap Around services (only got $25,000), Parent Universities and School to work.

A few key programs were partially restored: LEAP, Neighborhood Centers and the Parents Trust Fund program.

Higher Education:

Of all the changes the most relevant for us is the restoration of almost $14 million to the Board of Regent´s Transform SCSU grant, and more specifically, the fact that the budget earmarks $27 million for remedial education, including the new partnerships with adult education providers.

Besides that, Uconn gets some of its funding restored ($26M), and the Governor´s Scholarship program can now cover some private universities.
4. The budget: Property Tax Reform

One thing that should be getting more attention: the budget includes $41 million in funding for S.B.1, the property tax reform bill that is currently being discussed on the Finance Committee.

We have talked about the bill in a couple of policy briefs (here and here); it is a very good reform that would greatly help poor cities and towns. The car tax portion will likely see some significant changes and we will likely see tweaks to the PILOT reform and regional revenue sharing, but the bill seems to have quite a bit of support.

If you care about education funding or urban economic development in the state (and you should!), it is time to start bringing up that you support S.B.1 to legislators, especially if they sit on finance.

One final note:

I mentioned at the beginning of this post l that it would be a good idea to reach out to your legislators in the Appropriations Committee and thank them for their work on the budget.

The list of changes is impressive, and they will be getting quite a bit of flak on some issues like the spending cap. The same way we have been hounding them to reverse the cuts for the past few weeks, it is time to call or e-mail them and support their work. We are still quite far from a final budget, so we will need all the allies we can get.

SB.1 and regional property tax sharing

We have been following SB1 with some interest these past few days, as it introduces some significant long term reforms to our tax system. Although the car tax portion of the bill has received more attention (here is a one pager on the issue. We like it), the really interesting part is the regional property tax sharing.

 Remember, property taxes pay for education in Connecticut, and they are  very regressive .  I know it sounds boring, but bear with me – it is actually really interesting.

 Here is what SB1 does:

A regional property tax revenue sharing system for new commercial and industrial development.  Under this framework each community contributes 40 percent of the growth of its commercial and industrial property tax base after a specific year (2013 under S.B.1) to a regional pool. That is, the new property tax income is split – 60% stays in the town to cover infrastructure and traffic costs, and 40% is shared region-wide.  The funds are redistributed based on a formula that takes into account a jurisdiction’s population and fiscal capacity, as defined as per capita real property valuation

Why it is important for low income families:

One thing to keep in mind: right now, the poorer a city is, the higher are their property taxes. Poor cities have smaller grant lists, so they need higher mill rates to cover their costs. Higher mill rates makes them less attractive to business, as they prefer to wealthier towns with lower taxes. The less business you get in, the more you need to tax what you have, so cities end up being left behind. checkbook-pen.jpg

The impact of this reform goes beyond revenue, as it reduces the incentives for municipalities to compete for new development to shore up their tax bases . Under S.B. 1 cities and towns would be able to plan on a regional level. As any new development would benefit the region as a whole, with the town hosting the new development receiving additional revenue to pay for their costs, municipalities can work together to protect open spaces, focus on infill development and placing new projects close to infrastructure hubs.
This legislation would give rural communities and suburbs the tools to stop using their lower mill rates to steer development out of the poor urban cores,  while also enabling cities to attract new development more effectively.  Connecticut metropolitan areas would be able to re-balance their growth patterns between the core and outer areas, avoiding the harmful tax competition that penalizes the poor inner cities with smaller grant lists, or more non-taxable property.  S.B.1, as written, has  the potential to helpreverse decades of under-investment in our cities and urban sprawl while ensuring that no municipality is left behind.

Has anyone else done something similar?

Yes! A very similar law has been in operation in Minnesota with very good results. Property taxes are one of the most regressive taxes in the state, and they are set up in a way that actively penalize development and growth in our poorest cities. This reform is a very good step to reverse that.

Take Action!

SB1 was voted out of Planning, and it is currently sitting on the Finance committee. The bill has very strong support from the leadership, so it is likely to go to the floor, but once there things get dicier.

If you want to get involved in an effort to bring some real, long term change to the state in one of its most dysfunctional policy areas, e-mail me. This is an area where not many people are paying much attention right now, and we can make a big difference.

Webinar: a quick look at the Governor´s budget proposal

CAHS and CT Voices for Children hosted today a short webinar giving a quick overview of the Govenor´s budget proposal. This was part of our work in the Family Economic Success Coalition; we are looking forward to host more of these events in the future, giving periodical updates during the legislative session.

Here is what we talked about:

You can download the slides here.

We referenced quite a few things during the presentation and during the Q&A. The most important bits are the following:

  • From CT Voices for Children: Impact of the Governor´s budget on children. The figure of 54% of the cuts falling on kids come from this report; a must read. Their budget visualization tool is great, and lets you track how each program has fared since the early nineties.
  • We mentioned two generation education strategies – here is a primer.
  • CT Voices has also published a report on the impact on early care and education programs. Not as bad, but still significant.
  • Tax incidence study: this report from the Department of Revenue Services explains who  bears most of the burden of each tax in the state. This is why I kept talking about tax reform, by the way.
  • Tax expenditure report: this is where we are looking for new revenue – all the taxes the state does not collect due to (sometimes outdated) tax breaks.

For those looking to testify, a few links:

  • Calendar with all Appropriations Committee hearings. To testify, you have to go to the LOB (9 am to 10 am in the atrium, 10.15 until 1 pm on room 2700) to draw a number. The order is decided by lottery, so depending on how many people are speaking and your luck, you might testify very early or very late. More details about the whole process in the link.
  • General Assembly Calendar. Each committee does things a bit differently, so make sure to click on the hearing to check instructions specific to each hearing.
  • Remember: all committees accept written testimony, and legislators do read what is submitted. So if you don´t have time to drive up to Hartford, you can still be part of the process.

Expect more webinars soon, as the session advances. If you have questions, just ask!