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not really a high-tax, big spending state if we take into account its wealth, we do raise revenue in very ineffective, outdated ways.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 As with revenue, Connecticut has some spending practices that are both inefficient and outdated, creating a state and local government structure that is often not up to current challenges.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

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 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.

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!

Malloy´s budget proposal: quick takes

It is finally here – Governor Malloy just presented his budget proposal. We knew it was going to be a tough budget year, so there are plenty of things to talk about and discuss.  We have a FESC meeting this Friday, 9.30 to 11,30 am, specifically to go over the whole thing and plan ahead. Make sure to come, and there is a lot to talk about.

 

On to the budget, then. Let´s start with the basics:1780628_10100675970865764_6644564155060391429_n

That said, some very early, very quick takes on the budget:

 

General notes:

  • The deficit is still a bit north of $1 billion. To close the gap, the Governor is relying in a mix of spending cuts ($590 million) and revenue increases (not exactly taxes, but close enough), mostly tax cuts promised for this year that will not happen, some tweaks to the sales tax that will increase revenue and money from a settlement with Standard & Poor´s from the financial crisis.
  • No layoffs, but a good deal of attrition in the states labor force; 300 positions, or a 2% workforce reduction in two years.

The Good:

  • Full day kindergarten for all children in the state.
  • If you like transportation (and you should) the budget has some very good news; the New Haven-Hartford-Springfield rail line is still on track, and there is quite a lot of investment fixing up Metro North, as well as some road projects. More informationhere and here.
  • Second Chance Society Initiative: some significant changes in criminal justice, including eliminating minimum sentences in some areas, reducing penalties for simple drug possession to misdemeanor and streamlined parole proceedings for non violent offenders.

The Bad:

  • The State EITC is not restored to 30% of the federal credit, and remains at 27.5%
  • Many important line items remain frozen: municipal aid and ECS funding, for instance, have not seen a nominal increase for the past few budgets, what amounts to a fairly real cut in the past few years.
  • Significant program cuts in the department of labor: STRIVE, Jobs Funnel and youth employment, among others, lose more than $5 million in funding.
  • The Department of Social Services got hit with big cuts:
    • Husky A adults earning above 138% of the Federal Poverty Line will be shifted to Health Access CT, and will have to pay premiums with federal subsidies (a $44.6 million cut).
    • The biggest hit, however, was on Medicaid reimbursement rates: $43 million to providers, $5.1 million to low cost hospitals, $4.3 million to ambulance services.
    • Healthy Start got zeroed out, among other programs, cutting $8.1 million.
    • The overall budget cut looks smaller because they are getting $55 million from new revenue: an update on the Hospital Provider Tax.
  • The Office of Early Childhood saw a slew of programs cut, including Help Me Grow, the Community Plans for Early Childhood and Family School Connection (about $2 million)
  • Some cuts on higher education: the Uconn block was reduced by $27 million, and Board of Regents saw cuts both on Transform CSCU ($12 million) and their block grant ($4 million). Remedial education pilots and funding are also being cut; we are trying to see exactly by how much.

The Ugly:

  • The budget really does not add up unless one assumes an increase in revenue to appear in the April budget report. It might be there (the economy is actually doing fairly well), but still. We will see.
Even more budget stuff:
The CT Mirrror has a lot more on where the cuts fall, the transportation projects, and wheredoes the new revenue come from. More information in the Courant and CT News Junkie.  If you want budget numbers, we will keep you busy!

President Visits us Here in the Nutmeg State, Supports Minimum Wage Hike

Yesterday afternoon President Obama stopped by Central Connecticut State University in  New Britain where he made his case for increasing the federal minimum wage to $10.10 (current federal minimum wage is set at $7.25, Connecticut’s minimum wage is $8.25). Flanked by Governor Dannel Malloy, as well as the Governors from Massachusetts, Vermont, and Rhode Island, the President called on Congress to “give America a raise” and highlighted how the increase would help women and young people.

In our previous post, we discussed the the benefit a wage increase has on both our lowest-earning workers and the state’s budget. Several news reports following the event, that can be viewed here and here, featured quotes from Democratic lawmakers indicating the high probability of the legislature passing a minimum wage increase during this legislative session. Tom Foley,  the likely Republican candidate in this fall’s governor’s race, has stated he favors a minimum wage increase. There is also overwhelming public support, with the latest Quinnipiac poll showing voters backing the measure 3-to-1.

An increase in the minimum wage is an important first step in helping our state’s families move out of poverty and towards economic security. In future posts, we will discuss other aspects of the President’s economic agenda for 2014, which includes a more robust earned income tax credit with new support for single adults, additional job training programs, and expanded early childhood education opportunities.

Don´t cut SNAP benefits

Jim Weill, from FRAC, pens an excellent op ed on the Hill talking about why the cuts to SNAP proposed by Eric Cantor in the House of Representatives are a terrible idea:

Everyone with a conscience should be mad as hell at those in Congress who have signed up behind a heartless Farm Bill proposal to cut $40 billion from the Supplemental Nutrition Assistance Program (SNAP, formerly known as food stamps). Their plan would throw millions of people out of the program and cut benefits for millions more.

If you are a man, woman, parent, business owner, farmer, teacher or veteran, you should be furious. If you’re old, young, Black, Hispanic or White, your blood should be boiling. Why? Because we all stand to lose big.

Weill gives some examples on why SNAP benefits are so important, and why cutting them would have some real, lasting effects for millions of Americans and our economy:

Children. Rampant unemployment and the proliferation of low-wage jobs have resulted in one out of two American children spending at least a few months during childhood on food stamps. The good news? Food stamps help boost their health, learning and long-term productivity. The bad news? House Republicans have made children prime targets for cuts. (…)

Women. SNAP cuts are particularly brutal to women. Because they tend to earn less and be the primary caregivers to children, 60 percent of working-age adult SNAP recipients are women. In addition, 67 percent of elderly SNAP recipients are women.

In Connecticut alone, more than 430,000 people  received SNAP benefits in June 2013.  Many of them are children. The majority of them are on working families. SNAP benefits are going to be subject to automatic cuts later this years as additional funding from the stimulus bills expires; cutting the program further will be devastating to millions of children  and families across the country.

The SNAP program is a crucial part of the US safety net. Cutting the program is damaging and senseless, and will only hurt those who are the most vulnerable. Considering how income inequality has skyrocketed since the end of the recession, this cut is anything but a reasonable way to cut deficit.

America is failing to provide quality day care

Jonathan Cohn, at the New Republic, has an epic, 30,000 character article at The New Republic on the state of early care and education in America. His conclusion: we, as a county, are doing a terrible job at it.

WWII_daycare_Richmond_CAAmerican day care performs abysmally. A 2007 survey by the National Institute of Child Health Development deemed the majority of operations to be “fair” or “poor”—only 10 percent provided high-quality care. Experts recommend a ratio of one caregiver for every three infants between six and 18 months, but just one-third of children are in settings that meet that standard. Depending on the state, some providers may need only minimal or no training in safety, health, or child development. And because child care is so poorly paid, it doesn’t attract the highly skilled. In 2011, the median annual salary for a child care worker was $19,430, less than a parking lot attendant or a janitor. Marcy Whitebook, the director of the Center for the Study of Child Care Employment at the University of California–Berkeley, told me, “We’ve got decades of research, and it suggests most child care and early childhood education in this country is mediocre at best.”

At the same time, day care is a bruising financial burden for many families—more expensive than rent in 22 states. In the priciest, Massachusetts, it costs an average family $15,000 a year to place an infant full-time in a licensed center. In California, the cost is equivalent to 40 percent of the median income for a single mother.

This is specially worrisome because, as Cohn has pointed out in another must read article, early care and education is by far the most powerful, effective tool we have to help low income kids succeed.

CAHS has long recognized how important these issues are, and we have advocated for better early care and education for years we will continue to do so as member of the Early Childhood Alliance.

Our work this year is specially relevant, as budget deficits endanger Connecticut´s investment in helping low income families have access to quality child care. Care 4 Kids, the state´s child care subsidies program, has been targeted for cuts. Currently, when a family’s income raised above 50% of State Median Income (SMI), their childcare subsidy is adjusted, and they can continue receiving Care4kids until they reach 75% of SMI.  The Governor’ has proposed to close the program to families between 50 and 75% SMI, creating a sudden benefit cliff for these households. Due to the very high cost of child care in the state, these cuts can potentially drive working families to refuse pay raises or longer hours to avoid going over the income limit, as it will entail a net loss of take home income due to the sudden increase in child care payments. The governor´s plan, rather than saving money, puts these working families and their kids in a no-win situation.