Connecticut

1
Connecticuts Spending Cap Where are We Now?

• March 10, 2005, Briefing
• Alison Johnson, Connecticut Health Foundation
  Consultant
• And
• Liz McNichol, Center on Budget Policy
  Priorities Senior Fellow
• Commissioned By

2
How the Spending Cap Works

• Limits general budget expenditures to
• 5-year average growth in personal income
• OR
• Annual growth of Consumer Price Index
  (inflation), whichever is greater

3
Exemptions to the Cap

• Aid to distressed municipalities for grants in
  statute on July 1, 1991 (definition has changed
  over time)
• Payments of debt
• First-year costs of court orders or federal
  mandates

4
Cap can be Exceeded

• If the Governor declares an emergency or
• the existence of extraordinary circumstances
• AND
• 3/5 of both houses of the General Assembly agree

5
Connecticuts Cap is Tougher Than Most

• 27 states have expenditure limitations
• Connecticuts is one of toughest
• - Covers 80 percent of state expenditures,
  including federal revenue
• - Connecticut is only 1 of 2 states using 5-year
  average personal income growth
• - Governor has to initiate exceeding the cap
  requires 3/5 majority of legislature to override
• Each years cap based on previous actual
  expenditures vs. allowable expenditures

6
Current Tax and Spending Limit Activity in Other
States

• Other states are considering caps
• Both proponents and opponents recognize problems
  with caps when coming out of economic downturn
• There are a number of proposals to create more
  room under Colorados cap one often cited as a
  model

7
The Connecticut Experience 14 Years Under the Cap
8
State Spending Growth Declined
9
State Spending Growth Declined

• Before adoption of cap, spending growth averaged
  11.7 percent a year
• (FY 1987 FY 1991)
• After cap, growth was 4.8 percent
• (FY 1995 FY 2001)
• Due to economic downturn, growth slowed to 2
  percent annually over the past 3 years

10
Amount Actual Appropriations Were Below Cap
(excluding surplus)
FY 1993 - 120.0 million FY 1994 - 39.1 million FY 1995 - 53.4 million FY 1996 - 20.1 million FY 1997 - 3.6 million FY 1998 - 0.4 million FY 1999 - 2.3 million FY 2000 - 0.4 million FY 2001 - 0.0 million FY 2002 - 78.2 million FY 2003 - 333.0 million FY 2004 - 122.9 million

• Source OFA data

11
Cap has been Exceeded When There has been a
Surplus

• 249 million in FY 1998
• 591 million in FY 1999
• 462 million in FY 2000
• 292 million in FY 2001
• Surplus spending minus debt reduction
• and transfers to budget reserve
• Source CBPP calculations of OFA data

12
Surplus Spending and the Cap

• Historically, surplus spending has not been added
  to the base (at Governors discretion)
• There is disagreement over how much the cap has
  been exceeded to fund ongoing expenditures

13

• What are the
• Unintended Consequences
• of the Spending Cap?

14
Incentive to Borrow

• Debt service grew from 5.4 percent of all state
  spending in FY 1990 to 12 percent, or
• 1.3 billion in FY 2005
• More than budgets of DMHAS, DMR, OHCA agencies
  combined in FY 2005
• At 6,008 per capita, Connecticuts debt was 3rd
  highest in the nation, compared to national
  average of 2,234 in FY 2002

15
Incentive to Use Tax Expenditures

• Not subject to the spending cap
• Targeted tax treatments such as exemptions,
  credits, deductions, etc.
• Reduce revenue collected by the state, creating
  built-in losses to revenue stream
• Example 20 million tax exemption for
  advertising services

16
Disincentive to Obtain New Federal Funds

• All federal dollars count toward cap (unless they
  are federal mandates)
• Currently at cap limit in FY 2005
• An additional 10 million forces State to go over
  the cap (needs Governors declaration 3/5
  majority vote)
• Disincentive only happens when State near cap
  limit will be true for at least the next few
  years
• Example State has declined to pursue Medicaid
  Adult Rehabilitation Option could bring in 10.5
  million a year

17
Governor Proposes to Exceed Cap

• Governor proposes nursing home provider tax to
  obtain 237.7 million in federal matching funds
• Would exceed the cap by 244 million needs
  approval by 3/5 vote of General Assembly
• Would be 45.3 million under the cap in
  FY 2006, and 63.6 million in FY 2007
• First time a Governor has proposed including
  excess spending in the base

18
The Current Budget Situation

• For the last few years, revenues have been more
  of a constraint than the cap
• From 2002 to 2004, state spending was less than
  the amount allowed by the cap
• This has served to lower the spending base for
  future cap calculations

19
Recession Squeezed State Budget
Source CBPP calculations of data from OFA, U.S.
Census Bureau, U.S. Bureau of Labor Statistics,
and Connecticut DPH
20
Lower Base May Prevent Return to Normal Service
Levels

• State budgets were tight during the economic
  downturn starting in 2001
• Nominal spending increased an average of 2
  percent a year, well below average and the amount
  that the cap would have allowed
• This results in a low base for FY 2005 the
  starting point for allowable growth for FY 2006
  and beyond

21
Growth Allowed by Cap is Below Projected Economic
Growth
22
Cost of Maintaining Current Services will be Well
Above Cap
FY 06 FY 07 FY 08
Spending Cap 15,071 15,719 16,321
Current Services 15,894 16,669 17,419
Amount over/ Under cap 823 949 1,098
23
Possible Adjustments to the Cap

• Exempt additional types of spending
• Rebase
• Change calculation of growth factor
• Revisit the cap

24
Changes to the Base

• Base could be increased to amount allowed in
  prior year rather than amount actually spent to
  address ratcheting down problem
• Base could be adjusted upward to allow room for
  restoration of services cut during recession or
  for new initiatives

25
Changes to Allowable Growth Factor

• Use more current measure of personal income
  growth
• Reduce number of years in growth factor
  calculation
• Add AGI as additional growth factor to account
  for growth in capital gains
• Adjust for growth in specific populations such as
  the elderly

26
Changes to Growth Factor or Base(in millions)
Change FY 06 FY 07 FY 08
Add 0.5 percent to growth factor 57 120 186
Current Personal Income 38 149 349
Allowable Spending as Base 127 151 201
Source CBPP calculations of Governors budget
data
27
Additional Types of Spending Could be Exempted

• Medicaid
• New federal programs
• All federal funds
• Education Equalization Grants

28
Basic Principle for New Exemptions

• If fast growing programs are removed from the
  base, additional room under the cap will be
  created
• If slow growing programs are removed, the
  spending cap will be tightened

29
Effects of Additional Exemptions(in millions)
Exemption FY 06 FY 07 FY 08
Medicaid 111 157 279
Medicaid (with Medicare changes) 81 62 178
All federal funds - 242 - 293 - 270
ECS 5 - 48 - 94
Source CBPP calculations of Governors budget
data
30
Could Eliminate Cap by Constitutional Statutory
Changes

• If General Assembly and voters agreed
• Eliminate incentives to borrow and use tax
  expenditures
• Remove disincentive to obtain federal funds
• Could tempt state to spend beyond its means
• Create opportunity to more closely match budget
  growth with states economic condition

31
Where Are We Now?

• Cap is one of most restrictive in the nation
• Will be over cap limit for some time
• Current structure of cap will cause spending to
  lag behind economic growth
• Cap has unintended consequences
• State can cut programs or make cap adjustments to
  stay within spending limits

32
For More Information

• Visit www.cthealth.org
• Email CHFs Monette Goodrich at
  monette_at_cthealth.org or call 860.224.2200 to
  receive copies of the report and/or one-page
  highlight sheet