May 6, 2009

BUDGET CAP POSES PROBLEMS EVEN WHEN THERE'S NO MONEY TO SPEND

By Keith M. Phaneuf, Journal Inquirer

HARTFORD — When it comes to state spending, the focus of most discussions at the Capitol these days is on how to reduce it.

But an unintended side effect of the state's constitutional spending cap, coupled with a historic infusion of emergency federal aid, could leave Connecticut legally barred from funding basic programs in a few years — even if the economy rebounds and tax revenue is sufficient.

That's because all federal aid, even the nearly $2 billion in emergency stimulus funding the state will receive across this fiscal year and the next two, counts as "spending" under the rules of the constitutional cap.

At the same time, budget proposals both from Gov. M. Jodi Rell and from the legislature would reduce non-federal aid — in other words, state tax dollars — that the state would spend next fiscal year.

That means that state spending is likely to stay flat or shrink slightly in the next year.

And because the amount of allowable spending growth under cap rules is determined in large part by past spending, Connecticut's budget cap should fit very tightly a few years down the line — at the same time that historic levels of federal aid are set to disappear.

"I am more worried about 2012 than about 2010," House Majority Leader Denise W. Merrill, D-Mansfield, said Tuesday during a panel discussion on spending cap issues at the Legislative Office Building.

"People don't think about the spending cap as being a problem" during a recession, said Rep. Susan Johnson, D-Windham. "But it's a real issue."

William J. Cibes Jr., a Democratic gubernatorial candidate in 1990 who served as budget director under Gov. Lowell P. Weicker Jr. in the early 1990s, predicted health care and higher education programs would be hard hit by this combination of a tightening cap and vanishing federal aid.

"And these are the budget areas most recognized as protecting our most vulnerable citizens or providing the foundation for future economic development," Cibes said.

Johnson has introduced a bill that would change how federal aid is counted against the cap, to guard against this problem.

This isn't the first time the state's spending cap system has been accused of snarling the budget process.

A 2007 report from the nonprofit Connecticut Health Foundation concluded that the cap, adopted by voters in 1992 to complement the new state income tax, has encouraged the use of budget gimmicks and have weakened accountability.

These consequences include increased borrowing and, at times, the forfeiture of available federal aid.

In November 1992, four out of five voters agreed to amend the state constitution to require a cap, which was designed to ensure the state budget, excepting a few areas, doesn't grow beyond taxpayers' ability to pay for programs and services.

The largest spending exceptions are debt service and grants to poorer cities.

But since debt service is exempt, critics say, state officials often opt to borrow money for ongoing programs rather than pay cash out of the budget.

The Democrat-controlled Appropriations and Finance committees have recommended nearly $1 billion in borrowing to support the next state budget. Connecticut already is one of the most indebted states per capita in the nation, with more than $16 billion in bonded debt.

The cap system also has led officials to employ "intercepts," an accounting gimmick used to move huge sums of money outside normal restrictions.

Technically, the cap rules restrict spending of state dollars removed from the general fund and most other major funds that make up the state budget.

But legislatures and governors at times have established special accounts to "intercept" revenue before it lands in the general fund. Money spent out of these special accounts, therefore, doesn't count against cap limits.

And in 2000, the legislature and then-Gov. John G. Rowland arranged a complicated fiscal swap so Connecticut actually would receive $40 million less in federal aid.

They cut a hospital tax by $80 million while at the same time reducing state payments to hospital to cover treatment of uninsured patients by roughly the same amount.

Why make the switch?

Because a tax cut doesn't count as spending under cap rules, but grants for uncompensated care do. At the same time, though, Connecticut forfeited $40 million in federal reimbursement it was receiving for those uncompensated care payments.

"The cap has a lot of problems that people don't even know about," Merrill said. "I don't think the public wants the cap to be used this way."