At long last, deep-blue Connecticut has adopted a new, bipartisan $41 billion two-year budget, which closes an alarming $5.1 billion deficit. After four months’ operating without a budget, there’s relief across the state and amazement at the bipartisanship.
The relief may be short-lived, since the new budget itself forecasts big future deficits. These deficits should be expected, given sharply escalating public-sector labor costs.
Afterwards, GOP and Democratic legislators joined forces to craft the new budget, which passed by an overwhelming veto-proof four-to-one margin. If ever there was bipartisanship, this is it. However, bipartisanship is not a silver bullet.
While the budget closes the current deficit, the budget document itself projects a plunge back into a deep $4.5 billion deficit in the next biennium and a deeper abyss thereafter. Obviously, the budget fails to solve the state’s long-term problems.
While the budget includes $1.6 billion in “labor concessions,” overall state expenditures on public employees will increase by $775 million in the new budget.
The concessions are only “savings” according to the word’s meaning in government budgeting, i.e., reductions in the magnitude of a future increase, rather than savings relative to prior spending levels.
Of the $1.6 billion in concessions, $715 million derives from a two-year wage freeze, in exchange for which union-friendly Governor Malloy granted a four-year no-layoffs guarantee. Wages will be the same — not less.
The rest of the concessions come from slowed but still robust increase in benefits expenditures. The benefits concessions derive from the wage and benefits deal that Malloy struck last summer with the state-employee unions revising the long-term benefits agreement, the so-called SEBAC agreement. In the deal, Malloy agreed to an extension of the notorious SEBAC agreement to 2027, shielding overgenerous benefits with strong legal protection for a full decade. The legislature approved the deal in a strict Democratic party-line vote.
In the next biennium, wages and benefits expenses will explode. Wages will increase about $625 million to roughly $9.9 billion, given two annual 3.5 percent raises agreed in the SEBAC deal. With escalating scheduled pension-fund contributions and assuming only a 4 percent increase in health-care costs, total health and pension expenditures will jump $1.3 billion to $10 billion, more than 33 percent above the level in the two fiscal years that ended last June.
The SEBAC benefits agreement is fiscally unsustainable. Major corporations have recognized as much and departed — GE, Aetna, and, most recently, Alexion. In 2018, Bristol-Myers Squibb will join the exodus.
These departures exacerbate the fiscal woes that trigger them. Conventional income-, sales-, and corporate-tax revenue has flatlined recently, despite (or due to) two huge tax increases under Malloy. Loath to increase tax rates yet again, budget negotiators instead imposed about $350 million in less obvious tax increases in the form of reduced or canceled tax deductions, credits, and exemptions.
There’s also a $330 million increase in net revenue from the maximization of a complex tax maneuver under which the federal government over-reimburses states for taxing, and then redistributing tax revenue to, health-care providers to enhance Medicaid coverage. Federal funding is increasing about $750 billion under the scheme. That kind of money might lead Congress to consider policy modifications.
Beyond taxes, the budget closes the current deficit with a variety of one-time measures. For example, the budget sweeps about $300 million from various special-purpose accounts, including green-energy-subsidy accounts funded directly through charges on utility customers’ bills.
Of course, these one-time measures cannot help in the next biennium. On the tax side, Connecticut provides an illustration that constantly increasing taxes may not overcome an eroding tax base. Sure enough, the new bipartisan budget itself projects that overall revenue will decline in the next biennium, dropping by $1.5 billion to $39.8 billion.
The new bipartisan budget itself projects that overall revenue will decline in the next biennium, dropping by $1.5 billion to $39.8 billion.
A few brave Republicans voted against the new budget because Democrats and the unions nixed several pension reforms proposed to take effect after the SEBAC agreement expires in 2027. These reforms had been part of the budget passed in September. Despite their delayed effectiveness, the state’s outside actuaries had valued the reforms at $270 million in the current biennium and $10 billion over 30 years.
Most Republicans voted for the budget because it contains new formulaic caps on spending and borrowing. These restraints would have had great effect if enacted a decade ago. Now it’s less so, since the new spending caps exempt expenditures on unfunded public-employee pension obligations. Moreover, one spending cap is tied to inflation and the state’s personal-income level, which are increasing, however slightly, while the real problem is declining aggregate tax revenue, which will serve as the real brake on spending.
The other spending cap is tied to expected revenue (which, as just noted, is declining). The legislature can adjust the cap and, thereby, spending simply by raising taxes, which it will have to do just to maintain, or moderate cuts in, non-compensation spending, i.e., services for citizens.
When it mattered, on the SEBAC deal, there was no bipartisanship. Malloy, the Democrats, and the unions were zealous in protecting state employees to the detriment of Connecticut’s citizens.
Connecticut’s outlook is dire. The state looks like the canary in the mine. Other high-tax big-government blue states have similarly bloated ranks of public employees earning unaffordable benefits that have generated severely underfunded pension and health obligations. Illinois, New Jersey, and California come to mind. They should take heed.
— Red Jahncke is the president of Townsend Group International, a business consultancy in Connecticut, and a freelance columnist who writes on public-policy issues.