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The Underlying Causes of the State's Fiscal Crisis
By Bill Sullivan, Burlington
Our state government’s effort to close its budget deficit has focused exclusively on finding a short-term solution by increasing revenues and cutting costs to meet the immediate need of keeping our heads above the red ink that is drowning us. However, just like an individual in financial difficulty, we need to do more than just pay this month’s bills. As a state we have to address the underlying causes of this and future fiscal crises.
The blame for much of Connecticut’s budget woes lies with our excessive $12.4 billion public debt. The state borrowed heavily in the 1990s and we now find ourselves overwhelmed by the cost of repayment. Servicing the highest per-capita public debt in the nation drains too many tax dollars from our budget. Interest on this figure and the payment of maturing bonds will cost the state $1.3 billion this year—more than 10% of our revenues. Just a decade ago, only 5.4% of our budget went to interest and principal payments. If we still devoted 5.4% of our budget to debt service instead of the present 10.7%, we would have roughly $650 billion extra for operating expenses—the same figure needed to balance the books this year.
To reduce our debt burden, which currently stands at a staggering $3,037 per person, Connecticut must enact tougher legislative controls on borrowing. At this time, the law allows the General Assembly to maintain a debt that is 1.6 times that of its current tax revenues. We must reduce this ratio to impose needed restraint on our borrowing.
Advocating such a limit does not suggest that selling bonds to pay for capital projects is a bad policy. Many pressing needs demand public investment. A growing population of children necessitates the construction of schools; our transportation system ranks amongst the worst in the nation; and our cities cry out for revitalization. Connecticut’s future prosperity hinges upon these investments in infrastructure. However, the state cannot simply pull out its credit card for every project that seems worthy.
A tighter restraint on borrowing will force our government to prioritize the wish list. The politicians need to be put in a position to ask themselves difficult questions, for example: How many dollars should be devoted to one city, such as Hartford? Are magnet schools a top priority for funds, or should we focus more dollars on the space crunch in existing school districts? A critical overriding question for all proposed capital projects should be: Does this idea represent an investment that will benefit the common good, or is the proposal a legislator’s "pet" project that will benefit only a narrow constituency?
A more stringent cap on borrowing might also lead to the creation of new revenue ideas to pay for projects. For example, the open space initiative has set the noble goal of protecting some of our state from development. Presently, bonds finance the state’s share of the program, and thus all taxpayers will have to pay for the interest on that debt for 20 years. Why not ask those who threaten open space—the developers—to pay for the open space program? A tax could be imposed on each acre paved over, built upon, or turned into a shopping center. This would place the tax burden on those who rightfully should carry it. Those who destroy an undeveloped acre should help pay to preserve an acre somewhere else.
Getting a tighter hold on our borrowing will not prevent future budget problems on its own. The greatest threat to the state’s fiscal health remains the unfunded liability for employee pensions. Each year an independent actuarial determines the figure that the state must place in worker pension funds in order to keep these programs financially sound. Despite laws to the contrary, the General Assembly usually allocates only 85% of the amount that it is required to give.
This illegal raid of worker pension funds represents the worst kind of financial mismanagement. Anyone who understands compound interest can appreciate that every dollar appropriated and invested today will mean fewer dollars that taxpayers will have to pay in the future to cover the state’s obligations. Instead of making hard decisions about taxing and spending, the General Assembly has created a massive $6.6 billion liability that will wreck havoc on future budgets.
Our legislators seem to forget that the main cause of Waterbury’s financial meltdown was the city’s use of the same budget chicanery—steal from worker pension funds today and worry about the consequences latter. Since the General Assembly violates its own laws on this matter, we are faced with no other choice but to amend the state constitution to require the government to fully fund all worker pensions for which it is responsible.
Another critical reform of our fiscal practices would be changing the spending cap law to encourage rather than discourage federal aid to our state. The spending cap has done an adequate job of holding the growth of non-bonded spending to roughly the rise of income over time. Unfortunately, the spending cap counts any money received from the federal government and spent by the state as "state spending" to be counted towards the cap. Therefore, Connecticut has been forced to say no to millions of dollars in aid from the federal government because accepting the funds would put us over our state spending cap. The General Assembly must change the spending cap legislation to exempt the funds we are entitled to from the federal government. Any help in providing services should not be refused.
To date the debate over the state budget has focused on union concessions, spending cuts, and taxes. These short-term fixes will overcome the present crisis. However, unless the legislature takes a close look at our excessive borrowing, illegal pension raids and the spending cap, we will be left without long-term solutions to our state’s problematic fiscal health.
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