Opinion: Here is a plan from Yale for solving Connecticut’s spending standoff

CT Insider – Thursday, December 12, 2024
By Dan Haar

We’ve heard a lot of chatter about bending the state’s spending rules as the 2025 legislative session approaches, and we will hear a lot more.

Now a new policy group called The Connecticut Project has joined with Yale researchers to create a road map showing how, exactly, that might happen. The group, including former Hartford Mayor Luke Bronin, a Yale Law School lecturer, suggests updating the rules to maintain their original spirit while recognizing that the state’s finances have improved, perhaps permanently, since the rules took shape.

This fix to the guardrails, as the rules are known, would allow more spending.

“If the guardrails are adjusted, it’s unlikely to be to make them more stringent,” Bronin said. “They’ve captured more revenue than anyone involved in their initial design ever imagined.”

The key to a 6-part report from the Yale team, released Wednesday, is that it offers sustainable changes to the guardrails rather than doing what spending advocates have pushed over the years: Intercepting money to spend on favored programs before it gets into the general fund and falls under the rules; and making certain programs such as aid to distressed cities exempt, not subject to spending limits.

Instead of that back-and-forth, the report by Yale’s Tobin Center for Economic Policy and The Connecticut Project looks at tax receipts and state outlays over a longer period, using more years of data to set the spending limits. The authors say that makes more sense whether or not it leads to higher spending.

More detail below, after some context.

The big question is, if we alter the rules to allow more spending, will Connecticut’s winning streak come to an end? Gov. Ned Lamont, some of his fellow moderate Democrats and all Republicans say Connecticut must stay the course on the strict rules, with only slight tweaks, if any.

But Connecticut’s state government seems to have a built-in surplus year after year based on tax collections, a surplus lawmakers are not allowed to spend. And at the same time, the number of families barely making ends meet is rising.

As my colleague Alex Putterman reported, a large, new survey showed 40% of Connecticut residents say they’re “just getting by” or struggling mightily. That’s up from 28% just two years ago.

If the state has excess cash and taxpayers have a shortage, why not give it back with tax cuts? Trouble is, the folks on the short end aren’t paying enough state taxes to see much help if we cut the rates.

Thus the push to bend the spending rules in order to boost state services such as higher education, to keep a lid on tuition hikes; health care, especially for the working poor; and raises for the massively underpaid people at private firms, not on the state payroll, who take care of elderly and disabled people.

The main rule, known as the spending cap, created in 1991 with the state income tax, allows the state to increase spending only as much as the rise in personal income or economic growth, whichever is larger. That’s usually 3 percent to 5 percent per year. This coming year it’s 5 percent, or about $1 billion.

Another rule, the volatility cap, keeps state income tax revenue from capital gains, dividends and business partnerships — taxes mainly paid by rich people that rise and fall from year to year — in a separate bucket. If that bucket fills up over a certain amount, the state can’t spend the overage. It must go into surplus, typically to pay down our underfunded pensions.

As it turns out, that surplus volatility money, as it’s called, has been no less than $500 million since that guardrail started in 2017. Some years it has been in the billions. We’ve paid down the pensions by $8.5 billion, which will save $731 million a year for 25 years. But advocates for state services say spending on crucial areas has fallen behind.

“We’ve been dealt a false choice. We can invest in the present and the future. We can pay down to debt. We can do core services that matter for working families,” said Mel Medina, vice president of advocacy and external affairs for The Connecticut Project, a left-leaning policy group. “It’s time to move past the false choices and embrace solutions that work for everyone.”

“The fiscal rules, while stabilizing the past, are a little too rigid,” Medina added.

The Yale report discusses several options and suggests the following two main solutions, which it calls a dynamic model:

Base the volatility cap amount on a 5-year rolling average. As it stands now, the cap was pegged to taxes received in that bucket in 2017, which turned out to be a very low year — $3.14 billion. The average of the last five years is $4.5 billion. Sure, the change would allow more spending now but it would also accurately reflect the economic picture over many years, the report’s authors argue.
Reset the spending cap to reflect not the money the state actually spent, but the allowable cap amount every year. If one year lawmakers and the governor choose to spend less than the cap allows — which did happen in 2018 — then the cap ratchets down every year after that, forever. If the goal of the cap is to reflect the state’s ability to pay, sticking consistently to the income measure might make more sense.

“The dynamic model is meant to offer a way to better track longer-term changes in the state’s economy,” said Bronin, who worked with three others at Yale on the report and was a consultant to The Connecticut Project. “What we wanted to offer is something that felt like it’s been missing from those discussions, which is … a data-driven analysis.”

This is technical stuff for sure but if it’s put into effect, it can make the guardrails simpler, or at least more resilient. The reform would take away critics’ ability to say, as they do, that the guardrails no longer work for today’s finances.

The report didn’t land with a warm welcome from the Lamont administration, which maintains that the caps and guardrails are working well and that the state is now heavily cushioned against a possible recession.

“This report ignores the benefits of the guardrails in supporting and protecting essential services,” said Chris Collibee, spokesman for Lamont’s budget office, in a written statement. “Thanks to the protections built into our budgeting process, Connecticut has turned a corner from the mistakes of the past and has created honest, sustainable budgets that serve the state’s residents.”

The point of the Yale report is not to free up more spending but to create spending rules that adapt to present and likely conditions.

Basing the volatility cap on a 5-year rolling average comes as close as possible to predicting where it’s heading, said Zachary Liscow, a professor at Yale Law School who was chief economist at the U.S. Office of Management and Budget, the president’s federal finance office in the early Biden years.

Liscow was one of the four authors of the report on the Connecticut guardrails. “It is extremely difficult to project revenue going forward,” he said.

Ultimately, state spending is still a political decision and this reform won’t change that. These adjustments to the guardrails can be flexible and can lead to even stricter spending limits in a downturn. In that way, they make logical sense. The idea is to avoid what we’ve seen since 2017, a huge surplus of unspendable money every single year.

“Something we want to see is some years above and some years below,” Liscow said.

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