Budget Situation Requires Policy Changes

December 18, 2012

Each week, it seems like our state’s fiscal condition continues to deteriorate. Over the course of several months, we have learned about some troubling developments, including a rapidly expanding budget deficit and transfers of funds that were previously reserved for capital projects. These issues have made it clear that the debate surrounding whether the state has been living beyond its means is over. Policy changes are desperately required if the state is serious about stabilizing its long-term finances and being in a position to help those who are truly in need.

Prior to last month’s election, the state’s budget deficit was estimated to be $60 million. Shortly afterward, the Governor’s Office of Policy and Management (OPM) estimated that the deficit had grown to $365 million. While this increase is certainly a concern, the projections for the next few years are even more disconcerting. In the next fiscal year, the deficit is expected to hit $1.1 billion and remain near that level for the following two years. These deficits are proof that the current path is simply unsustainable, especially after the largest tax increase in history was instituted in 2011.

In September, the legislature’s Finance, Revenue and Bonding Committee held a meeting with OPM Secretary Ben Barnes and a representative from the Treasurer’s Office who provided committee members with an update of the budget situation. Of great concern to me is the practice of using large fund balances that are reserved for capital projects, such as bridge maintenance and school construction, to cover operating expenses if the state’s cash reserves, known as the common cash pool, are running low. This pool includes a diverse range of funds such as tax revenues, fee and license revenues, federal aid and previously borrowed funds.

At the time, I shared my concerns directly with the Budget Secretary and Assistant Treasurer that these practices are not well received by the markets and would in fact raise the possibility of another downgrade of the state’s credit rating. In January, Moody’s Investment Services downgraded the state’s rating from Aa2 to Aa3. Another downgrade could ultimately mean higher interest rates and increased costs for future borrowing.

While the budget deficit and spending cuts have gained recent attention, we have also learned this week that the Treasurer’s Office has requested $550 million in emergency financing to make sure that the state can pay its operating expenses over the next few months. Writing to Governor Malloy, Treasurer Denise Nappier stated that “the common cash pool has a negative balance, which has required the temporary transfer of $366 million from bond fund investment accounts.” This transfer was made before the request for additional emergency financing, which the governor has already approved. It appears as though it will be necessary to use the proceeds from this financing to continue funding current operating expenses.

As I warned in September, short-term borrowing to cover operating expenses is poor public policy, and the state would be wise to end the practice because it only masks the fiscal problems facing our state. We simply cannot afford to continue running state government in this manner. However, in addition to ending this practice, many challenges remain. Structurally, the state budget is unsustainable due to unrestrained spending and massive unfunded liabilities that will have to be confronted in the future. For these reasons, the state must consider how we can responsibly reduce spending and tackle the unfunded liabilities by reforming the state pension system. Otherwise, these billion-dollar deficits and unfunded liabilities will further cement our place as the worst ranked state in the country on fiscal issues at a time when people and businesses continue to suffer.

Last month’s meeting on fiscal accountability also included a remarkable admission. During the budget secretary’s presentation, there was a slide entitled, “Policy changes are required.” Along with other Republican legislators, I have been advocating for policy changes with regard to how our state’s finances are managed. Clearly, this is a profound change from what we have been hearing up to this point from the Governor’s Office, but actions speak louder than words. Only time will tell if we will see a true shift, but it is imperative for future fiscal stability.

According to state law, the budget deficit will have to be erased sometime in the next few months, and the legislature will soon be called into special session to make difficult choices over where to make cuts. The fact that the Legislature will have to make these choices is another indicator that the size and cost structure of state government has become unsustainable. The state must responsibly reduce spending and make changes so that the budget can become structurally stable once again. In January, the legislature will have this opportunity during the upcoming legislative session, and it is my hope that we can accomplish long-term reforms that will benefit our state and its citizens.