Wednesday, January 26, 2011

Governor Malloy’s Budget Intentions

Governor Dannel Malloy announced in a meeting with his commissioners of state agencies that he would cut $2 billion from the projected annual costs of state services. Mr. Malloy proposes to eliminate 55% of the state’s deficit with spending cuts and 45% with tax increases.

Three points ought to be considered. First, the state debt Mr. Malloy hopes to discharge with his particular distribution of spending cuts to tax increases is a projected deficit. In the past, such projections have not been accurate. The final figures for the next few fiscal years may be higher.

Second, just as a man is no island unto himself but each is a part of the whole, so no state is an island unto itself. Mr. Malloy has said or implied repeatedly, both before and after his election, that his approach to budget matters will make Connecticut competitive with other states or, at the very least, will not tilt the economic playing field in favor of competing states, so that the flow of business, entrepreneurial and human capital -- most especially young people who have been fleeing the state for greener pastures elsewhere – might be reversed in Connecticut’s favor.

In this regard, it may be important to point out that the newly installed Democratic Governor of New York, Mario Cuomo, has vowed to attack his state’s budget deficit without recourse to new taxes. The Cuomo plan involves closing a $10 billion budget gap by freezing wages and taxes, limiting spending growth to the rate of inflation and consolidating departments, while Mr. Malloy proposes to raise nearly $1.7 billion in new revenue. Mr. Cuomo has also proposed a cap on property taxes, setting up a fight to the death struggle between the governor and a tax thirsty state legislature.

Third, Mr. Malloy must get his budget project approved by a Democratic caucus that in the past has not been in favor of cuts adversely affecting unions credited with Mr. Malloy’s election as governor. Effective cuts of this kind would be permanent, reaching far into the future; they also would represent disinvestments in areas where the state’s growth in spending has in the past been resistant to reductions. An end to binding arbitration, for instance, would allow municipalities to control their own destinies. One supposes that measures of this kind – precisely because they would be effective in controlling future costs – would be vigorously resisted by Speaker of the House Chris Donovan, who in the past has shown himself to be unusually attentive to union interests.

Both co-chairwomen of the budget-writing Appropriations Committee, Sen. Toni Harp and Rep. Toni Walker, cautiously greeted Mr. Malloy’s announced intentions. Ms. Walker said she looked forward “to seeing where exactly those reductions will come from. We have nothing concrete yet." It is the Democratic dominated legislature that first adjusts and then sets in concrete Mr. Malloy’s budget plan.

In the meeting with his agency heads, Mr. Malloy unfurled four principles guiding his budget decisions: He would refuse to borrow money through bonding to pay down current expenses, “absolutely fund our pension obligations next year - and all years,” not rely on early retirements to cut expenses, and force state government to live within its means by changing the state “in a profound way.”

Mr. Malloy’s intentions will become clearer after he presents his budget to the Democratic dominated General Assembly. Connecticut’s red ink arises from a disproportion between revenue and spending. Debit in Connecticut has not been caused because legislators and previous governors have been uninventive in creating “tax investments” that increase revenues. The state is up to its knees in red ink because the rate of spending has increased precipitously over the last two decades following the institution of an income tax that made it possible to boost revenues and add surpluses to the general fund. Consequently, the ravenous beast that was fed got fatter – and considerably more demanding. It is now eating up the state’s seed corn.

It took the state of Connecticut about ten years to recover jobs lost during the milder recession that followed the institution of the Lowell P. Weicker Jr. Income Tax, which turned out to be a license to spend. Any solution to the disparity between getting and spending that does not PERMANENTLY reduce spending by about 25%, while holding the line on taxes during what promises to be for Connecticut a far more protracted recession, will not succeed in properly positioning the state relative to contiguous states so that, when the recession gives way to a rising tide, Connecticut’s ship of state can speed forward on the crest of the tide, rather than being stranded on a sand bar of its own making.
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