Friday, January 20, 2012

Connecticut’s Vanishing Surplus

The state of Connecticut should not be running surpluses. A surplus is the amount of money the state has overcharged its citizens to meet expenditures. Connecticut has run surpluses ever since former Governor Lowell Weicker engineered his income tax to pay for extravagant spending that has increased the state’s budget from $7.5 billion under former Governor William O’Neill, the last pre-income tax governor, to $20.4 billion under Governor Dannel Malloy. Successive surpluses have been tucked into budgets for the last 20 years, with predictable results; Connecticut’s chief engine of growth for the last 20 years has been municipal and state governments.

Partially owing to surpluses and a perverse notion that the state of Connecticut never had a spending problem during these years of plenty – the operative assumption of pro-spending forces, iterated in scores of editorials and op-ed commentary, having been that the state could solve all its budget problems by increasing revenue -- the bottom line on the state budget tripled during the administration of three governors, two of them Republicans. Mr. Weicker, father of the state’s income tax, was a longtime Republican who created his own party to run as governor. The General Assembly, the organ of government primarily responsible for budgets, was during the same period dominated by Democrats.

Without engaging Republicans in the General Assembly, the governor and Connecticut’s dominant Democratic legislature approved a budget for this fiscal year that contained a surplus of $88 million. A surplus of $496 million was tucked into the 2012-13 budget.

Under the hammer blows of a failing economy, apparently undetected by Democrats in the legislature and the Malloyalists who negotiated putative savings with SEBAC, Connecticut’s fourth branch of government, surplus figures have now been paired back.

The $1.5 billion in new taxes the governor and his Democratic affiliates in the legislature imposed to rid the state of a $3.2 billion deficit in the state’s budget is not subject to the vagaries of our partially free market system. The state can take its tax increases to the bank. Cost savings of $1.8 billion that were supposed to offset the red ink are far less dependable. The relatively non-partisan Office of Fiscal Analysis was never able to affirm Mr. Malloy’s projected savings.

The biennial budget for fiscal years 2012-13 totals $40.54 billion, about $20 billion a year. Since 1980, state spending has risen from$ 4,400 per household to $10,000 per household, an increase of 227%. Connecticut has a total state debt of approximately $99,751,294,000, calculated by adding the total of outstanding official debt, pension and other post-employment benefits (OPEB) liabilities, Unemployment Trust Fund loans, and FY2011 budget gap, according to a Sunshine Review report.

Figures such as these point to a spending problem, and spending problems are not addressed by revenue increases. Indeed, spending problems are exacerbated when revenue increases, because the depth of the spending floor increases in exact proportion to revenue gains. The more money you get, the more you spend. The more money you spend, the larger the deficit becomes with each succeeding budget. And when the grim reaper of a recession finally knocks on your door, he will find you knee deep in red ink, scrambling to meet state indebtedness, if you are a left of center progressive, by instituting permanent tax increases and dubious long term cost saving measures.

Mr. Weicker removed from Connecticut its most distinctive and appealing feature, the lack of an income tax. The additional taxes he imposed on the state, including the income tax, made the state less competitive with other non-income tax states. The recent additional taxes imposed on Connecticut by a Democratic governor and a Democratic General Assembly unwilling to include Republicans in their budget deliberations, the largest tax increase in Connecticut’s history, sent a clear message to businesses outside the state that might have considered embedding jobs in the state: Te spending arc is bending in the wrong direction.

The Malloy-managed solution to “growing the economy” – remove entrepreneurial funds from the private economy by increasing taxes and use the sequestered funds to provide tax relief to large companies – is simply an admission of defeat. Targeted tax credits and loans directed at too big to fail companies are little more than bribery, though it has become difficult in present circumstances to discover who is bribing whom, the crony capitalists or the crony government.

Senate Minority Leader John McKinney's stinging analysis – “This is more proof that Governor Malloy's over reliance on tax increases was a failed approach to balancing the state budget in a responsible way. When the largest tax increase in state history isn't enough to pay the bills, I hope everyone can agree that a significant reduction in the size and cost of government is in order" – preceded only by a few hours a decision by Moody’s Investors Service to further downgrade Connecticut’s general obligation bond rating to Aa3 from Aa2.

The rating agency cited as sufficient reasons for the downgrade Connecticut’s high fixed costs for debt service and post-employment benefits, as well as low pension fund ratios and depleted reserves. Almost instantaneously, Secretary of the Office of Policy and Management Ben Barnes issued through the governor’s office a response hinting darkly that Moody’s downgrade was intended principally to “satisfy their internal corporate need to deflect attention from their historic lack of credibility.”

Moody’s downgrade,” Mr. Barnes wrote in a press release, “reflects their continued reaction to their central involvement in the financial scandals that led to the deepest recession since the Great Depression. Coming on the eve of our budget release, without an imminent bond sale, suggests that the move is motivated by factors other than Connecticut’s creditworthiness.”

Unfortunately, attacking the messenger of bad news is becoming a too familiar deflective strategy among Malloyalists surrounding the governor.
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