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In An Era of Fiscal Crisis, Malloy Has Few Places To Run


Dan Haar

3:49 PM EST, December 2, 2012

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Connecticut's latest fiscal crisis roared to the forefront this week with patterns that say a lot about what we can expect to see not just this month or even in the coming year, but for the rest of Dannel P. Malloy's term as governor.

The big picture is that the state faces deficits averaging $960 million a year in each of the coming three years, even after it fills a $362 million shortfall for 2012-13, all caused by a rise in Medicaid and other social services, health and pension costs and disappointing tax receipts in a balky economy.

Malloy's budget chief issued a firm statement in writing: "The Governor will NOT propose tax increases as a solution to these challenges."

That assertion's being met with widespread skepticism — and some lawmakers have even launched bids for new ways to raise cash, among them Rep. Tony Guerrera, D-Rocky Hill, who revived his push for tolls on state highways. Still, the pressure to avert any tax increases in 2013 will be enormous.

Knee-jerk anti-government rhetoric aside, there's no responsible way to cut 5 percent of state spending in one fell swoop in 2013. Malloy knows it, lawmakers know it and the Connecticut people know it.

So, the governor is in a jam even though this deficit is smaller than the $3.5 billion debt he inherited in 2011. He already played the best cards in 2011 — a tax hike and a deal with state employees. After a relatively easy round of cuts, there's nowhere to run to, nowhere to hide.

Another pattern is subtler but even more troubling than the tax increases roaring down the busway: We saw a 10-page list of cuts Wednesday totaling $170 million, which came with a promise of more cuts, which followed a statement by budget czar Ben Barnes that we need to make long-term "policy changes," not just cuts.

Clear conclusion: This is not a one-shot crisis. It's part of a yearslong slog with flare-ups and periods of calm. The crisis of the moment is really the crisis of this era, closely connected with the decline of U.S. economic might around the world.

"The economy has appeared to be in a new place in Connecticut and the nation," said economist Ron Van Winkle, who has a close stake in the crisis as West Hartford's town manager. "It hasn't got the ability to pick itself up."

The first round of cuts, announced Wednesday by Barnes and top Malloy adviser Roy Occhiogrosso, fell basically in the category of management. It orders spending reductions that the state commissioners — who are more powerful under Malloy than under the two previous governors — can work around by doing things faster, better.

The deficit shrinks by only $123 million, because $47 million of the cuts were already built into the budget when it became clear that the state wouldn't spend that money.

Next will come program cuts, probably made through the legislature — deeper reductions that pare what the state does in a more painful way. Looking ahead, Malloy and lawmakers will have to make those policy changes that Barnes warned about — broad pullbacks in the promises that the state makes to its citizens, such as who is entitled to Medicaid and what services are available to homeless people.

That includes the closing of facilities, and not just prisons, Barnes warned.

"To look at any one of these cuts in isolation misses the larger point," Occhiogrosso said.

The larger point is that the budget shortfalls are linked to an era of more social demands and slower growth, just as the federal budget crisis will not abate when President Barack Obama and Republicans eke out a patch to avert the so-called fiscal cliff later this month.

Complicating the picture, Malloy and lawmakers would have to slice state spending by an average of $1.7 billion in each of the next three years (out of a more than $20 billion state budget), not just $1 billion, just to stay within the mandatory spending cap — which is based on overall income and economic growth. Lawmakers can and will amass the votes needed to blow through the cap, but it's not just a legal maneuver. It means we're conceding that state government is outpacing the growth of the state's economy.

Not Your Father's Crisis

As scary as it looks, the $2.8 billion in shortfalls for fiscal years 2014-2016 are all based on personal income tax revenues growing at 7.2 percent a year — up from an average of 4.6 percent gains in 2011 through 2013. Oh, and federal grants would have to leap by 30 percent to $4.9 billion for the hole to be only as large as projected.

"It's going to take us more time to climb out of this hole than any of us would like," Occhiogrosso said.

We've heard all this before, the need for patience with deep reforms. But this time it seems different for four reasons.

First, this isn't a recession like 1991, 2001 or 2008, so we don't necessarily have better times to look forward to. (Yes, cynics, 2010 and 2011 were better than the low point of 2008-09.) Worse, there's evidence that Connecticut's economy is weaker than that of our neighbors.

Second, Malloy has already raised taxes by $1.5 billion in the last go-around, and his statement about not raising taxes this time only adds to the pressure. There's not much room for that trick even if it could work. The cigarette tax, for example, is starting to show reverse results as smoking declines, and corporations have developed an appetite for more tax credits that they'll get here, or move elsewhere.

More to the point on tax increases, Connecticut's income rose by 5 percent in 2011, faster than the 4.4 percent in the nation, a new federal report showed last week. But the increased money is overwhelmingly in the hands of the rich, and I'm talking with more financial advisers who say that their clients are willing to flee the state as taxes rise here and not elsewhere. Call them names if you like, but the threat is real.

Think we should patch things up next year and postpone the pain? My calendar shows that after 2013 comes 2014, and that's an election year for the governor and all legislators. A tax increase ain't gonna happen then.

The third difference this time around is that financial engineering such as borrowing and shorting the pension funds will be last resorts because we've already done those things — causing the bond rating agencies to speak clearly with rebukes.

That said, it shouldn't come as a surprise if Malloy does fall back on borrowing a few hundred million bucks. When pressed, Occhiogrosso would not say that borrowing is off the table. And Barnes made a point of telling legislators that Connecticut is not No. 1 in per-capita debt burden, it's No. 5, far behind New York and Massachusetts, when we measure state and local borrowing, not just state. In debt as a percentage of personal income, we're right in the middle, No. 23.

And fourth, unlike in 2011, employee savings will be almost impossible to achieve. The full-time, executive branch state employee payroll is already down by 3,700, more than 12 percent, since 2008, although it was up by 600 in the past year. And employees are overdue for raises totaling $112 million and $152 million over the next two years. Malloy has already promised no layoffs through 2015, so he shouldn't look there for more wiggle room.

Hope and Prayer

Nowhere to run to, nowhere to hide?

Well, almost nowhere. The state's Medicaid budget, $5.1 billion this fiscal year, is projected to grow to $6.2 billion in three years as federal health reform kicks in and the number of eligible adults rises sharply. The good news is that federal Medicaid reimbursement will rise even faster, which is why overall federal grants will surpass the state sales and use tax by 2015.

And in a glimmer of hope noted optimistically by retiring Sen. Edith Prague, who didn't seek her old seat but has no shortage of energy to finish out her term, there are ways to reverse Medicaid spending trends. Barnes said Tuesday, for example, that the state could hope to persuade federal Medicaid officials to allow Connecticut to keep elderly people out of skilled nursing homes, and in less costly community or home care — at least in some instances.

"I have no idea how successful we will be," Barnes said, but the savings "could potentially be hundreds of millions of dollars a year."

Another source of savings is management efficiency, and Malloy has taken this concept more seriously than any governor in memory. We don't know how soon that effort will show results.

There's always hope for an economic surge. Economists, including Van Winkle, point out that businesses are hoarding huge piles of money, which could spur a stronger recovery. "That cash is sitting on the sidelines and critical to this bounce," Van Winkle said.

But the overall pattern is that Connecticut's bounce-backs have been weak since 1991, causing Van winkle to call us the "canary in the coal mine" for flat U.S. growth.

On Friday, the Brookings Institution issued a report ranking the world's largest 300 metro areas in growth in 2012, based on output per-person and jobs. Even among lagging U.S. metros, Bridgeport-Stamford and Hartford ranked low, Nos. 255 and 226, respectively. New Haven was the rabbit at No. 195, still well below New York and Boston.

I asked Barnes to compare this crisis with the one in 2011, when he presided over the filling of a $3.5 billion budget hole.

"I like to think I'm a little smarter today than I was back then," Barnes said. "It's a challenge, but we have the benefit of a group of commissioners who have had an opportunity to understand … what's driving their costs."

They'll need that skill because even though Democrats are in power, government will remain a sector under siege for a long time.

For example, in response to a question about $19 million in cuts to community programs for people with mental retardation — less than 3 percent of those line items — Barnes said, "A significant portion can be achieved without a cut in services."

In the next round, that won't be true. "Our governor needs the wisdom of the gods," Van Winkle said. "It's not a political question."