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Connecticut’s Spending Cap: Where are We Now?. March 10, 2005, Briefing Alison Johnson , Connecticut Health Foundation Consultant And Liz McNichol , Center on Budget & Policy Priorities Senior Fellow Commissioned By:. How the Spending Cap Works. Limits “general budget expenditures” to : - PowerPoint PPT Presentation
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Connecticut’s Spending Cap: Where are We Now?
March 10, 2005, Briefing
Alison Johnson, Connecticut Health Foundation Consultant
And
Liz McNichol, Center on Budget & Policy Priorities Senior Fellow
Commissioned By:
2
How the Spending Cap Works
Limits “general budget expenditures” to:
5-year average growth in personal income
OR
Annual growth of Consumer Price Index (inflation), whichever is greater
3
Exemptions to the Cap
• Aid to distressed municipalities for grants in statute on July 1, 1991 (definition has changed over time)
• Payments of debt
• First-year costs of court orders or federal mandates
4
Cap can be Exceeded
If the Governor declares an emergency or
the existence of extraordinary circumstances
AND
3/5 of both houses of the General Assembly agree
5
Connecticut’s Cap is Tougher Than Most
• 27 states have expenditure limitations
• Connecticut’s is one of toughest: - Covers 80 percent of state expenditures, including
federal revenue - Connecticut is only 1 of 2 states using 5-year average
personal income growth - Governor has to initiate exceeding the cap; requires
3/5 majority of legislature to override - Each year’s cap based on previous actual
expenditures vs. allowable expenditures
6
Current Tax and Spending Limit Activity in Other States
• Other states are considering caps
• Both proponents and opponents recognize problems with caps when coming out of economic downturn
• There are a number of proposals to create more room under Colorado’s cap – one often cited as a model
The Connecticut Experience: 14 Years Under the Cap
8
State Spending Growth Declined
11.7%
6.2%4.8%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
'87-'91 '91-'95 '95-'01
Average Annual Percent Growth
9
State Spending Growth Declined
• Before adoption of cap, spending growth averaged 11.7 percent a year
(FY 1987 – FY 1991)
• After cap, growth was 4.8 percent
(FY 1995 – FY 2001)
• Due to economic downturn, growth slowed to 2 percent annually over the past 3 years
10
Amount Actual Appropriations Were Below Cap (excluding surplus)
Source: OFA data
FY 1993 - $120.0 million
FY 1994 - $ 39.1 million
FY 1995 - $ 53.4 million
FY 1996 - $ 20.1 million
FY 1997 - $ 3.6 million
FY 1998 - $ 0.4 million
FY 1999 - $ 2.3 million
FY 2000 - $ 0.4 million
FY 2001 - $ 0.0 million
FY 2002 - $ 78.2 million
FY 2003 - $333.0 million
FY 2004 - $122.9 million
11
Cap has been Exceeded When There has been a Surplus
$249 million in FY 1998$591 million in FY 1999$462 million in FY 2000$292 million in FY 2001
Surplus spending minus debt reduction and transfers to budget reserve
Source: CBPP calculations of OFA data
12
Surplus Spending and the Cap
• Historically, surplus spending has not been added to the base (at Governor’s discretion)
• There is disagreement over how much the cap has been exceeded to fund ongoing expenditures
13
What are the
Unintended Consequences
of the Spending Cap?
14
Incentive to Borrow• Debt service grew from 5.4 percent of all state
spending in FY 1990 to 12 percent, or $1.3 billion in FY 2005
• More than budgets of DMHAS, DMR, OHCA agencies combined in FY 2005
• At $6,008 per capita, Connecticut’s debt was 3rd highest in the nation, compared to national average of $2,234 in FY 2002
15
Incentive to Use Tax Expenditures
• Not subject to the spending cap
• Targeted tax treatments such as exemptions, credits, deductions, etc.
• Reduce revenue collected by the state, creating built-in losses to revenue stream
• Example: $20 million tax exemption for advertising services
16
Disincentive to Obtain New Federal Funds
• All federal dollars count toward cap (unless they are “federal mandates”)
• Currently at cap limit in FY 2005
• An additional $10 million forces State to go over the cap (needs Governor’s declaration & 3/5 majority vote)
• Disincentive only happens when State near cap limit; will be true for at least the next few years
• Example: State has declined to pursue Medicaid Adult Rehabilitation Option; could bring in $10.5 million a year
17
Governor Proposes to Exceed Cap• Governor proposes nursing home provider tax to
obtain $237.7 million in federal matching funds
• Would exceed the cap by $244 million; needs approval by 3/5 vote of General Assembly
• Would be $45.3 million under the cap in FY 2006, and $63.6 million in FY 2007
• First time a Governor has proposed including excess spending in the base
18
The Current Budget Situation
• For the last few years, revenues have been more of a constraint than the cap
• From 2002 to 2004, state spending was less than the amount allowed by the cap
• This has served to lower the spending base for future cap calculations
19
Recession Squeezed State Budget
Average Annual Percent ChangeInflation Adjusted Spending Per Person
-1.0%
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
FY01 FY02 FY03 FY04
Source: CBPP calculations of data from OFA, U.S. Census Bureau,
U.S. Bureau of Labor Statistics, and Connecticut DPH
20
Lower Base May Prevent Return to Normal Service Levels
• State budgets were tight during the economic downturn starting in 2001
• Nominal spending increased an average of 2 percent a year, well below average and the amount that the cap would have allowed
• This results in a low base for FY 2005 — the starting point for allowable growth for FY 2006 and beyond
21
Growth Allowed by Cap is Below Projected Economic Growth
4.1%4.4%
3.5%
4.5%
3.0%
4.5%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
FY06 FY07 FY08
Annual Percentage Growth
Allowable Spending Personal Income
22
Cost of Maintaining Current Services will be Well Above Cap
FY 06 FY 07 FY 08
Spending Cap $15,071 $15,719 $16,321
Current Services $15,894 $16,669 $17,419
Amount over/
Under cap$ 823 $ 949 $ 1,098
23
Possible Adjustments to the Cap
• Exempt additional types of spending
• Rebase
• Change calculation of growth factor
• Revisit the cap
24
Changes to the Base
• Base could be increased to amount allowed in prior year rather than amount actually spent to address ratcheting down problem
• Base could be adjusted upward to allow room for restoration of services cut during recession or for new initiatives
25
Changes to Allowable Growth Factor
• Use more current measure of personal income growth
• Reduce number of years in growth factor calculation
• Add AGI as additional growth factor to account for growth in capital gains
• Adjust for growth in specific populations such as the elderly
26
Changes to Growth Factor or Base(in millions)
Change FY 06 FY 07 FY 08Add 0.5 percent to growth factor
+ $57
+ $120
+ $186
Current Personal Income + $38 + $149 + $349
Allowable Spending as Base + $127 + $151 + $201
Source: CBPP calculations of Governor’s budget data
27
Additional Types of Spending Could be Exempted
• Medicaid
• New federal programs
• All federal funds
• Education Equalization Grants
28
Basic Principle for New Exemptions
• If fast growing programs are removed from the base, additional room under the cap will be created
• If slow growing programs are removed, the spending cap will be tightened
29
Effects of Additional Exemptions(in millions)
Exemption FY 06 FY 07 FY 08
Medicaid + $111 + $157 + $279
Medicaid (with Medicare changes) + $81 + $62 + $178
All federal funds - $242 - $293 - $270
ECS + $5 - $48 - $94
Source: CBPP calculations of Governor’s budget data
30
Could Eliminate Cap by Constitutional & Statutory Changes
• If General Assembly and voters agreed
• Eliminate incentives to borrow and use tax expenditures
• Remove disincentive to obtain federal funds
• Could tempt state to spend beyond its means
• Create opportunity to more closely match budget growth with state’s economic condition
31
Where Are We Now?
• Cap is one of most restrictive in the nation
• Will be over cap limit for some time
• Current structure of cap will cause spending to lag behind economic growth
• Cap has unintended consequences
• State can cut programs or make cap adjustments to stay within spending limits
32
For More Information
• Visit www.cthealth.org
• Email CHF’s Monette Goodrich at [email protected] or call 860.224.2200 to receive copies of the report and/or one-page highlight sheet