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Hard Choices Offer Opportunity To Reshape Finances Of State

LYNNDEE KEMMET

July 12, 2009

The impasse between Republican Gov. M. Jodi Rell and the Democratic-controlled General Assembly over how to close the state's $8.8 billion budget deficit has put Connecticut in the company of seven other states that failed to complete a budget at the start of the new fiscal year on July 1.

With the recession continuing to erode state revenues nationally — the latest projection is that combined state budget deficits for this fiscal year will total around $166 billion — state legislatures and governors are finding it increasingly hard to come to agreement on how to address the fiscal crisis.

All but four U.S. states start their new budget year in July. Connecticut, which operates on a two-year budget cycle, can take some comfort that it is not alone in missing its budget deadline — even the federal government in past years has missed its deadline. The state — the legislature, governor and citizens — needs to wake up to the fact that it has some hard decisions to make.

California may be grabbing the headlines for having the largest budget deficit at around $26 billion, but Connecticut may have the record in per capita terms. California, which just this month went to paying some bills with IOUs, has a per capita budget deficit of about $722, meaning that if every man, woman and child in the state kicked in $722, the state could cover the budget deficit. New York's budget deficit of $17.7 billion comes to around $918 per resident. In comparison, Connecticut's per capita budget deficit is around $2,513, which, based on some of the most recent budget deficit data available, seems to be the highest.

There is little doubt the current recession has ravaged state budgets. Gaps began to open as early as the end of the 2008 calendar year, and they've been widening ever since.

Connecticut got into this mess the same way most states did: It failed to anticipate the economic downtown in 2009 and overestimated revenues. It was not alone. According to the National Association of State Budget Officers, for fiscal 2009, states assumed a combined increase of 2.8 percent in sales tax revenues, a 3 percent increase in personal income tax revenue and a 2 percent increase in corporate income tax revenue. They were wrong.

Unlike the federal government, nearly every state is prohibited from running a deficit or borrowing to cover operating expenses, leaving them with two main options for closing budget gaps — raise taxes or cut spending. A third is to draw down available reserves, but those who had them have pretty much used them up.

The "big three" revenue sources for most states are personal and corporate income taxes and sales taxes. These sources have taken a huge hit in the recession.

Business and personal incomes have dropped, as have tax revenues from these sources. Connecticut has clearly felt the effect from business and employment losses in the financial and insurance industries. And with consumers too strapped to spend, sales tax revenues have tanked as well.

Solving the state's budget crisis won't be easy. Either raising taxes or cutting services will draw the ire of citizens. The nickel-and-dime approach tried by some states of raising only those taxes and fees that have an effect on smaller segments of the population, such as tobacco and alcohol taxes and court fees and fines, has shown little success. At best, increasing such taxes and fees raises a few hundred million dollars. Closing an $8.8 billion budget gap will require that everyone step up — legislators, the governor and citizens — and make some hard choices.

It may be difficult to imagine a silver lining in this current situation, but crisis often breeds opportunity. It's time for all sides in the budget debate to come to the table and have a serious discussion on how best to finance government and services.

Crises have a way of focusing attention on current practices, leading to serious questions about how best to manage a business or a state. Connecticut, like other states, is on the cusp not of crisis, but of opportunity — and it can open the door or not.