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Smaller Government Is The New Reality

Decreased Revenues Aren't A Temporary Problem

ROB GURWITT

December 20, 2009

Get ready for a long, hot winter — and I'm not talking about climate change. With Gov. M. Jodi Rell's plan to cut state services and aid to municipalities, followed by the General Assembly's "now you see 'em, now you don't" response to her call for a special session, Connecticut is set for a serious dust-up between those who believe there's no alternative to shrinking state government and those eager for some way — any way — to avoid it.

The rhetoric over the past few days — from dire predictions of hardship, to jibber-jabber over whether Rell's proposal will or will not cost the state 5,000 jobs, to proposals for a variety of one-shot tricks to close the deficit — suggests the direction the debate will take. It will focus on getting past this moment, on buying some time to get through this particular crisis in hopes that the pressure will soon ease. This approach has worked in the past, but it is hardly adequate to the task ahead.

Take a moment to look around you. Just to the east, Republican Gov. Donald Carcieri said Monday night that he plans to cut $125 million in aid to Rhode Island cities and towns and end automatic cost-of-living increases for newly retired teachers and state workers.

To the west, Democratic Gov. David Paterson of New York just announced a 10 percent across-the-board cut in state aid to school districts, part of a series of cuts he contends he must make because the $2.7 billion deficit reduction plan recently passed by the legislature falls hundreds of millions short of actually closing the state's deficit.

Or look farther afield. Illinois is entering next year's legislative session facing a $12 billion shortfall in a $26 billion budget. Michigan's governor has warned that she'll probably have to cut the budget by 20 percent next year on top of this year's 10 percent cut.

States including California and Arizona are in full-on political meltdown as they grapple with their budget crises. And the Center on Budget and Policy Priorities predicts that over the next two fiscal years, states overall will face budget deficits of $260 billion — after what remains of federal stimulus dollars gets factored in. Does all this sound like business as usual is going to cut it?

What is going on in Connecticut, New York, Rhode Island and elsewhere is the hard reality that state revenues simply do not match states' commitments and show no signs of catching up. There are lots of reasons for this, including the recession and years of putting off hard choices in the interest of political peace, but the simple truth, as a high-ranking New York state agency official told me, is that "government can't afford government anymore." The turmoil you see in Hartford, Providence, Albany and most other state capitals around the country is the political class struggling to come to terms with this fact.

It is driven by an astounding drop in state revenues, as retailing and incomes have contracted sharply. And though plenty of legislators in Connecticut and elsewhere are convinced that things will get back to normal once the economy rebounds, there are a handful of politicians and a larger number of state budget officials who believe otherwise.

The most prominent is Mitch Daniels, the Republican governor of Indiana, who in a September Wall Street Journal op-ed piece warned, "What we are being hit by isn't a tropical storm that will come and go, with sunshine soon to follow. It's much more likely that we're facing a near permanent reduction in state tax revenues that will require us to reduce the size and scope of our state governments."

Daniels is basing his prediction on calculations suggesting that the underpinnings of state tax systems — in most places, sales taxes and personal and corporate income taxes — have been changed permanently by the recession and by long-term changes in the American economy. Not only are consumers spending less, but as The Courant's Rick Green pointed out in his blog the other day, the economy is exchanging high-paying jobs for lower-paying jobs.

So Connecticut will have to adjust. How it chooses to do so — restructuring pension obligations, cutting the scope and ambition of state programs, reshaping its tax structure, or some combination of all these things — is what its political leaders will spend the next few years sorting out. Let's hope they finally muster the political will to approach it strategically.