Yankee Institute Policy Brief

Crowding Out What Matters:

The 2016-2017 State Budget
By Suzanne Bates
Policy Director, Yankee Institute

and Zachary Janowski

Director of External Affairs, Yankee Institute

February 24, 2015

www.YankeeInstitute.org

Introduction
The two-year budget just proposed by Gov. Dannel Malloy contains the clearest warning signs
yet that Connecticut must reform its public sector pay and benefits, as the growth in employee
compensation continues to outpace the growth of state revenue.
In order to pay for these increased costs the state has had to both reduce spending in other
areas and to increase taxes, primarily on businesses.
Connecticut is already overtaxed, and a recent Department of Revenue Services study shows
the burden these high taxes impose on every segment of the population. Increased taxes will
only further inhibit economic growth in Connecticut.
In addition, the state projects that in the next ten years Connecticuts working population will
shrink, even as the population of people over the age of 65 is expected to increase by 55
percent. At the same time, the school-age population (future employment pool) is expected to
decrease by 10 percent.1
Red flags are waving. State lawmakers should take into account the expected growth in state
employee compensation as well as the projections about the states population growth as they
deliberate what to do with the governors budget.

Crowding Out Vital Functions
The states proposed budget calls for more state spending over the next two years, yet this
same budget has been called devastating by progressive lawmakers.2 Thats because even
with spending increases of 3.3 percent in 2016, and 3.1 percent in 2017, this years budget still
calls for deep cuts to social services and higher education.
So why is it that cuts are necessary, even as state spending continues to increase?
The answer: Runaway growth in just a few areas of the budget are crowding out3 the other
functions of state government including social services, education, and transportation.4

Connecticut Office of Policy and Management. 2016-2017 Biennium Economic Report of the Governor. Feb. 18,
Stuart, Christine. Lawmakers Have Harsh Words For Malloys Proposals To Reduce Safety Net Funding.
CTNewsJunkie.com. Feb. 20, 2015.
http://www.ctnewsjunkie.com/archives/entry/lawmakers_have_harsh_words_for_malloys_proposals_to_reduce_
safety_net_fundi/
3
The term crowding out is used by progressives like Californias David Crane and scholars such as Daniel DiSalvo
at the Manhattan Institute. See for example, Government Crowded Out: How Employee Compensation Costs Are
Reshaping State and Local Government, at http://www.manhattan-institute.org/html/cr_77.htm#.VOtP2bPF90w.
4
Crowding out can also refer to how the growth of the public sector can hurt the private sector, which is also
occurring in Connecticut.
2

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In Connecticut, this runaway growth is occurring primarily in two areas: (1) State employee
compensation, especially benefits; and (2) the repayment of debt.
The cost of employee pay, benefits and debt service will increase $565 million from 2015 to
2016 exceeding the $521 million proposed increase in overall spending. That means, even
with increased spending, other areas of the budget will have to be cut.
In particular, the cost of state employee benefits is growing at a rate of 10 percent a year,
which is far faster than the growth in tax receipts. If this segment of the budget is allowed to
continue to out-pace the growth of revenues, the state will be forced into even greater
reductions in other spending, or into further tax increases.
Recommendation: State lawmakers must address the growth in state employee
compensation this year, rather than continuing to push the issue into the future.
Employee and retiree cost-sharing for health benefits should increase, and cost of living
increases should be phased out for pensions over the median state income.5

The Growing Size of Government
Although Gov. Malloy deserves credit for slowing the rate of growth in state government, he
cannot claim credit for cuts as taxpayers generally understand them. The budget reduces the
planned rate of growth in government spending often called the current services budget
but those cuts arent deep enough to constitute actual cuts in state spending from the previous
year.
Based on the growth estimates provided by the administration6, if the proposed budget is
adopted Connecticut government spending will have increased 135 percent between 1996 and
2017. Spending per person is up 118 percent.
During the Malloy administration alone, per-person spending is up 14 percent.
Because it was impossible to sustain this growth through existing revenue streams, state
lawmakers increased taxes. To keep future spending growth in check, the state should budget
for future cost-cutting.
When announcing the budget, Office of Policy and Management Secretary Ben Barnes made a
revealing point. He said that the severance cost of laying off state employees is often a quarter-
to a half-year of salary, limiting the immediate savings from that approach.7

All recommendations are listed in Appendix A.

The administration adjusted these budget numbers to exclude the federal portion of Medicaid costs. This
adjustment undercounts the impact of Medicaid cost growth relative to the rest of the budget.
7
OPM secretary media budget briefing, Feb. 18 2015.
6

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The lack of flexibility in managing the state government workforce contributes to its costs,
especially because state employees often collect benefits worth between a third and half of
their salary.
Recommendation: Budget $3.5 million, about .1 percent of payroll, to fund severance
costs for employees who work in low-need areas; are unproductive; or fail to meet basic
employment standards (i.e., commit crimes or otherwise violate the publics trust).
Over time a rebalancing of the state workforce could pay for needs like more engineers and
project managers in the Department of Transportation to complete essential projects.
Recommendation: Make additional cuts totaling $58 million. (See Appendix A for
details.)

Our Spiraling Debt
For the past two years, Connecticut has put off paying back a portion of its debt. This year the
cost of that decision is realized. Debt service payments have increased by 7.7 percent (or $148
million) this year, even as the state plans to increase its bonded debt.
Connecticut has significantly more debt per capita at the state level than other states. In the
governors economic report, Connecticuts debt is pegged at $32 billion, or $8,898 per person.
This is more than double the fifty state average, which is $3,661 per person.8
The cost of this debt is considerable. In 2016, the state expects to spend $2.4 billion on interest
and principal, with another $2.6 billion in 2017. That represents 12 percent of total state
spending in 2016, and 13 percent in 2017. As the state ramps up its transportation spending
and borrowing, this number is likely to increase even further.
Recommendation: Delay all bonding by six months to reduce debt service, saving about
$15 million in the first year and $90 million in the second. Use bond premiums to reduce
net borrowing (rather than paying debt service) at a cost of $150 million in the first year
and $135 in the second year.
In addition, there are significant liabilities in the states two pension funds, and in its retiree
healthcare fund. According to the state budget, the balance in the teachers retirement fund is
expected to be below its current balance by 2017, which means the state will have additional
pension liabilities. However, this projection is based on a conservative estimate of returns on
investments. The state employee retirement fund assumes much higher returns, which allows a
much more optimistic projection that the fund will end 2017 in a better position than it is in
now.

8

Connecticut Office of Policy and Management. 2016-2017 Biennium Economic Report of the Governor. Feb. 18,
2015. Hartford, Connecticut. These numbers are from FY 2012, which are the most recent available.
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Recommendation: Over time, all pension funds should move to an expected 4 percent
rate of return, which is considered a safe rate and is used by private pension funds.
Recommendation: Bill agencies for 5 percent of fringe benefits, excluding agencies that
already pay full cost. Offer agencies to a $1 increase in their budgets for every $2 of
fringe benefits saved.

The Tax Burden
The growth of government increases the tax burden on the people of Connecticut. A select few
have the luxury of leaving Connecticut to avoid this growing burden, but that only leaves more
for the rest of us to pay.9
The proposed budget makes a positive move by eliminating the business entity tax, which is
biased against small and new businesses. But the budget makes Connecticut less attractive for
large employers, by increasing the effective corporate tax rate on many successful businesses.
Recommendation: Cancel $377 million in economic development borrowing and put
the debt-service savings toward canceling these tax increases, about $15 million in
FY2017 and $30 million in following years. Cut an additional $13 million from the DECD
budget. Eliminate the corporate tax surcharge as a first step toward real economic
development, more jobs and better pay.
The budget also makes a complicated series of adjustments to the sales tax. Rather than cutting
the sales tax and increasing other taxes, leave taxes in place at current rates until the Tax
Review Committee reports on comprehensive tax reform.
Recommendation: Remove the sales tax cuts (and compensating tax increases) from the
proposed budget.

Educating Our Children

Even as the number of school children in Connecticut shrinks, costs continue to
increase. Lawmakers must find ways to reduce state mandates on cities and towns so that they
can adjust their education budgets to meet the needs of their local populations.

One way to reduce education costs is for education dollars to follow the child.
Currently, school districts that lose students to magnet, charter, private, or other public schools
nevertheless continue to receive money for those students. This creates bad incentives for
school districts, since those districts are rewarded when students leave failing schools for better

9

See High Taxes Hurt, Yankee Institute Policy Brief, Feb. 11, 2015.

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alternatives. Over time, this double-funding should be reduced, so that eventually school
districts are no longer funded for students who attend school elsewhere.
Recommendation: Reduce phantom student grants by 10 percent to save $18 million
per year.

Improving Our Healthcare
One positive change in the budget involves shifting some residents from Medicaid to the states
insurance exchange. Medicaid has notorious problems with access to care, which are only likely
to become worse with additional provider cuts. The state should move toward a smaller
Medicaid program that can more effectively meet the needs of residents who receive coverage.
Recommendation: Move additional Medicaid recipients onto the insurance exchange.
Split the savings between Medicaid providers and taxpayers. In other words, eliminate
provider cuts in favor of narrowing the scope of Medicaid to those most in need.
This budget doubles down on a gimmicky, ethically dubious tax which taxes hospitals and
redistributes money between them solely for the purpose of increasing their costs, in order to
extract more money from the federal government. In other words, the tax inflates healthcare
costs to increase reimbursements, a practice the state would likely discourage and even
prosecute among its own providers.
Recommendation: Keep the hospital tax at current levels to make it easier to eliminate
in the future.
Rather than increasing access to health care, the state Office of Health Care Access actually
limits it as seen most recently when its interference caused the cancellation of a large
planned investment in Connecticut hospitals.
Recommendation: Eliminate the Office of Health Care Access for savings of about $2
million.

Empowering Our Poor
Connecticut often takes an indirect approach to helping the poor. A more effective and
empowering approach puts more money in peoples pockets through the existing Earned
Income Tax Credit program, which makes employment more attractive to the working poor.
Recommendation: End the connection between the state and federal EITC. Instead the
state should pay workers 6.35 percent on the first $15,000 in income ($30,000 for
married couples) through their paychecks. Cut non-Medicaid human services spending
by $100 million to pay for the expansion.

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Helping Those Who Need It
The Department of Developmental Services is perhaps the agency that suffers the most from
the inflexibility and high cost of the state workforce. State-run facilities for people with the
greatest need cost 2 to 2.5 times the cost of similar care from private providers. There is a long
waiting list for state services. Over time we should shift most DDS clients to private providers.
Doing so will enable the state to serve more people for less money.

Improving Our Transportation
The governor has proposed an ambitious transportation program. There is good reason for this
- the states aging and crumbling infrastructure is in urgent need of repair. But the governor
does not say how he will pay for this plan, and under current revenue projections the special
transportation fund will be depleted by 2018.
Recommendation: The state should use tolls and congestion pricing to pay for its
infrastructure needs. At the same time it should also reduce the gas tax so that
Connecticuts fuel pump prices are more competitive regionally. For each dollar raised
through tolls or congestion pricing, the state should cut other taxes by a dollar. This
more fairly distributes the cost of infrastructure upgrades, by charging those who use
the infrastructure most.
In addition, one of the largest projects planned for the next five years is the expansion of the
New Haven to Springfield rail line. According to Department of Transportation projections, this
line is expected to carry 3,500 passengers a day, while the cost to preserve and expand the line
is projected to be $1.58 billion. Thats more than $450,000 per passenger.
Meanwhile, projected spending over the next five years for the New York-New Haven corridor
is projected to be $890 million. This region sees by far the most congestion, while around
150,000 rail passengers are frustrated daily by delays and other maintenance issues. The state
should reprioritize its spending so that the greatest needs are addressed first.
Recommendation: Cancel plans to redevelop the New Haven to Springfield rail line and
instead concentrate spending first on the states most pressing needs. In particular,
more spending should be focused on the roads and rail needs in Fairfield County, where
there is insufficient transportation infrastructure for the current population.

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Restructuring the Department of Corrections

The governor expects to see savings in corrections based on changes in his proposed
second chance initiative, which would divert non-violent offenders into community or other
rehabilitation programs. The state would increase the number of parole officers and also the
number of members on the parole board. As the number of inmates in jail continues to drop,
the state should decrease the number of prison guards.
Recommendation: State lawmakers should continue to find safe, sensible ways to divert
non-violent offenders from the prison system, and should also reduce the number of
prison guards.

Looking Ahead
There are several good things in the governors proposed budget such as the elimination of
the business entity tax. The tax raises very little revenue, and is a nuisance tax for Connecticuts
businesses. Likewise, although the proposal to reduce incarcerations for non-violent offenders
is in a preliminary stage, is has merit, as does moving some residents off Medicaid and onto the
states healthcare exchange.
But the state still relies far too heavily on gimmicks to keep state spending afloat, including
using bond premiums as operating revenue, and pushing more spending off the books to keep
the budget under the spending cap.
There are many common sense ways that state lawmakers could significantly reduce the state
budget. Lawmakers should begin by acknowledging the negative impact on the states finances
of the growing cost of state employee salaries and benefits. Without sensible and meaningful
reform, these costs will increasingly crowd out vital government services, even as taxpayers are
forced to pay more and more to subsidize a government that offers them less and less.

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Appendix A: Recommendations

Recommendation: State lawmakers must address the growth in state employee
compensation this year, rather than continuing to push the issue into the future.
Employee and retiree cost-sharing for health benefits should increase, and cost of living
increases should be phased out for pensions over the median state income.

Recommendation: Budget $3.5 million, about .1 percent of payroll, to fund severance
costs for employees who work in low-need areas; are unproductive; or fail to meet basic
employment standards (i.e., commit crimes or otherwise violate the publics trust).

Recommendation: Make additional cuts totaling $58 million distributed across the
Legislative ($5 million) and Judicial Branches ($15 million), plus general government ($5
million), regulation and protection ($5 million), DEEP ($1 million), Department of
Housing ($3 million), technical high schools ($2 million), Office of Early Childhood ($3
million), UConn ($2 million), UConn Health Center ($1 million), community colleges ($8
million), state universities ($4 million) and Department of Correction ($2 million).

Recommendation: Delay all bonding by six months to reduce debt service, saving about
$15 million in the first year and $90 million in the second. Use bond premiums to reduce
net borrowing (rather than paying debt service) at a cost of $150 million in the first year
and $135 in the second year.

Recommendation: Over time, all pension funds should move to an expected 4 percent
rate of return, which is considered a safe rate and is used by private pension funds.

Recommendation: Bill agencies for 5 percent of fringe benefits, excluding agencies that
already pay full cost. Offer agencies to a $1 increase in their budgets for every $2 of
fringe benefits saved.

Recommendation: Cancel $377 million in economic development borrowing and put
the debt-service savings toward canceling these tax increases, about $15 million in
FY2017 and $30 million in following years. Cut an additional $13 million from the DECD
budget. Eliminate the corporate tax surcharge as a first step toward real economic
development, more jobs and better pay.

Recommendation: Remove the sales tax cuts (and compensating tax increases) from the
proposed budget.

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www.YankeeInstitute.org

Recommendation: Reduce phantom student grants by 10 percent to save $18 million

per year.

Recommendation: Move additional Medicaid recipients onto the insurance exchange.
Split the savings between Medicaid providers and taxpayers. In other words, eliminate
provider cuts in favor of narrowing the scope of Medicaid to those most in need.

Recommendation: Keep the hospital tax at current levels to make it easier to eliminate
in the future.

Recommendation: End the connection between the state and federal EITC. Instead the
state should pay workers 6.35 percent on the first $15,000 in income ($30,000 for
married couples) through their paychecks. Cut non-Medicaid human services spending
by $100 million to pay for the expansion.

Recommendation: The state should use tolls and congestion pricing to pay for its
infrastructure needs. At the same time it should also reduce the gas tax so that
Connecticuts fuel pump prices are more competitive regionally. For each dollar raised
through tolls or congestion pricing, the state should cut other taxes by a dollar. This
more fairly distributes the cost of infrastructure upgrades, by charging those who use
the infrastructure most.

Recommendation: Cancel plans to redevelop the New Haven to Springfield rail line and
instead concentrate spending first on the states most pressing needs. In particular,
more spending should be focused on the roads and rail needs in Fairfield County, where
there is insufficient transportation infrastructure for the current population.

Recommendation: State lawmakers should continue to find safe, sensible ways to divert
non-violent offenders from the prison system, and should also reduce the number of
prison guards.

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