Connecticut’s Spending Cap is in Need of Repair

Update

February 2007

The spending cap will be an issue in FY2008 budget

• The spending cap will allow growth of just 3.31 percent for FY2008

• “This level of permitted growth leaves little room for paying the state’s ongoing expenditures, never mind significant state reforms …”

» FY2006-2008 proposed budget

Growth allowed by cap is unrelated to economic cycle

0.00%1.00%2.00%3.00%4.00%5.00%6.00%7.00%8.00%

FY93FY94

FY95FY96

FY97FY98

FY99FY00

FY01FY02

FY03FY04

FY05FY06

FY07

FY08 e

st

Personal Income Spending Cap

Personal Income

Allowable

Figure 2 (revised December 2006) Source: CBPP calculations of personal income data from Bureau of Economic Analysis and Connecticut Office of Policy and Management

Rev 12/06

Spending cap is overridden often

0 0 0 0 0

247

591

462

292

0 0 0

232

553

0

100

200

300

400

500

600

700

FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08est

Am

ou

nt

of

Sp

end

ing

Ove

r C

ap (

mil

lio

ns)

Source: CBPP calculations of OFA data Rev 12/06

When economic growth is strong, cap is overridden

• Over the past 20 years, Connecticut’s personal income grew 4.8 percent per year on average.

• Since 1993, the state’s personal income growth was above average in 1997, 1998, 1999, 2000, 2001, 2005 and 2006.

• In all of those years except 1997, the state exceeded the spending cap.

Amount of spending that exceeded cap is substantial

(not including debt reduction and transfers to budget reserve)

$249 million in FY 1998

$591 million in FY 1999 $462 million in FY 2000 $292 million in FY 2001

$232 million in FY 2005 $553 million in FY 2006

Source: CBPP calculations of Office of Fiscal Analysis data

Base of cap recently adjusted for some of this spending

• For FY2007 the prior year’s base was increased by the $244 million spent on nursing homes

• For FY2008 the base increased by the $125.5 million deposited in Teacher’s Retirement Fund

• These adjustments were proposed by Governor Rell and approved by the legislature

Amount current services are over (under) cap in FY 2008

Base: current cap with no changes$520

Use current personal income growth 184

Use current personal income and rebase by including some surplus spending in FY2005 base (138)

Use current personal income and exclude first year of new federal funds 133

Implement all three changes (current personal income, exclude first year of new federal funds, include some surplus spending in FY2005 base) (190)Table 1 (revised Feb 2007) Amounts in millions, CBPP calculations

Changes that would address some of the cap’s problems

Conclusion

• The spending cap has weakened rather than improved Connecticut’s fiscal accountability

• The cap has led to an increased use of budget practices that remove significant parts of the budget from the oversight of the Appropriations Committee.

• Changing the cap to reflect more accurately Connecticut’s economic growth would both address the FY2008 problem and future problems.

Fiscal Year

Growth

Allowed

Under Cap formula

Personal

Income Growth

Spending Over the Cap

(excluding debt service and transfers to

reserve)

FY92 8.06% 2.81% 0

FY93 7.11% 5.07% 0

FY94 6.03% 2.92% 0

FY95 4.94% 3.70% 0

FY96 3.64% 4.43% 0

FY97 3.32% 5.65% 0

FY98 3.78% 7.16% $247

FY99 4.35% 6.15% $591

FY00 4.76% 7.11% $462

FY01 5.41% 7.34% $292

FY02 6.10% 0.83% 0

FY03 6.68% 0.13% 0

FY04 5.69% 4.23% 0

FY05 4.46% 6.41% $232

FY06 4.06% 5.64% $553

FY07 3.88% 5.70% ??

Appendix