Federation of Connecticut Taxpayer Organizations

HARTFORD � While trying to convince fellow legislators not to increase taxes this fiscal year or next, House Minority Leader Lawrence F. Cafero conceded that deferring increases now �maybe� would force a tax hike in 2012.

No sooner had the words come out of his mouth during the June 26 House of Representatives debate than he changed his forecast to �possibly.�

Upon further reflection, Cafero, a Republican, switched one more time: �Probably? Yeah.�

Analysis

Cafero�s word search captures a growing concern that state officials from both parties are expressing � some privately and some publicly.

It�s that the legislature, to some extent, and that Gov. M. Jodi Rell, to a greater degree, are sweeping the state�s worst fiscal problems under a rug that won�t be lifted until Rell�s current term ends in January 2012.

The result could be a budget deficit and a potential tax increase totaling two or even three times the annual value of the tax-hike package Rell vetoed this week.

�one-shot� solutions will mean bigger problems

�There are some things worse than raising taxes,� House Majority Leader Denise W. Merrill, D-Mansfield, said during the same June 26 debate, adding that an over-reliance on gimmicks now could hit taxpayers hard in 2012.

�One-shots� a bad deal?

�There needs to be a greater effort in this biennial budget to try to cure the structural imbalance,� said William J. Cibes Jr. of Hartford, who was Gov. Lowell P. Weicker�s budget director in 1991 when Connecticut officials closed a record-setting budget gap by enacting the state income tax. �There isn�t any need at all to �pyramid� the use of all of these one-shots.�

The �one-shots� of revenue Cibes is referring to involve far more than the budget reserve, commonly known as the Rainy Day Fund, and the emergency federal aid that has garnered big headlines since February.

Proposals to sell state assets, raid special funds, and sell a decade�s worth of future gaming revenue and federal energy grants to gain a fraction of those dollars now are all being offered in lieu of increasing taxes.

Rell � a Republican who insists no tax hikes are needed � uses $2.3 billion in one-time dollars to balance her plan for 2009-10, and $1.94 billion in 2010-11. The second year is the most important, since by the time that year is done the state will have exhausted both its reserve and its stimulus funds as well as all of the other gimmicks.

The Democrat-controlled legislature isn�t much better, using $1.57 billion in one-time funds in the first year, and $1.83 billion in the second.

Further complicating matters is that the governor�s proposal remains $700 million to $800 million out of balance in the second year, according to the legislature�s nonpartisan Office of Fiscal Analysis. The Democrats� plan she vetoed this week also was out of balance in 2010-11, according to analysts, but by less than $50 million.

If Rell�s plan were adopted and revenue were to fall short, that would mean borrowing $700 million to $800 million more � another costly, one-time shot.

In that event, Rell�s plan would leave a $2.64 billion to $2.74 billion hole for the governor and legislature to fill in 2012. Rell, whose term expires in January 2011 and who hasn�t said whether she will run for re-election, vetoed the Democrats� budget that averaged $1.25 billion in tax and fee hikes in both this year and next.

�I don�t think that part of the debate has been revealed to the public so far,� said George C. Jepsen, a Democrat from Stamford who served as Senate majority leader during the 2003 budget crisis that produced the first across-the-board state income tax increase. �We need to be thinking not only about 2010 and 2011, but beyond.�

Door No. 3?

Whoever is governor in 2011 � and therefore responsible for crafting the 2012 budget � also would have fewer tools to work with to combat any shortfall.

Not only would the budget reserve and stimulus be exhausted, but the likelihood of unionized state employees � who in April endorsed a $700 million, two-year concession package � agreeing to further concessions in 2012 could be slim.

The State Employees Bargaining Agent Coalition has aired several commercials in recent weeks urging Rell to complement labor�s contribution with higher taxes on the wealthy and on businesses.

�It is inexcusable that she is putting us all at risk to protect millionaires and others who should be part of the solution,� Sharon Palmer, president of the Connecticut chapter of the American Federation of Teachers, said this week of Rell�s veto.

The governor�s office declined to comment for this story. Legislative leaders from both political parties have agreed not to discuss budget negotiations since they resumed talks with the governor last Sunday.

Looking for a rebound

Advocates of using one-time gimmicks to sidestep tax hikes now argue that the economy will be stronger in 2012. With more people working and buying more, revenue could grow without any tax hikes.

But in recent years when the state enjoyed revenue growth, that growth was outstripped by inflationary increases to current services � most notably, double-digit growth in health care costs.

Two years ago, for example, on the way to the largest surplus in state history � some $1.05 billion � inflation pushed the cost of maintaining services up 6.8 percent, according to State Comptroller Nancy Wyman�s office.

One year later in 2008, revenue rose 4.3 percent. Costs rose 8.7 percent.

So there�s no guarantee that an economic recovery wouldn�t drive up costs as much, or more, than it could pump up tax revenue. And revenue growth in good years tends to be in the hundreds of millions of dollars � not billions like the deficit the state could face in 2012.

Wyman, a Democrat from Tolland who reported this year that governors and legislatures have saved less than half of the $3.65 billion in surpluses amassed since the economic downturn of 2001-03, this week warned the Rell administration about falling back on budget gimmicks.

Failure to address the potential deficit in future years �will force the state to borrow cash to meet its daily payment obligations and will push higher costs onto our taxpayers,� Wyman�s office wrote in a July 1 letter to the governor.

Get it now, pay later

Perhaps the most controversial proposal offered by Rell and by lawmakers involves securitization.

The governor wants to expand legalized gaming in Connecticut by adding Keno. She then would sell a portion of the revenue that Keno and other state lotteries are expected to rake in over the next decade.

Specifically, Connecticut would forfeit $105 million a year for the next decade, or $1.05 billion total, in exchange for a one-time $700 million payment now.

Once that money and other one-shot sources are gone, the state not only would face a big fiscal hole, but would do so down $105 million a year in gaming receipts.

Similarly, the governor wants a $350 million lump-sum payment in exchange for 10 years of energy fund revenue. That revenue is worth an average of nearly $50 million a year.

The legislature offered its own version of securitization in the budget Rell vetoed, hoping to raise a $335 million one-time payment, but failing to identify which revenue would be sold to do so.

Cibes, who described the potential 2012 deficits in recent budget proposals as �very significant� and even �dangerous,� added that he believes the securitization proposals could violate the state constitution.

The former budget chief referred to Article 28 in the Connecticut Constitution, an amendment voters adopted in 1992 following institution of the state income tax.

The provision is best known for spending-cap language that limits how much the budget can grow. But it also requires that the legislature approve a balanced budget.

That means it�s acceptable for the state to borrow money to close an unexpected deficit at the end of a year, but it�s an entirely different thing to concede before the year even begins that the budget is out of balance and that funds must be borrowed.

While some state officials have argued that securitization isn�t �borrowing� in the legal sense of the term, others contend that�s just semantics � that acquiring a sum up front in exchange for a series of payments worth that sum plus more down the road is borrowing by a different name.

Meanwhile, budget talks are to resume after the holiday weekend.