MODIFICATIONS COULD CREATE MORE ROOM UNDER THE STATE'S SPENDING CAP
Growth Allowed by Cap Does Not Accurately Reflect Connecticut's Current Economic Health
NEW BRITAIN (March 24, 2006) - Modifications to the state's spending cap could more accurately reflect the state's economic growth and create more room under the cap in fiscal year 2008 to fund current services, according to a Connecticut Health Foundation (CT Health) policy brief released Friday.
"Because the allowable increase in spending is based on historical personal income growth, the way the cap is calculated has little to do with actual growth in the state's economy in the budget year under consideration," said co-author Elizabeth McNichol, Senior Fellow at the Washington, D.C.-based Center on Budget and Policy Priorities. "For example, in FY 2008, the state would have to cut spending some $354 million from current services in order to keep the budget within the cap."
The Foundation commissioned McNichol and Alison Johnson, a Middletown-based state budget consultant, to develop modifications to the formula used to set the spending cap every year in an effort to more accurately reflect the state's recent economic growth.
The policy brief estimates the effects of three modifications:
Use projected personal income growth rather than the lagged five-year average – This change alone would reduce the gap between the amount of spending allowed under the cap and the amount needed to maintain current services in FY 2008 by almost $300 million down to $56 million.
Include some or all of spending from budget surpluses in the base – If the state had counted a portion of spending from FY 2005 in the base for FY 2006 in addition to changing the growth calculation, there would be $213 million more room under the cap in FY 2008. The amount of spending allowed under the cap would exceed the amount needed to maintain current services in FY 2008 by $158 million.
Exclude the first year of new federal spending from the cap – The impact of this change depends on the federal funds available. If we assume $25 million in federal funds becomes available in FY 2006, the cap would be raised by $50 million in FY 2008.
If all three changes were implemented concurrently, the impact would be to eliminate the projected FY 2008 gap between allowable spending and the amount needed to maintain current services. Rather than exceeding the cap by $354 million, the budget would be $209 million under the cap in FY 2008.
"This additional room under the cap could help the state return to pre-recession service levels," said co-author Johnson. "Changing the cap would not only address budget problems in FY 2008, but also give the state more flexibility to restore services cut during the recent economic downturn."
This policy brief entitled, Connecticut's Spending Cap is in Need of Repair, along with an insert that describes the basic principles of the current spending cap formula, is available on the Foundation's website at www.cthealth.org. The Foundation began analyzing the impact of the spending cap in 2001 when it released a report entitled, Connecticut's Spending Cap: Questions and Answers Policy Analysis. The second report released in 2005 -- Connecticut's Spending Cap: Updated Questions and Answers Policy Analysis – reviewed the unintended consequences created by the cap over the past 15 years. Both reports are also available online at www.cthealth.org.
The Connecticut Health Foundation (CT Health) is the state's largest independent, non-profit grantmaking foundation dedicated to improving the health of the people of Connecticut through systemic change, program innovation and health policy analysis. Since it was established in July of 1999, CT Health has awarded 286 plus grants in 39 cities and towns totaling close to $23 million in three priority areas – children's mental health, racial and ethnic health disparities, and oral health.
To schedule an interview with the co-authors, please contact Maryland Grier, Public Affairs Officer, at 860-224-2200, ext. 32, or maryland@cthealth.org.
