Grappling with Connecticut’s Budget Crisis – Part I: What about Education Funding?

With a $19 billion dollar state budget, Connecticut spends about $2.5 billion dollars a year to support primary and secondary education (Pre-K through 12th grade) in the state’s 169 towns.

The bulk of those funds are distributed directly to towns/school districts through the ECS (Educational Cost Sharing) Formula which was designed to provide Connecticut’s poorer towns with extra funds since they didn’t have the tax base to fully fund their own school systems.

In order to fulfill Connecticut’s Constitutionally mandated requirement to provide all children with equal access to a quality education, Connecticut’s official policy goal for the past 25 years has been to have the state pay for 50% of the total costs associated with funding local schools leaving the cities and towns with the obligation for raising the other 50% through local property taxes.

Following the adoption of the income tax in 1991 the state reached a point in which it was paying about 43% of the total costs. Since then the state’s share has slipped lower and lower. Today the state only covers about 35% of the total cost associated with operating Connecticut’s public education system.  As a result of this underfunding, Connecticut’s level of state and local spending on education has means we’ve dropped to 39th in the country when it comes to our total outlay to help our state’s children acquire the knowledge and skills to succeed.

During the 2010 gubernatorial campaign Dan Malloy (and his Republican opponent) both promised not to make any cuts to the ECS formula. Neither campaign signaled whether the “no cut” pledge applied to the other $600 million the state spends on education costs.

That said, as Malloy Administration faces a nearly $4 billion dollar budget short-fall, it is unlikely that any real savings can be found in the education portion of the budget. For one thing, the new Governor is extremely committed to supporting education and secondly any cuts to state education funding would only translate into a greater burden on local communities and higher local property taxes.

The following highlights where the state’s education dollars are allocated;

  • Education Cost Sharing formula:     $1.9 Billion
  • Adult Education:     $21 Million
  • After School Programs:     $5 Million
  • Bilingual Education:     $2 Million
  • Excess Cost (Special Education):     $120 Million
  • Extended School Hours:     $3 Million
  • Private School Health Services for Pupils:     $5 Million
  • Inter-district Cooperation:     $14 Million
  • Magnet Schools:     $175 Million
  • Private School Transportation:     $4 Million
  • Open Choice Program:     $14 Million
  • Priority School Districts:     $117 Million
  • School Based Health Clinics:     $10 Million
  • School Breakfast Program:     $2 Million
  • Transportation of School Children:     $48 Million
  • Vocational Agriculture:     $5 Million
  • Youth Services Bureaus:     $3 Million

8:39 AM UPDATE —- Perhaps I spoke to soon – CT Mirror has a story today that suggets Malloy is backing off his pledge to not cut funding for local education.  Or perhaps it signals that while he will keep his promise not to cut the ECS forumla he may propose cuts to some of the other state grants to support primary and secondary education.  Here is a link to today’s CTMirror Story http://ctmirror.org/story/9153/malloy-education

After pledging during the campaign that he would maintain state funding for local education, Gov. Dannel P. Malloy backed off a bit Thursday, saying that is “a goal” that he will “try and accommodate.”

“That’s a goal that I have when preparing the budget,” he said during his first press conference after taking office. “There are many goals that I have. We are going to try and accommodate all of them,”

On the campaign trail he was much more definitive.

 

From WNYC.Org – A Tale of Two Governors: How Cuomo and Malloy Will Tackle Their Budget Crises

A Tale of Two Governors: How Cuomo and Malloy Will Tackle Their Budget Crises By Stephen Reader, WNYC.org, Tuesday, January 04, 2011

As the new governor of the state of New York, Andrew Cuomo has pledged to freeze the salary increases of state employees, veto any increase in personal or corporate income taxes, and impose a state spending cap.

Dan Malloy, who will be sworn in as the next governor of Connecticut on Wednesday, hasn’t pledged anything of the sort.

Both states face calamitous budget shortfalls in 2011 and for years to come. Both states regularly flirt with being the top taxing state in the country already. Andrew Cuomo, at least, has been frank about making thrift a priority, much to the dismay of hundreds of thousands of state employees who may not see an salary increase all year, and 900 others who were just laid off. Cuomo expects to use other spending decreases to correct budget deficits, rather than use higher taxes to increase revenue.

It’s less clear what Malloy has in mind. Unlike Cuomo, he has made no promises about his state’s taxes going up or down. Take a trip to the policy section of Malloy’s campaign website (which is suspiciously un-navigable from www.danmalloy.com), and you’ll see phrases like “address the balance of state and local taxation,” or “relieve the local property tax burden,” but nothing explicit about taxes being lower.

That could be because Malloy won’t make taxes lower for everyone, and doesn’t want to say who’s going to be hit with a hike. Restructuring the tax code or relieving the tax burden for certain demographics doesn’t necessarily imply a tax cut. For instance, Malloy could raise taxes on the wealthiest of Connecticut’s residents, thus lowering the tax burden, or share, for lower- and middle-income families without actually lowering their taxes.

Malloy has been at pains to keep tax hikes on the table without making them sound inevitable. “I want to be very clear: We’re not going to raise taxes,” Malloy said in the final gubernatorial debate in October. “That is the last thing we will do…if we have to, and only then to protect the safety net.” By “safety net,” Malloy means social services and health care that the state provides for the poor, elderly and disable. And when he says “if we have to,” it’s unclear how big an “if” that is.

Though Malloy (and every other politician in 2010) has railed against out of control spending and the need to get one’s fiscal house in order, he’s also been up front about plans to borrow cash to invest in infrastructure projects.

“I believe that infrastructure investment is long overdue, it primes the pump, and it puts people back to work. All eight of the downturns since World War II, we were led out of by construction,” Malloy told The New York Times. “Yet we elected people to Washington who don’t believe it’s an appropriate tool to use. I want to be very clear: I believe it is.” 

Malloy insists that investments will be strictly targeted toward those projects capable of generating the most revenue and employing the most people. Regardless, the promise of more government borrowing and spending does little to help Malloy’s case that taxes won’t go up.

The backing Malloy received from labor unions during the campaign raises more questions about how Malloy is going to make everybody happy. When Cuomo was on the campaign trail, he singled out labor unions as budget-busters that would lobby aggressively and run negative ads against any governor who targeted them for spending cuts. Freezing state employees’ salaries wasn’t going to lose Cuomo too many friends. On the other hand, the Service Employees International Union (SEIU) spent $400,000 campaigning for Dan Malloy last year, and Connecticut labor leaders have sounded generally optimistic about working with the new governor. Were Malloy to change tack and adopt a Cuomo-style approach to cost-cutting, you can bet he’ll take more heat for burning the bridge.

Lastly, while Cuomo has proposed giving New York’s government a spending cap, analysts are predicting that Malloy may circumvent Connecticut’s. In the absence of significant spending cuts, Malloy will have to do some legislative finagling to get around the cap that was set by the state in 1991.

How Cuomo and Malloy fare as first-term governors will tell a great deal about their respective approaches to balancing state budgets. Connecticut and New York, already in critical fiscal condition, may turn out to be models of what state governments should and should not do to restore economic stability. As more and more states face rough seas ahead, it remains to be seen which course is worth following — and what Dan Malloy’s course ultimately will be.

 http://www.wnyc.org/articles/its-free-country/2011/jan/04/tale-two-governors-how-cuomo-and-malloy-will-tackle-their-budget-crises/

MIND THE GAAP – Confronting the Cost of Fiscal Honesty

January 5, 2011:  Dan Malloy is sworn in and Connecticut finally gets a Democratic Governor.  Oh, and the state will likely see the largest tax increases and deepest budget cuts in history.

Furthermore, as the state of Connecticut enters this new year and new decade, we will get a firsthand look at the underlying cost of introducing Fiscal Honesty to the state’s budget.

Why…because one of Governor-elect Dan Malloy and Lt. Governor-Elect Nancy Wyman’s  most significant campaign  promises was to move Connecticut government to Generally Accepted Accounting Principles (GAAP).   Connecticut requires all cities, towns and boards of education to adhere to GAAP standards, it just exempts itself from these common sense requirements.

During this year’s gubernatorial campaign Dan Malloy and Nancy Wyman repeatedly pledged to Connecticut to GAAP accounting as the single most important way to ensure greater honesty and transparency in state budgeting.  He made it clear that it would be one of his first and highest priorities.  Over the months he said he’d veto any budget that was not based on GAAP Accounting and recently said he will sign an executive order on his first day in office implementing GAAP accounting for state government.

The task is a noble, important and worthy one.  Connecticut state government should be required to conduct itself using this basic accounting system.  There is only one problem;

Shifting the State to GAAP will cost $1.2 billion dollars.  That’s $1.2 billion on-top of the $3.7 billion dollar budget short fall Connecticut is facing for next year. 

Borrowing an additional $1.2 is out of the question since the overall final cost to state taxpayers would actually exceed $2 billion once the loan and interest was paid.  Furthermore, it isn’t even clear the state could successfully float that much debt on Wall Street in the present economic environment.

Alternatively rather than actually shift to GAAP accounting all at one time, the new Governor and his Administration could “phase in” GAAP accounting.  Not quite the clean-cut shift that was originally promised or implied, but it could be argued that taking a real step in the right direction would certainly “move the state toward greater fiscal honesty”. 

The process of shifting to GAAP accounting is a very complex one, but an initial first step would be to “freeze the existing GAAP gap” and thereby make sure that the existing GAAP gap does not grow beyond the $1.2 billion figure.  While the state would not make any real forward progress toward eliminating the GAAP gap, a move to freeze the existing problem in place would, at the very least, make sure that Connecticut didn’t slide further into the financial chasm caused by our elected official’s unwillingness to hold state government to the most basic rules of honest financial accounting.

The move to “freeze the GAAP Gap” would cost the state an addition $80 to $100 million dollars in NEXT YEAR’S BUDGET.  After that, assuming the state then devoted an additional $80 million or more a year to the task of shifting the state to GAAP accounting, Connecticut could be fully GAAP compliant in – oh – let’s say 15 years.  

Any deviation from that task over the next decade and a half would prevent that goal from being reached, not to mention that the state could not engage in any more fiscal gimmicks over the same time period. 

The underlying problem (and big question) is that since the new Administration will already be proposing significant tax increases and program cuts (while seeking major state employee “give backs”), will the state government have the political will to allocate an additional $80 million to begin a 15 year shift to GAAP accounting.

With the state and nation still mired in the greatest economic recession since the Great Depression and the demand for vital state services increasing dramatically, it may be hard to convince a majority of legislators to allocate $80 million to freeze the GAAP gap at a time when most constituents will see major tax increases and many constituents will see their level of state services reduced.

Even in an era when Connecticut has a $19 billion dollar budget, $80 million is a lot of money.  For example, $80 million would go a long way toward ensuring that Connecticut’s most vulnerable residents get the additional services they need.  Alternatively, $80 million would help preserve the state’s critical state property tax credit program that helps middle-income families off-set a portion of increasing local property taxes.  And certainly an additional $80 million dollars in education aid to cities and towns would prevent the layoff of thousands of school teachers as cities try to maintain current levels of funding for their schools.

Virtually every candidate running for office in 2010 pledged to support the effort shift Connecticut to GAAP accounting.

As Connecticut state government finally confronts its economic crisis and moves to address the impact of years of failed budget policies keep a careful eye on what happens with the GAAP accounting issue.  Doing what is right on GAAP will likely mean that a lot of vital programs and services will go unfunded.

Keith Phaneuf’ at CT Mirror.org has been leading the coverage on this issue.  Here is one of his recent articles on the topic can be found here:   http://www.ctmirror.org/story/8536/conversion-gaap-means-kicking-bad-fiscal-habits .

Brian Lockhart has more on Malloy’s plans for GAAP on his blog today.  Take a look.  http://blog.ctnews.com/politicalcapitol/2011/01/03/malloy-explains-his-gaap-plans-sort-of/

 

Beware the GAAP