In This Together CT

http://journalinquirer.com/articles/2009/01/29/news/doc4981c4d7e77f3456986967.txt

By Keith M. Phaneuf
Journal Inquirer

HARTFORD — The mantra of state officials since Connecticut fell into recession has been either no — or pretty darn few — new taxes in the next budget.

That’s fine, provided Gov. M. Jodi Rell, a Republican, and the Democrat-controlled legislature are prepared to craft record-setting cuts to eliminate a historic $8 billion deficit spread across the next two fiscal years.

Another option — and one that lawmakers from both parties privately say is most likely — is that both sides instead will turn to short-term gimmicks.

That could mean “securitizing,” or essentially forfeiting, hundreds of millions of dollars in future revenue to get an immediate one-time boost.

Or it could involve pre-funding debt for the first time. In other words, that means borrowing $1 billion or more before the next budget even begins — and potentially adding hundreds of millions in annual debt payments for years to come.

This state’s chief fiscal guardian, Comptroller Nancy Wyman, warned this week that unless officials from both parties make tough choices now, taxpayers could be paying for this recession when the next economic downturn arrives.

“What we do today is going to set the agenda for years to come,” Wyman said, adding that balancing an $18.4 billion state budget with deficits approaching $3.5 billion and $4.5 billion for the next two years won’t be accomplished with gimmicks. “You can’t spend that kind of money backed with one-shot deals. What do you do one year later, when that money isn’t there?”

Wyman and lawmakers will get their first hint where state government might be headed on Wednesday, when Rell unveils her budget proposal for the 2009-10 and 2010-11 fiscal years.

The governor, who has said that increasing taxes is the last thing she wants to do, has promised dramatic spending cuts. But she hasn’t offered any indications she’s prepared to cut $3.5 billion to $4.5 billion from programs to balance the books over the next two fiscal years.

More job losses seen

With Connecticut expected to lose between 60,000 and 80,000 jobs before mid-2010, and with income tax revenue down $600 million to $700 million this year alone due to last fall’s plunging stock market, economists say it could be two years or more before revenue grows again without tax hikes.

That’s not to say the state isn’t counting on any temporary help.

An initial review of the federal stimulus package under debate in Congress shows Connecticut could gain an extra $650 million to $750 million in total Medicaid funds for the next two fiscal years.

The state has $1.4 billion in its emergency reserve, or Rainy Day Fund, but also has a $920 million deficit in the current budget. If that reserve went to cover the deficit, nearly $500 million would remain to help prop up sagging revenue for one year.

The problem with that, Wyman said, is twofold: First, those two sources of bonus dollars aren’t enough to close an $8 billion two-year gap. Second, they’re temporary. What happens in 2012 when the “one-shot” revenue is gone, but the programs they support continue?

And if relying on $1 billion to $1.5 billion in revenue from temporary sources is tricky-yet-understandable in a slumping economy, what happens if state officials patch a bigger share of that $8 billion two-year hole with one-time revenue?

Boom or bust?

Unless Connecticut comes out of the recession and enters a boom economy in 2012, it could face the prospect of closing an even larger deficit.

“Let’s be honest,” the comptroller said. “They are going to have to raise some taxes and at the same time they are going to have to do much more cutting. Otherwise, they are just going to drag this recession out.”

Rell’s budget director, Office of Policy and Management Secretary Robert L. Genuario, said the administration knows “we can’t do too many one-shots. To be sure, we can’t get out of this problem in a responsible way without significant decreases in expenditures and a significant reworking of government.”

However, Rell and the legislature might avoid taxes and minimize spending cuts at the same time. There are a few options.

One is called “securitization,” and, according to sources, it’s the option most favored by the governor. This is similar to a lottery winner who accepts a reduced, lump-sum payment right away rather than wait 20 years to collect a full jackpot prize. Connecticut has several streams of revenue it expects to receive over the next decade or two that it could offer to investors.

A 1998 settlement with five big tobacco companies gives the state a payment worth $115 million this fiscal year, which increases gradually beyond $170 million over the next 20 years.

Casino revenue down

Connecticut also gets 25 percent of the video slot revenue from its two Indian casinos. That was expected to yield almost $450 million this year. Not surprisingly, with the economy down, the state’s take now is expected to be $386 million.

Similarly, the state could securitize its lottery revenue, worth about $280 million to $290 million per year. Ex-Gov. John G. Rowland’s administration proposed a similar plan in 1996 to eliminate a budget hole.

The common thread in all three instances is that states that securitize revenue don’t receive a lump sum equal to the full amount they forfeit over 10 to 20 years. In fact, states rarely receive even 50 cents on the dollar.

For example, Wisconsin got 48.6 cents on the dollar in 2003 for giving up its next 20 years of tobacco settlement revenue, according to the National Conference of State Legislatures.

And the longer the period of securitization and the less stable the revenue source — such as casino receipts — the fewer cents per dollar a state is likely to receive.

If Connecticut were to raise hundreds of millions now through securitization, it likely would forfeit at least the amount it had raised.

And once the lump-sum payment is gone, the state must fill that hole with some permanent solution — likely either a tax hike, a spending cut, or both — and then proceed for another decade or two without the revenue stream it had forfeited.

Genuario declined to comment when asked this week about securitization.

Another option would be for Connecticut simply to try to bond as much of the debt as possible. Sources say Rell opposes economic recovery notes, but that Democratic lawmakers have investigated this option.

In 1991, the year that produced the state income tax, the state bonded $965.7 million, an amount equal to about 13.3 percent of that year’s state budget of $7.3 billion. In 2002 and 2003 Connecticut borrowed $219 million and $97 million, respectively.

But the big difference in those years was that the state borrowed at the end of the fiscal year. It never has adopted an unbalanced budget and borrowed to fund it before the year even began.

Some states, such as California, have taken this approach to budgeting, but have struggled to get out of it, having to borrow increasing amounts each year.

“There are things worse than raising taxes,” House Majority Leader Denise W. Merrill, D-Mansfield, said, adding, “We have to be careful we don’t borrow ourselves into an even bigger hole.”

Merrill did add though, that regardless of jargon, securitization could cost Connecticut even more than the interest tied to long-term economic recovery notes.

“It’s a choice among evils,” she said, “but I’m very leery of going down that path toward securitization. It’s just another type of borrowing.”

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