Budget Reform: Consider The Dynamic Effects Of The Budget

One of the issues that I eventually intend to address in detail on CT Good Governance is the process by which state government develops its budget. The current process–in which legislative leadership and the governor hammer out a budget in largely secret meetings and then ask rank-and-file legislators to vote on it with almost no opportunity for meaningful review and debate, much less public hearings–is the essence of poor governance. This is not a Democrat or Republican issue; it is a bipartisan, institutional failure.

One of the problems with the current budgeting process is the failure of legislators and the governor to pay sufficient attention to the dynamic effects of their budget decisions. The following online comment by UConn economics and finance professor Fred Carstensen, in response to Dan Haar’s Hartford Courant article about the budget , describes the problem:

What ought to concern folks the most is that the entire budget process proceeds without any analysis of its dynamic impacts. This is flying blind. From what is now available, it looks as if the budget decisions will make matters worse that they might have been; some cuts will be compounded by foregoing significant federal transfers; some cuts will actually simply increase costs elsewhere. Despite a state economy that has flat-lined, with no job creation since 1989 for all practical purposes and no growth in real output since 2007, there is virtually no consideration of this startling competitive weakness and how that might be addressed. The failure is entirely bipartisan, whether we look at the historical record (remember is was GOP governors that made unfunded liabilities dramatically worse with a 20 year contract that permits cutting contributions by hundreds of millions and multiple early-retirement programs than increase liabilities by perhaps as much) or current debates. Who from either side of the aisle is given any serious consideration to our competitive health? Yes, there is a bit, but it is very much at the margins.

The governor, and I think most legislators, now recognize that Connecticut must adjust the size and cost of state government in light of the new economic “normal” of shrinking revenues and increasing costs, particularly employee pension and benefit costs. But a slash and burn approach to the problem won’t work. Our elected representatives need to make smart decisions about cutting the budget, which requires an understanding of the long-term economic consequences of their decisions.

The Democratic leadership acted wisely in deciding not to force a vote on the budget before the end of the session last night. Everyone needs time to review the budget, debate it and consider its short and long-term economic impact.

2 thoughts on “Budget Reform: Consider The Dynamic Effects Of The Budget

  1. One point that cannot be overemphasized is that the funding mess on the pension side was accomplished with the approval of the state employee unions. So it wasn’t just the state administration doing this alone. There was never any question in my mind that the allowance for inadequate funding of the pension system on behalf of the unions was going to come back and bite them by the state having to come back and need to dramatically reduce pension benefits. Politicians unfortunately rarely look beyond their term, so getting an administration to agree to look ahead and not just seek to put as little as possible into a pension fund is a very difficult thing to do. So in effect, no one was really looking out for the taxpayers long term. And the state is still not putting adequate money into the pension fund. They continue to use an unattainable discount rate with a completely unacceptable amount of risk built in and they continue to use a back loaded amortization plan (both with the consent of the unions). The rank and file state employees and state retirees have absolutely no voice in any of these things. Union leaders tend to do what is in their best interest in the short term, just as politicians do. In the short term, their consenting to inadequately fund the pension system allowed more money to be available for pay raises and maintenance of membership. The problem of course is that in the long term the taxpayers and state employees both suffer.

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