Fleischmann Proposes Ten Year Budget Cycle

Unlike the federal government, Connecticut must balance its state government every year. We can’t run a deficit. This is part of a package of reforms put into place after the fiscal crisis of the early 1990s (although another of those reforms, the spending cap, has been ignored by governors and legislators both).

Rep. Andrew Fleischmann (D-West Hartford) wants to change that by requiring the budget to balance every ten years, instead of every year. The idea is that the business cycle is usually ten years in length, and that a longer budget term would allow for more flexibility within that business cycle. Here’s his argument, published in the Sunday Courant:

If you believe it makes sense for government to stimulate the economy to help reduce the severity of the current downturn, then — whether you’re a groundskeeper, gas station owner or governor — you should join me in pushing Connecticut to alter its constitutional requirement to balance the state budget each fiscal year.

Many people believe that cuts in critical services and investments like the resident state trooper program and school construction must be made to keep the budget in balance. This requirement — in place since the state fiscal crisis of 1991 — drives Connecticut to cut expenditures and/or increase taxes at the precise moment when sound economic policy demands the opposite.

That’s why I introduced legislation requiring state government to balance its budget over the course of the 10-year business cycle — not in a single fiscal year. This simple change will allow our state to pursue policies that reinforce — rather than undermine — the recently enacted federal stimulus plan.

Fleischmann would, after cutting unnecessary services, have the government issue what he calls “economic recovery notes” to cover the cost of deficits, which would then be repaid as the economy improves: neatly eliminating the need for further spending cuts or tax increases.

It’s an interesting sort of middle way between the competing ideologies of slashing services and other spending (often at the expense of the poor) or raising taxes (usually on the wealthy), which would result in a balanced budget at the end of the ten years. Of course, the risk is that the government might be hard-pressed to repay the notes if the economy stays sour, or the notes represent a very large sum of money.

Crises are good things in that a lot of ideas that never otherwise would have seen the light of day emerge, and people are more willing to consider all possible solutions. I don’t know if this is a workable solution, I’d have to know more about how it would work, but it’s certainly worth thinking about.

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29 responses to “Fleischmann Proposes Ten Year Budget Cycle

  1. The requirement that the state balance its budget yearly is one of the few effective checks on spending left to us.

    Mr. Fleischmann proposes removing it.

    To what end, many of us who have been watching the state budget balloon from $7.5 billion to its present distended $18 billion? The deficit is now $8 billion, about half of the last pre income tax budget.

    That increase means that the constitutional cap on spending is, to put it mildly, a polite fiction. So, the only real “cap” is the requirement that the state balance its budget yearly; this means, when the state sees red ink, it must either raise taxes or cut spending.

    Fleischman’s proposal is a reprieve from this rather too harsh sentence.

    He airily proposes that his measure will give the legislature time enough to revamp its budget in a way that will prevent both tax increases and cuts he thinks are destructive.

    Very good. Let Mr. Fleischmann propose right now the cuts and spending increases he thinks appropriate. Surely he has been in the legislature long enough to examine the programs he wishes to restructure. In fact, the budget deficit is forcing the legislature to adopt is prudent measure right now.

    Mr. Fleischmann’s proposal is what an earlier, more wide awake generation might have called a pig in a poke.

    It cannot be prudent to remove the dam and hope the water will magically stay in place.

    The time to revamp programs in the manner Mr. Fleischmann sees fit was when the state was enjoying obscene surpluses, which an irresponsible legislature plowed into the general budget. We need more restraints on spending, not fewer. Spending should be tied, constitutionally if necessary, to the rate of inflation, which will increase under the enlightened administration of President Barack Obama and his chief counselor Rhamn (send’em a dead fish) Emmanuel.

    Now is the time to pay the piper. And Mr. Fleischmann does not want to do it. In this, he is not at odds with his Democrat caucus – the surplus devourers.

    Any rational state would turn the lot of them out of office.

    Tea party anyone?

  2. The problem is there was no way to accurately predict revenue or expenses enough to even get remotely close to having something you can adjust with “recovery notes”. Ten years ago, gas was somewhere around $1.20, No one saw the dot.com bubble bursting coming, let alone having the effect it had. No one saw the economic ripples of 9/11 leading us to a recession in 2001. No one saw the Iraq war coming and the economic ripples it has had, and that is only the tip of the iceberg compared to the last 18 months.

    How would you even come close to predicting a ten year budget over that period. Plus can you imagine in 1999 the state putting on paper an estimate of the budget nearly doubling over the next ten years? Politically, that could never actually happen.

    Sounds to me like Fleisch is trying to mount a run and make a splash with big ideas. Maybe treasurer?

  3. Both valid points. I would add that the Legislature has never demonstrated the strict fiscal discipline that would be required to even contemplate engaging in this idea.
    My guess is that Fleischman is hoping to avoid the hard decisions that are required now.

    Sounds to me like Fleisch is trying to mount a run and make a splash with big ideas. Maybe treasurer?

    With thinking like this, God help us if he ever got the job.

  4. He just doesn’t want to cut spending.

  5. GC, You say:

    I don’t know if this is a workable solution, I’d have to know more about how it would work, but it’s certainly worth thinking about.

    If you have thinking about this idea more than a few minutes before seeing the obvious problems with it you have given it a more time than it is worth. Unless the idea of giving our currently elected legislators who have created this fiscal mess a blank check to continue to take the easy road now, and expect future legislators and our children to deal with their lack of courage, leadership, and even bigger mess appeals to you. I am sure it does not.

    Don, You say:

    “The requirement that the state balance its budget yearly is one of the few effective checks on spending left to us.
    Mr. Fleischmann proposes removing it.”

    Don, Perfect!!!!!! IMO you hit the nail right on the head, as did the rest of your post. Sure let’s give the foxes the last set of keys we taxpayers have to the chicken coop………..

  6. It’s nearly impossible to predict revenue now! How the hell does he think they can do it over a 10-year period, especially when that would require the legislative body to be elected and/or re-elected to five terms in order to have any institutional knowledge while working on this decadeinal budget. My favorite line in the article is, “…this simple change”. Right.

  7. Bruce Rubenstein

    This is a great idea from Rep Fleischman and would provide more elasticity and flexibility in the budget…

    BTW Mr Pesci…it is bad economics to cut spending in a deep recession, especially cutting in areas where the money is going into the general economy,….the cutting would make the recession worse. Herbert Hoover tried what you suggest, without any success.

  8. Fleishman is clever… basically saying since the Governor supports stimulus, she should support him.

  9. My immediate reaction is that it sounds like he’s turning the budget into another long-term liability. And we see where that’s gotten us with teachers protesting (a year or two ago) and (is it) $40 billion or so of unfunded postretirement bene’s.

    Btw, did Crusher ever issue those teacher pension bonds and actually invest them?

  10. Fleischman’s plan would work great … for nine years.
    And in the tenth year the then legislature would repeal it.

    Duh.

  11. With serious talk of a collapse of the EU or Euro… I’m wondering if the US dollar survives because the Euro collapses first.

    I know CT legislators visit CTLP… any of you care to make use of the bully pulpit and call for a return to sound money?

  12. BTW Mr Pesci…it is bad economics to cut spending in a deep recession, especially cutting in areas where the money is going into the general economy.

    Prove it.

  13. wtfdnucsailor

    Ten years is too long. Any predictions beyond three years are just guesses and between one and three years they are SWAGs, which is just a little better. Towns used to adjust assessments (revaluations) every ten years. the legislature changed it to five years because the ten year adjustment was too great a shock for the taxpayer homeowner. I wouldn’t make the window any greater than three years or it is liable to get too far out of control and the fix too painful.

  14. Bruce,

    This is what Hoover did to combatn the depression:

    He passed the Emergency Relief and Construction Act in 1932. This included funds for public works programs and the creation of the Reconstruction Finance Corporation, the goal of which was to provide government secured loans to toppling financial institutions.

    To pay for all this, Hoover imposed the largest tax increases in US History. The Revenue Act raised income on the highest levels from 25% to 63%; the estate tax was doubled; corporate taxes were raised by about 15%. Hoover also imposed a “check tax” amounting to amot 30 cents in today’s dollars on allk check transactions. This severly contracted the money supply.

    If it is your position that tax increases of this kind did not stem the Great Depression, I heartily agree witrh you.

  15. One thing that is almost unknown today is that Herbert Hoover started many expansionary programs by the federal government, which allowed FDR to really expand things. Had HH not done so, FDR might have had a more difficult time expanding federal power.

    GWB probably did the same thing for BHO…

  16. NEW YORK (AP) The Dow Jones industrial average plunged below 7,000 Monday for the first time in more than 11 years as investors grow even more pessimistic about the health of banks, and in turn the economy.

    This immediately following Obama’s speech on the budget.

    Looks like someone doesn’t like it.

  17. GWB probably did the same thing for BHO…

    Probaby?

  18. Btw, did Crusher ever issue those teacher pension bonds and actually invest them?

    Absolutely. The bonds were issued this past spring. $2billion went to the fund and $200 million went for underwriting costs. The face rate was 5.8%, but if you include the interest thst has to be paid on the underwriting cost, the effective rate is a little over 6%.
    The proceeds were put into the Teachers’s Fund which has lost about 30% since then. Big Jimbo called this the best deal ever for the taxpayers, but at least for now, I think there’s room to doubt that.
    One other interesting point. About one-third of the bonds were issued as “Capital Appreciation Notes” (a/k/a Zero Coupons) which start coming due in 4 or 5 five years. The obvious reason was that the entire interest expense did have to be included in the budget up front since the state doesn’t use GAAP (only actual cash expenses are recognized/there are no accruals or sinking funds). Consequently when they have to start paying these off, both principal and interest will hit the budget.

  19. Sorry for the sp. Probably? Bush, towards the end of his career, was John the Baptist to Obama. People are just unsure at this point whether Obama is Hoover of FDR. He ain’t no Lincoln: http://donpesci.blogspot.com/2009/02/on-lincoln-obama-liberty-and-republican.html

  20. Towns used to adjust assessments (revaluations) every ten years. the legislature changed it to five years because the ten year adjustment was too great a shock for the taxpayer homeowner.

    Actually the principal reason for going to five years was that ten years drove mill rates sky high which was extremely detrimental to businesses that pay on personal property and have to file current values each year. The same was true of motor vehicles that would be replaced at current market values probaly two or three times durind a ten year period. If you’re going to tax personal property, reval every five years is fairer. FYI Florida revals annualy which is about as fair as you can get.

  21. Absolutely. The obvious reason was that the entire interest expense did have to be included in the budget up front since the state doesn’t use GAAP (only actual cash expenses are recognized/there are no accruals or sinking funds). Consequently when they have to start paying these off, both principal and interest will hit the budget.

    That should have read “the entire interest expense did NOT have have to be included”.
    Sorry

  22. Like others said, 10 years is too long.

    Let’s make a Constitutional amendments that require these:

    1) Fully fund current pension obligations over the next 15 years;

    2) As local school construction aid is fairly constant and predictable, and perhaps the biggest single source of state bonding, it is to be handled on an annual appropriation basis instead of bonding, eliminating the interest expense from bonding.

    3) The State shall put aside 15% of revenue collected each year into cash, cash equivelants, and investment grade bonds as a savings plan. This state savings may not be tapped into unless there is a drop in real (inflation adjusted) income or sales that results in a loss of revenue, which also allows you to suspend contributions. This savings fund may also not be tapped during a fiscal year that sees increases in income or sales taxes unless the the savings fund drops below 25% of annual revenue.

    8 years x 15% = 120% of the budget. Given the lower contributions earlier in that 8 years, you’d still end up with about a year’s worth of savings. So you hit a crisis like this and start to tap the fund and draw it down at 30% per year…three years of state budgets w/o tax increases or decreased spending.

    Yeah, I know imagining a world of fiscal responsibility where we give up short term pleasures of slush funds, make work agencies like the Permanent Commissions, make work regulations that needlessly drive up costs, and throwing money at public employee unions like drunken sailors is about as much of a pipe dream as John Lennon imaging a world without greed or hunger. But at least we can try and argue for responsibility.

  23. The sum of my three proposals above gives us a state with:

    1) Significant cash savings to apply to counter-cyclical government spending by:
    a) Maintaining state expenditures so there isn’t program cuts or layoffs which excerbate economic downturns;
    b) We have substantial borrowing capacity to “surge” public works expenditures — likely at low interest rates — when the opportunity of lower prices due to a cyclical economic downturn presents itself.

  24. Dal,

    #3 sounds like a surplus or a slush fun. We know what happens to surplusses, having had some experience in this area over the past 15 years. Whatever the constitutional provision, they get dumped into the general fund and are quickly dissipated by those with large appitites.

    Slush funds? Eh!

    What is really needed is a measure that prevents the state from forcing towns to accept unfunded mandates, and an acknowledgement that people do not mind paying for government programs that work, the corollary being that failing programs (and schools) should not survive.

    If taxes are to be considered “investments,” what is the rational for refusing to invite everyone to invest, according to their means? It’s pretty obvious that you can’t get a penny from a rock. But why should we continually expect a slim minorityof taxpayers to support services enjoyed by all, when we know this permits political demagogues to ratchet up spending beyond the means of anyone to pay. You can’t even get these guys to admit that deficits are produced by excessive spending. They think that debts caused by excessive spending can be discharged by more excessive spending. Holes dissapear when you dig them deeper.

    Ask anyone who has lived through the Great Depression how to keep out of debt. They’ll tell you: work hard, save your money, don’t spend foolishly, pay off your stinking debts instead of foisting them on your children – the so called “rich” are the “children” of progressives — don’t overreach.

    If you can pretend to ignore this sage advise, you too can be a politician.

  25. Given that Connecticut already has one of the highest per capita bond debt burdens (4th among all states), why on earth would we give the legislature, in effect, another credit card?

    I appreciate the need for stimulative action in these extraordinary times, but would this encourage fiscal responsibility by legislators who may not even be around for a full 10-year cycle? What if the legislature guesses wrong and the bill comes due during a year like this – do we extend the cycle for 20 years?

  26. Message from Main Street: Cut — or, better still, eliminate — payroll taxes for two years. This will save the wasteful trip of dollars to Washington and back again to Main Street in an attempt to stimulate spending. After those who are permitted to keep the sweat of their brow pay off their bills, they’ll still have some dollars left over to sock away for a rainy day (Main Street needs its rainy day funds too) and stimulate the economy. It’s a plan that cuts out the middle man savior. It will be quick, effective and efficient.

  27. Susie B and Dan are gonna be watching the state’s postretirement bene’s.

  28. Idiotic idea, zero accountability

    If you legislators cant figure out how to balance a budget on a year by year or biennial basis because you have so many sweetheart programs you want to fund, how on earth would you get the courage to cut funding for all of them 10 years down the road when we are $50 billion in debt? You wouldn’t.

  29. Although budget caps and calls for an annual budget are widely perceived as a way to keep controls on spending, Fleischman’s idea deserves serious consideration as a starting point for creative legislation. Thinking long term serves the citizens better than short-term, election cycle thinking. It is no less true in government than in business that short sighted political goal seeking is detrimental to the long term interest of the citizens (shareholders). Combining his proposal with a first step elimination of unproductive, wasteful expenditures and tax credits/breaks and maintaining a required rainy day fund with requirements for how it is used to smooth out economic ups and downs gives legitimacy to the proposal. I don’t know if ‘economic recovery notes’ are the correct hedge, but the concept should be developed. It shouldn’t be the business of government to do everything, but it is its job to develop the infrastructure upon which business growth and development can take place. Long range planning during the economic downturn is more important than ever.

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