Category Archives: Budget Process

CT’s Regionalization: Cost-Savings and Service Sharing

Originally published at Global Site Plans

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Unlike most of the United States, Connecticut has no system of county governance. While a regional, “county” government once existed (ceasing in 1960), it didn’t hold much power and had very few functions. Under the laws of the state constitution, 169 towns hold powers similar to that of a city and manage their own administration. To meet the cost-sharing, regional needs of local governments, Connecticut passed a law in 1947 “allowing two or more contiguous towns with planning commissions to form a regional planning authority.” The statute called for these regional planning authorities to be:

“Based on studies of physical, social, economic and governmental conditions and trends and shall be designed to promote with the greatest efficiency and economy the coordinated development of the region within its jurisdiction and the general welfare and prosperity of its people.”

In 1948 the first new regional planning authority, covering New Haven and a few of its suburbs began operation. Planning authorities would gain more importance in Connecticut in 1954 when new federal grants for projects in cities and regional areas became available, but required that administration be done by official regional agencies. Within twelve years of creation, New Haven’s Regional Planning Authority of the South Central Region served all of the towns in its region, fifteen in total. However, there were holdouts to regional planning authorities and a reluctance to mandate all towns to participate in one.

After the state outlined boundaries for fifteen different planning regions in 1957 in an attempt to make them “logical and economical,” there was often contention and negotiation about which planning region a town was allowed to belong to.  Before that legislation, town contiguity in a planning region could theoretically stretch across Connecticut. To encourage participation, incentives were offered, and in some cases, sanctions imposed. Very often, the state would mandate specific activities be regionalized, or perform the project planning itself, overriding the input of the non-participating towns.

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Two state-wide groups supplement the regional planning agencies and provide cities and towns with management and technical assistance, research, and lobbying efforts. The Connecticut Conference of Municipalities (CCM), founded in 1966; and Connecticut Council of Small Towns (COST), founded in 1975, are governed by boards of elected officials of the member municipalities. CCM currently represents roughly 90% of Connecticut towns, and is a powerful lobby at the capitol. COST, represented by first selectmen, mayors and managers, has also been successful, writing and lobbying the legislation which established the state’s Small Town Economic Assistance Program.

Over time, three types of regional planning organizations have evolved under Connecticut General Statutes: the regional planning agency, the regional council of elected officials, and the newer regional councils of government (COGS), which provide cities and towns a wider ranges of services than the earlier regional planning agencies.  The state has recently consolidated the fifteen regional planning agencies into nine, as part of recommendations negotiated with CCM, COST, and the COGS. As of January 1, 2015, the municipalities within these nine regions must adopt local ordinances to join a single Regional Council of Governments in each of these nine regions.

How is regionalized planning approached where you live? What is the role of government?

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SLIDESHOW: Connecticut – Tax & Budget

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Connecticut Senate Democrats Guide to the Connecticut State Budget

Connecticut Senate Republicans POV: The Dysfunctional Budget Process

A Good WordPress Site About the Connecticut State Budget

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Budget Assignment Portends Tax Hike

For the budget hearing assignment, our group decided to attend the town budget hearing for the City of West Hartford. The City has a population of 66k, surpassing the criteria of the assignment and well represents a median sampling of statewide town budgeting.  Taking classes at a nearby UConn satellite campus, our groupmate, Christian, was able to witness and tape record the hearing, as well as collect additional materials describing the Proposed City Budget.   At the hearing, he was able to observe a number of citizens express their input and concerns regarding the proposed budget for 2012. Representing the town of West Hartford was the Mayor Scott Slifka who chaired the town meeting.

Rather than addressing each budget item individually, the Mayor invited City residents to participate by signing up to speak publically on the item of their choosing.  Easily witnessed in all of the proceedings were the passions of each speakers concern—city/small town politics are surprising loud. At the hearing, a number of citizens expressed public concern for the proposed budget; specifically on topics they felt were not adequately taken into consideration.   Certain individuals commanded time well beyond their allotment, and through a listening of the recordings of the event, it is apparent that not everyone would be able to get all that they wanted to express heard.

One case that dominated the hearing addressed the “fair assessment” of property taxes within the City.  Local resident, Mr. Robert Melon, brought this matter up when comparing the property tax rate of West Hartford to four times that of Greenwich, Connecticut where the mill rate hovers at around $8.  Mr. Melon claims through his research that properties in West Hartford which were improperly assessed in value (Lewis-Hildreth,315.) could have resulted in more revenue for the City.  It was his suggestion that proper evaluations of properties, and the revenue gain therein, would be preferable to any raise in mill rate (Lewis-Hildreth,326.)  However, like Mr. Melon says, “this does not make a contribution to this budget.”  It is a matter of revenue “collection,” and not the agenda matter of the hearing.  Others came forth to speak, but similarly, they strayed from the matter of the budget towards their cause of choice—with apparent practice.

In our evaluation of the material provided at the meeting, we were able to make some observations on the state of West Hartford’s budget stability.  Differences between the adopted FY ‘10/11 budget versus the FY ‘11/12 show increased expenditures and increased revenue to match.  Total increases for the proposed budget of FY ‘11/12 of $5.6 million dollars are shown across a number of categories including wages, operating costs, and benefits.  These express a 5.8% rise in spending over the prior fiscal year.  If the trend follows, the City of West Harford could likely see future tax increases match the gap.  This will affect a rise in the collection property taxes, which are the primary source of revenue for the City. Also, decreases to the capital financing budget may also lead to disinvestment in City and school system infrastructure maintenance.  Decreases in expenditures to items such as “Community Services,” “Human and Leisure Services,” and Town Clerk operations project a decrease in services, provided, relative to the prior FY.

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Connecticut State Budget Process

The Connecticut General Assembly generates a two-year (biennial) budget every odd-numbered year which begins in the Executive Branch, when the governor each state agency to prepare draft budgets for the following biennium. Over several months the governor’s budget office, the Office of Policy & Management (OPM), compiles this information, makes changes, and then works to match the agencies’ spending projections with revenue.

The result, often referred to as the ‘governor’s budget,’ is delivered to the General Assembly in a formal address by the governor in early February. The annual budget address often includes policy initiatives, spending proposals, and vehicles through which additional revenue may be generated. In the address, the governor identifies his priorities for the biennium.

When the legislature convenes, members of the General Assembly go through a similar process. Joint Committees (consisting of state senators and representatives), chiefly, the Finance, Revenue, and Bonding Committee oversee the revenue side of the state budget, which includes fees and taxes. On the spending side, the Appropriations Committee handles matters regarding state agency budgets and other state spending. When the Appropriations and Finance Committees approve a budget, it is often different from the governor’s. The two versions are negotiated into the final budget language and the budget must be voted on and passed by both the House and Senate and signed into law by the governor.

Aerial view of the Connecticut State Capitol Building in Hartford.    (AP Photo/Douglas Healey)

KEY DATES           

May through July:
Agencies/commissioners prepare biennial budget projections.

June 30/July 1:
Fiscal Year ends/New Fiscal Year begins.

August 1:
State agencies and commissioners budget request instructions

September 1:
Biennial budget requests due.

September through January:
OPM reviews recommendations and prepares proposed ‘governor’s budget.

February:
Governor transmits budget to General Assembly.

February through May:
General Assembly convenes, holds hearings, debates and makes adjustments.

May through June: 
Reconciliation of governor’s budget with General Assembly budget.[1]

SPENDING

State spending is roughly $10,000 per household, while the state debt per capita is $27,539.70.

The current fiscal year projects spending of nearly $3 billion in direct aid to the state’s cities and towns through a variety of grant programs. The vast majority of that funding is channeled through the Education Cost Sharing (ECS) grant to help finance public education. Other primary municipal grant programs include: the Excess Cost Grant, designed to mitigate the high cost of special education mandates; Town Aid Road (TAR) Fund, which helps maintain local streets and roads; and Payments In Lieu of Taxes (PILOT), which compensates local governments for hosting tax-exempt institutions like not-for-profit hospitals and state-owned buildings that don’t pay local property taxes.  A popular grant, The Small Town Economic Assistance Program (STEAP) funds economic development, community conservation and quality of life projects in rural and suburban towns.

Municipal grants are awarded on a sliding scale based upon criteria including the economic status of the city or town, the income level of its residents, and the worthiness of specific infrastructure improvement projects.”

Medicaid accounts for much of Connecticut’s spending and is currently driving a budget shortfall, according to DSS spokesperson David Dearborn. As a result, the biggest cuts are coming from Medicaid to fix that deficit. Governor Dannel Malloy announced $170,444,693 in statewide budget rescissions this past week; $32 million of it is from the Department of Social Services, $8 million from the Department of Education and $1 million from the Department of Economic and Community Development. The biggest cuts from DSS include housing and homeless services which is close to $3 million and $5 million from TANF. However, according to DSS spokesperson David Dearborn the cuts represent real services with real effect on people from Medicaid. Those budget cuts are intended to help slash an estimated $365 million from the state deficit.

Since 1978 Connecticut has had a Budget Reserve Fund, more commonly referred to as the Rainy Day Fund. The fund was created to help close fiscal year-end budget gaps. The Rainy Day Fund is currently depleted, when it was used to help balance the FY 10-11 budget. In the past few years, state government has spent more than $900 million in emergency federal stimulus aid as well as a nearly $1.4 billion emergency budget reserve, and the entirety Rainy Day Fund. Connecticut operates from a common pool that mingles tax revenues, federal grants and receipts from fees and licenses with borrowed funds. With the governor’s approval, state law permits the treasurer’s office to temporarily transfer funds between operating and capital programs, which has done so in emergencies when bills exceed tax and other operating fund receipts.

In regards to the current budget situation, Treasurer Denise Nappier has informed the governor: “For several months I have reported reduced cash levels for the state, particularly within the common cash pool that funds daily operations and circumstances now warrant a contingency plan for ensuring adequate cash resources.” Because of technicalities in state budgeting rules, Comptroller Kevin Lembo’s office could not count the emergency budget cuts ordered by Malloy; in his latest report, Lembo officially certified a $415 million deficit, though he acknowledged that the actual shortfall is probably closer to $290 million.[2] Whenever the comptroller’s office certifies a deficit larger than 1 percent of the general fund ($19.14 billion), state law requires the governor to submit a plan to the legislature. The current threshold is such that it will trigger the statutory requirement, forcing Malloy to present a plan to the General Assembly in special session.[3]

The comptroller attributes much of the shortfall to an increase in Medicaid spending. “Medicaid — the largest single gross appropriation line-item in the budget — is significantly above the budget target,” Lembo said. “Caseload growth continues in the low-income adult program area with the addition of more than 4,000 clients since the start of the fiscal year” causing “double-digit increases [which trend into] this fiscal year, according to data from the Department of Social Services.” Lembo adds that “The fiscal year 2013 budget relied on over $100 million from Medicaid program savings initiatives, many of which have not been implemented to date.” [4]

Rather than raising taxes from the outset, Governor Malloy has made cuts across nearly every agency request that has come his way, and has mandated the adoption of Generally Accepted Accounting Principles (GAAP) “In order to improve the state’s accountability for its use of public funds.” Executive Order No. 1, which directed the Secretary of the Office of Policy and Management (OPM) to initiate a process intended to result in the implementation of GAAP, was his first act upon taking office. [5] Malloy has faced criticisms by labor and citizenry for his cuts, but they have come, thus far, on the revenue side, without an increase in taxes. “First we downsized government. Then we cut spending. Then we identified what we need to ask state employees to do. Only when those three processes were complete did we begin to look at revenue.”[6][7]

REFERENCES

[1] http://www.senatedems.ct.gov/Budget.php

[2] http://www.ctmirror.org/story/18344/nappier-seeks-emergency-550m-loan-help-state-pay-its-bills

[3] http://www.ctmirror.org/story/18340/comptroller-raises-deficit-estimate-50-million

[4] http://www.ctmirror.org/story/18340/comptroller-raises-deficit-estimate-50-million

[5] http://www.ct.gov/opm/cwp/view.asp?a=2998&q=477452

[6] http://www.governor.ct.gov/malloy/cwp/view.asp?A=11&Q=474024

[7] http://www.ct.gov/opm/lib/opm/budget/2012_midterm_budget/pdfs/fy2013_sectiona.pdf

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VAT Tax: Better Than Current Model

Andrew Mancini & Daniel Malo

1 October 2012

Value Added Tax

 Introduction

American Exceptionalism has been part of United States history since our victory over The British in The Revolutionary War.  America has always aspired to set the global standard in everything it does.  When it comes to the tax system however, America is behind the rest of the world.  The United States heavily relies on taxing income to raise revenues and the only significant taxes on consumption are at the state level.  Most countries have some form of a value added tax (VAT), generally accepted as the best form of consumption tax, which provides many benefits over the income tax. The VAT is better for businesses and could promote more production here in the United States while at the same time, level the playing field with foreign companies here and abroad.  The VAT is also more efficient and better at capturing revenues from people that have an ability to pay when compared to the income tax in place now.  This paper will focus on discussing the benefits of a value added tax when compared to the current income tax system but will also address some of the weakness with the tax and attempt to show that they are not that significant.

Better for Business

A VAT provides a significant advantage for countries in global trade.  The VAT is most beneficial because of its border adjustability.  The tax is subtracted from exports and added to imports (Haimowitz 4:30).  “A VAT works like an export subsidy for foreign exporters and an import tariff at the same time,” (Economyincrisis.org).    A good example of how the VAT affects trade is described in a video on Taxreform.org.  A $50,000 dollar car is produced in Germany and about to be shipped to China.  Upon leaving Germany, the 19% VAT in Germany is returned to the car manufacturer, making the price of the car $42,000.  When the car reaches China, the 17% value added tax in China is assessed on the car making the price for sale in China $49,000 (Haimowitz 5:50).  This example shows the advantages of the VAT.  Without it, the German car would cost $58,500 in China.

Since the United States has a corporate income tax and its trading partners operate with a VAT, the United States is at a major competitive disadvantage in global trade.  “The U.S. corporate income tax tends to decrease exports and increase imports (by definition, therefore, hurting U.S. trade competitiveness)” (Nicholson p26).  As it currently stands, over 150 nations use the value added tax (Economyincrisis.org).  The United States is the only OECD country that does not have some form of a VAT (Nicholson p2).  For the most part, this covers every country that the United States trades with.  As it stands, there are no tax deductions for products being exported from the United States but these same products will be hit with a foreign countries VAT when they arrive there (Haimowitz 6:50).  “The VAT ranges from 5% in Canada and Japan to over 16% in China, Mexico, Spain, Italy, and the UK” (Haimowitz 7:05).  This makes U.S. products more expensive.  At the same time, imports coming into the United States from other countries receive a tax rebate equivalent to that country’s value added tax rate.  Upon arrival in the United States, there is no value added tax placed on these imports by the United States, giving imports a price advantage over U.S. produced goods (Haimowitz 6:50).

This system provides a competitive advantage to foreign countries.  United States companies have been paying while companies in countries with a VAT in place have been saving.  “In 2006, foreign nations collected VAT rebates totaling $218.2 billion while American companies were forced to pay $122.4 billion in taxes due to the VAT.  Each year the VAT imposes an average of $290 billion burden on our goods exported and another $85 billion on services,” (Economyincrisis.org).  Under this system, United States companies are outsourcing in order to avoid the disadvantages of producing in the United States.  At the same time, the United States is a less attractive place for foreign companies to produce goods.  A VAT in the United States could help with keeping jobs here and increase the advantages to producing in the United States.  With a national unemployment rate of 8.3% and the current national debt of over 16 trillion dollars, it is something to strongly consider.

More Money In Your Pocket

The VAT is foremost about paying a tax on goods consumed, rather than paying that tax through deductions from income. It can be favorable to the consumer in that they might notice more net income in their paycheck, possibly encouraging personal savings but also increasing one’s fluid spending ability. These two positives externalities of the VAT have the potential to assist contemporary (and timeless) concerns of retirement savings and economic vibrancy, by offering stronger personal savings stewardship and more spending ability in the local economy. The VAT can possibly be an economic engine, and necessary for a stable economy, hedged across the spectrum of taxable consumer purchases; foremost, it puts more money in people’s pocket, saved or spent, either is an investment.

Of course, these potentials come only in lieu of lowering or removing income and corporate taxes, in favor of a ‘light’ or total VAT system.  A system as such would allow for more spending by companies, as well as making them more competitive with other VAT countries. The ‘lost’ taxes could then allow for the phase-in of consumption taxes, generating revenue on increased purchases. Even a slow adoption of the taxation model would reward handsomely and make our current tax structure closer to parity. For example, in 2009 the United States imported $1.9 trillion worth of consumer goods. A nominal VAT of just 10 percent could have raised $190 billion from those imports.

Uncle Sam Needs You!

The VAT captures a consumer’s ability to pay by levying a consumption tax on goods that might otherwise go untaxed. Under a VAT system everyone would pay into the ‘pool’ with every purchase. It can theoretically be applied across all types of purchases, such as homes, cars, computers, and exotic goods; there are ethical considerations to be made regarding items of human necessity. The VAT can simplify tax structure for all parties, easing the burden, cost and size of tax administration and enforcement. Rather than a system of deductions, subsidies, and rebates; corporate accounting and loopholes, the VAT proposes a more efficient revenue collection scheme.

Under our current income tax structure, many people make no tax contribution, such as students, tourists, or workers in the country illegally. This gives equity to the system by inducing their participation in reciprocity for receiving many of the benefits that others’ income taxes pay for.  There is less ‘deadweight’ in the financing of public spending, HOWEVER when implementing policy, we should remain cognizant of the real economic burden on those groups, so that they aren’t ‘outpriced’ from purchases. If the rate of taxation is not ‘fair’ it will be unworkable by intrusion of underground economies and decreased purchasing, and only serve to the detriment of the policy.

Weaknesses

The Value Added Tax is a form of consumption tax.  The main problem with consumption taxes is that they are both horizontally and vertically unequal.  The vertical equity problem is that it would be a regressive tax by nature.  The lower a family’s income, a higher proportion of their income will have to be spent on consumption goods.  This means that lower income families will pay a higher proportion of their income to taxes.  In general this is not a good thing.  There are measures that can be taken to reduce the regressive nature of the tax.  No tax on food and water is a good start.  Also, lower tax rates could be placed on items that are essential for households such as kitchen appliances.  At the same time, higher tax rates can be enforced on luxury goods such as expensive clothing, fancy cars, or jet skis.

The horizontal equity problem is that tax rates amongst people with the same ability to pay can be different based on lifestyle.  With a consumption tax, a person that saves more will pay fewer taxes than a person who likes to spend a lot of money.  We can conclude from this that a consumption tax would encourage people to save and invest which is not necessarily a bad thing.  For example, Social Security cannot provide enough income for people when they retire.  If Americans save more money under the VAT, it will reduce some of the pressures on the Social Security system, a big problem for our country right now.

 

Conclusion

The Value Added Tax has the potential to be an economic catalyst for our country when properly implemented. It would better leverage American companies to compete against foreign VATS levied nearly everywhere else in the world. It would keep more cash for spending or savings for the individual and their local and state economies. The VAT keeps taxation equitable and collective. Acknowledging the regressive-ness inherent in the tax, attempts could be made at the taxation of the most expensive and most copious products, again, capturing an individual or company’s ability of means to pay. That the United States is not working with a highly effective VAT system, wherein the rest of the world does, can remind one of our stubbornness to accept the global measuring standard, the metric system–in favor of the Imperial approach. Folks familiar with that issue might recall a NASA blunder where our measuring errors were responsible for a multi-billion dollar Mars mission failure. Similar to our healthcare system,  our global neighbors, and our stagnation towards a universal single-payer delivery and management program which would bring equitability and parity to our ‘American Exceptionalism Dream’. We should embrace all of these approaches, especially concepts like the VAT, and we must also make them our own, because they are practical and fair, and would make that vision closer to reality.

 

Works Cited

Class Notes
Economyincrisis.org.  “Value Added Tax (VAT)”.  Economy In Crisis.  Web. 29 September 2012

Haimowitz, Sara.  “Value Added Tax (VAT): Fair Trade, Jobs & Growth”.  17 August 2012.  Online Video Clip.  Trade Reform.  29 September 2012

Nicholson, Michael W.  “Value-Added Taxes and U.S. Trade Competitiveness”.  Forum for Research In Empirical International Trade.  July 2010.  Web.  29 September 2012