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Weathering States’ “Perfect” Budget Storms:

The Challenge for PhilanthropyThe Connecticut Case

Shelley Geballe, Co-President,

CT Voices for Children

for

Grantmakers in Health

April 15, 2004

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A Bit of Context:Connecticut’s Wealth

- CT has the nation’s highest per capita income.

- Even without Fairfield County (the “Gold Coast”), CT has the nation’s 3rd highest per capita income.

- CT ranks #1 in millionaires per capita

- CT ranks very high in K-12 education performance and has one of the nation’s best educated workforces

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A Bit of Context:Connecticut’s Divides

Slightly more than 1 in 10 of all CT children under age 18 live in poverty and 1 in 4 below 185% of the FPL. Hartford has the second highest child poverty rate among US cities with population over 100,000.

During the 1990s, the real income of CT’s poorest 20% of families declined by 19%, while the real income of its wealthiest 20% increased by 21% -- the greatest “pulling apart” of any state in the US.

Kids in CT’s school poorest districts are half as likely to come to kindergarten with some preschool experience, 5x less likely to pass our mastery tests in grades 4,6, and 8, and 12x more likely to drop out of high school –perpetuating the poverty cycle.

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CT’s Health Divides Are Strongly Associated with Its Income Divides

Avon, Farmington, Glastonbury, Granby,

Marlborough, Simsbury, Tolland

Hartford

Population

Median family income

Infant mortality (per 1000 births)

Late prenatal care

Lead poisoning

Asthma (hospital discharge per

10000)

Child abuse (per 1000 children)

121,578

$27,051

14

17%

5%

57

30

123,785

$93,511

5

12%

<1%

6

3

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CT’s Perfect Budget Storm

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Huge General Fund Deficits After Many Years of Surplus (in millions)

Source: OFA, Year-End Analysis of the General Fund and Transportation Fund Budgets (October 22, 2002); OFA, Connecticut State Budget 2001-2003 (October

2001)

$576

($1,268)

($1,738)($2,000)

($1,500)

($1,000)

($500)

$0

$500

$1,000

SFY 01 SFY 02 SFY 03

CT’s Perfect Budget StormCost of state

services grows at normal pace

“Down” economy results in increased demand for

state services and sharply declining state

tax revenues

“Painless

” one-time

budget solutions are used

up

Revenues cut

(new tax cuts & out-dated tax

systems)

Booming economy generates temporary surpluses

9/11 results in increased homeland security costs & a

growing federal deficit leads to less federal

help for state budgets

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In FY 00, CT Collected $8.57B in Taxes. Tax Cuts Enacted in the Late 1990s Resulted in

an Annual Revenue Loss of $2.07B by FY 00.

57.8

66.1

158.1

190.2

190.4

193.3

496.6

711.5

0.0 100.0 200.0 300.0 400.0 500.0 600.0 700.0 800.0

Other Taxes

Local Business Property Taxes

Inheritance Tax

Gasoline/Diesel Tax

Hospital Tax

Sales Tax

Corporation Tax

Income Tax

Revenue Reduction (in millions)

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CT Was Not Alone – 43 States Enacted Tax Cuts Between 1994 and 2001

Tax Cuts as a Percent of State Tax Revenue

Greater Than 3%

Between 1% to 3%

Source: CBPP calculations based on Rockefeller Institute’s data (September 2002).

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A General Fund Deficit Was PredictedEven Before CT’s Recession Began

Normal state budget growth, coupled with millions of dollars of permanent tax cuts, led to a 9/97 warning by the General Assembly’s Office of Fiscal Analysis of a General Fund deficit by FY 00 – because of an emerging “structural deficit.”

As the recession began, FY 02 General Fund revenues fell more than $1 billion short of the budget plan. All taxes came in below budget. Income tax revenues were down 12%, corporation taxes down 24%, sales taxes down 6%, inheritance taxes down 27%. Investment income also was 62% below budget.

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CT’s Revenue Declines Were Amongthe Greatest in the US

P ercen t C h a n g e , A d ju sted fo r In fla tio n

-3 0 % to -1 0 %-1 0 % to -5 % -5 % to 0 %N o C h an g e o r In c rea seSource: CBPP calculations based on Rockefeller Institute’s

data (September 2002).

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To Address CT’s FY 02 and FY 03 Deficits:

80% of the “solution” came from:

• One-time revenues (e.g., the Budget Reserve/Rainy Day Fund, tax amnesty, transfers from cash reserves of other funds including the

tobacco settlement fund, stock liquidation),

• Spending cuts

• Borrowing

New revenues from permanent and time-limited tax and fee increases contributed to just 20% of

the solution.

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CT’s Budget Storm First Hit Those Most in Need

FY 02-03 deficit-reduction included (using SFY 02 spending as the baseline):

– Elimination of various medical services for single adults (e.g., vision, PT, home health, podiatry, psychologists, non-emergency medical transportation) and optional Medicaid services for low-income seniors & disabled

– Cuts to HUSKY(Medicaid) outreach & to Healthy Start– 8% cut to Department of Public Health budget– Cuts in funding for Temporary Family Assistance, Safety Net Services,

anti-hunger programs, transitional rental assistance, services for persons with disabilities.

The lay-offs and early retirements of thousands of state employees also made the timely delivery of many state-funded services more difficult.

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Beginning in FY 03, CT Began To Make a More Serious Effort at Adding Back Some of

the Tax Revenues Cut When Times Were Good

PA 03-2, adopted early in the 2003 General Assembly Session, generated $440 million in net “new revenues,” $300 million of which came from new taxes and fees:

• Income Tax. Top bracket income tax rate increase from 4.5 to 5%

• Sales and Use Tax. Repeal or reduce certain exemptions (health clubs, clothing between $50-$75/item)

• Cigarette Tax. Increase by 40 cents/pack • Business Tax. 20% surcharge for 2003 income year on the

corporation tax and $250 “entity”fee on LLCs, LLPs, and S corporations

• Fee Increases. Adjustments to attorney’s occupation tax, court fees, and program fees

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But To Address the Remaining FY 03 Deficit,

PA 03-2 Also Made Even Deeper Cuts

After > $900 million in cuts to mitigate FY 02-03 deficits, PA 03-2 cut General Fund allotments by an additional $130 million, including:

Reductions in Health Services (-$21M FY 03 & -$84M FY 04), e.g.,

• reduce Medicaid eligibility for parents from 150% to 100% of FPL • eliminate continuous and guaranteed eligibility• impose co-pay for @ outpatient service and Rx drug for adult Medicaid and SAGA recipients• eliminate eligibility for many legal immigrants • increase co-payment requirement and annual registration fee for ConnPACE Rx drug program

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CT’s FY 04 Budget Includes Changes That Will Further Reduce Health Benefits & Increase

CostsThe FY 04 budget requires Connecticut to seek a federal waiver so that it can:

• Impose premiums and co-pays on children, pregnant women, and their families with incomes as low as 50% of the federal poverty level (FPL) ($7,836 for a family of 3)• Change the Medicaid benefit package to the state-employee plan (including eliminating EPSDT)• Deny prescriptions to those who fail to pay the co-pay• Change the SCHIP benefit package to the largest available commercial plan and significantly increase co-payments• Impose premiums on medically-needy adults and increase co-payments on medical services.

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Cuts to Health ServicesAre Particularly Short-Sighted

Cuts to Medicaid/SCHIP are no “miracle cure” – Kids will continue to get sick, but care will be delayed until conditions worsen and become more costly to treat. CT will sacrifice federal matching funds and health care costs will be shifted.

Continued cuts to mental health and substance abuse services will result in corrections and foster care populations continuing to soar – at a cost to CT of $35,000/year (for incarceration) to more than $325,000/year per child (for certain foster children), and incalculable cost to families.

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While Philanthropy Can Make A Difference, It Can’t Make Up the Difference

$1,120

$694

0

200

400

600

800

1,000

1,200

FY 04 Deficit Total CT Foundation Grants (2001)

In M

illio

ns

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But Philanthropy Can Help Catalyze Change

The CT Health Foundation (one of CT’s health conversion foundations) made a number of strategic investments to try to turn the tide on state budget choices generally, and health care cuts specifically:

1. Commissioned a report by CBPP on CT’s restrictive spending cap and reform options (completed when CT still enjoyed budget surpluses).

2. Provided a grant to CT Voices to get technical assistance on message framing and strategic communications on state tax and budget issues. Approved a subsequent 3-year grant to CT Voices to implement the strategic communications plan devised by the PR firm.

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3. Commissioned four Policy Briefs by Georgetown U. Health Policy Institute and CT Voices for Children on impact of FY 04 changes on affected individuals & the CT economy and:

- Held press conferences as each report was released

- Scheduled private briefings on key findings by the researchers to legislative leadership and media

- Received terrific press on key findings (e.g. that an estimated 30% of those in HUSKY A/Medicaid --nearly 87,000 children and parents - would lose coverage because they cannot afford the premiums; that CT can expect to lose $96M in federal funds & see a 43% increase in uninsured children under the proposed changes)

(See www.ctkidslink.org/pub_issue_12.html)

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The Result, So Far?

Legislation to repeal many of the changes made in the 2003 Session is introduced, and co-sponsored by 20 of 36 State

Senators and 85 of 151 State Representatives.

Repeal of many changes was incorporated in the Appropriations Committee budget, and new funding provided

to restore services and eligibility.

The Finance Committee’s budget incorporates many of CT Voices’ revenue enhancement proposals (e.g., “millionaire’s

tax, estate tax decoupling) that will help fund this restoration of benefits.

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For more information contact:

Shelley Geballe, JD, MPH (shelley@ctkidslink.org)

at CT Voices for Children33 Whitney Ave. New Haven, CT 06510

203-498-4240, 203-498-4242 (fax)www.ctkidslink.org