Hartford - Some state legislators are frustrated with the governor's proposal to change how the state's spending cap is defined, essentially giving the state more spending flexibility.

"We're within the spending cap as he defines the spending cap," state Rep. Larry Cafero, R-Norwalk, said after Gov. Dannel P. Malloy released his budget. "He redefines it in his budget so we're not under the spending cap, we're actually over it."

According to the Office of Fiscal Analysis, the state's two-year budget is over the spending cap by about $466 million in fiscal year 2014 and $690.8 million in fiscal year 2015.

Malloy has proposed to move payments for unfunded pensions outside of the state's "capped" spending and into "non-capped" spending, as the state does with debt service payments and state aid to distressed municipalities.

The governor also proposed moving spending that was 100 percent funded by the federal government, such as certain Medicaid programs, out of capped spending.

These changes and others allow Malloy to say that the budget is $92.4 million under the spending cap.

A statutory spending cap was put in place by the General Assembly in 1991 to tie the growth of the state's budget to personal income growth or the rate of inflation. In 1992, voters passed spending-cap requirements, and the 28th Amendment was added to the state constitution. The allowed growth rate of the spending cap has been 4.6 percent over those 20 years, according to the governor's budget proposal.

The growth rate in fiscal year 2014 will only be 1.79 percent using Malloy's new spending-cap definitions.

A two-thirds vote would be required for the legislature to pass changes to the spending-cap definition, said Benjamin Barnes, secretary of the state Office of Policy and Management.

The governor's proposal to move 100 percent federally funded programs outside of the state's spending cap would put Connecticut in line with states across the country. As of 2010, there were 23 states that had spending limits, according to the National Conference of State Legislatures. Generally, state spending caps exclude federal funds, Mandy Rafool, a policy specialist for the fiscal affairs program at the NCSL, wrote in an email.

"With respect to Medicaid, Connecticut is the only state that budgets the federal portion and appropriates that," Barnes said. "They (other states) tend to just appropriate the local resource required."

For example, if Medicaid costs $6 billion and about $3 billion comes from the federal government, other states would only consider the $3 billion in state spending under the spending cap, Barnes said, but Connecticut counts all $6 billion.

The change is in part being requested because of the Medicaid expansion under the Affordable Care Act, which is driving up spending, Barnes said. This proposed change means about $300 million would be moved to non-capped spending over two years, according to the budget proposal.

Cafero, after he was briefed on the governor's proposal last week, said, "Knowing we only get the money when we spend our own money, it has to be counted as (part of capped spending). It has always been counted as that."

Moving federal funds

State Rep. Edward Moukawsher, D-Groton, and state Sen. Andrew Maynard, D-Stonington, said they were reluctant to say whether they would support the governor's definition changes until they had a more comprehensive understanding of the entire budget proposal.

"These ideas have been floated before," Moukawsher said. "I would be reluctant to do anything that would lead to more spending."

The state needs to look at spending cuts before it looks at anything else, he said.

Maynard said moving federal dollars outside of the spending cap made some sense. "I think it doesn't make sense to count non-state tax dollars when the whole intent was to prevent overspending or overtaxing of our people," he said.

The Connecticut Business & Industry Association said Friday that new requirements under the Affordable Care Act were the kind of exception envisioned under the spending cap.

Fred Carstensen, director of the Connecticut Center for Economic Analysis at the University of Connecticut, said the current spending-cap rules put Connecticut at a disadvantage. "The spending cap is the stupidest idea, hands down," he said.

Connecticut is one of the worst states at getting money back from the federal government, Carstensen said, adding that the spending cap tells the legislature and governor that if they accept federal money, they have to reduce spending that comes from state taxes.

Malloy is proposing changes to stay within the spending cap during a difficult economic time, Barnes said.

Seven of the 21 budgets passed since the start of the spending cap have exceeded that cap, Barnes added. These instances were during former Gov. M. Jodi Rell's and former Gov. John G. Rowland's tenures, he said. Four came about because the governors had excess revenues and wanted to spend it, he said.

Pension payments in play

The other proposed change to spending-cap rules is to move payments for unfunded pensions outside of capped spending. Ratings agencies such as Moody's Investors Service and Standard & Poor's are increasingly treating unfunded pensions or pension liability as debt, Barnes said. The logic behind putting debt-service payments and unfunded pension payments outside of capped spending is that it would encourage the state to pay down debts as rapidly as possible as opposed to artificially stretching out spending on debt, he said.

Maynard said he would consider this move as well.

"I regard the pension liability as one of the chief things we have to tackle, but it's hard to do more on that with down revenues and a spending cap that limits your ability to even meet those obligations," he said.

Peter M. Gioia, a CBIA economist, said pensions were "explicitly not excluded" from the cap and should not be exempted.

Heath Fahle, deputy director of the Yankee Institute, said redefining the spending cap is "an artificial fix" and the focus instead should be on reducing spending.

"The problem is not the spending cap but rather the spending in the budget goes up 5.1 percent and 3.9 percent in the second year," he said.

j.somers@theday.com