Connecticut’s Perpetual Fiscal Crisis

Illinois may have the midwestern title wrapped up, and New Jersey the mid-Atlantic crown, but in the contest for fiscal misery, Connecticut is winning the Northeast race going away.

So it was that earlier this month, Connecticut Gov. Dannel Malloy delivered a grim budget address that demanded huge concessions from the state’s labor unions and a fundamental restructuring of the relationship between the state and its cities and towns. “Our economic reality demands that we re-envision state government,” Malloy declared.

His budget address threatened layoffs of 4,200 state employees if labor contracts are not reopened and savings found. And it announced formation of a new state entity, the Municipal Accountability Review Board, to supervise the finances of big cities like Hartford, Waterbury, Bridgeport and New Haven—in the hope that this will keep them out of bankruptcy.

The budget address also voiced deep concern that federal reductions in medicaid and other programs for the needy might place added burdens on the state and its residents.

But it was concern that the state is no longer competitive with others for business investment, job creation and retention of wealthy citizens that seemed most to animate the governor’s address.

“State government has failed in many places to build the kind of world-class education system necessary for growing a new generation of workers,” Malloy told his audience of state legislators. “We’ve failed to build a modern transportation system that efficiently moves people or products from one place to another. And we’ve failed to build thriving, vibrant city centers where industry and businesses want to grow. The truth is, other states have had the foresight to make necessary investments in these areas, and, as a result they’ve gained a competitive advantage on us.”

Indeed, in a recently updated “State Financial Position Index (SFPI) and competitiveness posture report,” PwC, the big accounting and professional services firm, gave Connecticut a ranking of 47 among the 50 states, with only Illinois, Kentucky and New Jersey ranked below. A leading cause is pension debt, which equals $14,769 per person, more than all other states except for Illinois and Alaska, according a January 2016 analysis by CNBC.

Former U.S. Comptroller General David M. Walker, who devised the PwC rankings, noted in an interview that the Nutmeg State continues to suffer net negative migration, as it has in every year since Malloy first took office in 2011. Outbound migrants tend to be in upper income brackets, Walker said—and in fact, the state has begun to track its highest 100 taxpayers and to meet with some who were known to be planning moves to other states. Walker is a resident of Bridgeport and lost in a tight race for the Republican lieutenant governor nomination in 2014.

Malloy, who engineered two major tax increases earlier in his tenure, reached a popularity nadir in mid-2016, an approval rating of just 24 percent. That put him among the five least popular governors in the country, according to a Morning Consult survey of 66,000 voters in all 50 states from January through May. He was the only Democrat in the basement, sharing honors with with Republican Govs. Rick Snyder of Michigan, Sam Brownback of Kansas, Chris Christie of New Jersey and Paul LePage of Maine. Malloy is now serving as chairman of the Democratic Governors Association.

Perpetual Fiscal Crisis

A remarkable history of Connecticut’s descent into perennial fiscal crisis is found at the CT Mirror, an online publication dedicated to coverage of public policy and politics in the state. The five-part series, titled “A Legacy of Debt,” was authored by Keith M. Phaneuf and was published at the beginning of February.

CT Mirror is published by the Connecticut News Project, a nonprofit organization founded in 2009 by wealthy donors who were concerned that layoffs at The Hartford Courant and other newspapers was seriously sapping the vital investigative and oversight capabilities of the state’s media organizations. The project’s website explains the need for a new “watchdog”:

One indicator is the number of reporters covering the state Capitol: In 1989, two dozen reporters representing most of the daily newspapers in the state covered the Capitol full time; today, less than a third remain. Another indicator is the news space allotted to this coverage, which also has declined with the size of newspapers overall. Meanwhile, the pressures and responsibilities of state governments everywhere have increased enormously.

Phaneuf’s five-part series begins with a few paragraphs that concisely capture the essence of the story:

Connecticut stands on the cusp of an unprecedented fiscal crisis.The budget that Gov. Dannel P. Malloy will present to the legislature Feb. 8, in an attempt to close $3 billion in deficits over the next two years, is only a portent of a far greater, long-term challenge facing the the state.Simply, the bill is coming due in ever-increasing amounts for the 80-year failure of one of the richest states in the nation to adequately save for retirement benefits promised to teachers and state employees.Hobbled by debts accumulated by generations of governors and legislators, Connecticut for at least 15 years to come is likely to face a bleak and politically dangerous menu of options that could shape the state’s economy and quality of life.

The series traces the generous promises made by state and local governments to teachers and other employees for pensions and health care whose costs would extend far into the future. Together with debt service on bonds for capital projects, these benefits now consume 31 percent of general fund revenues, up from 12 percent 20 years ago. But there’s more to come: all in all, the state has accumulated $74 billion in unfunded retirement benefit obligations and bonded debt.

The series covers the state’s proclivity for spending—rather than saving—budget surpluses that have totaled $6.1 billion since 2001. It tracks the decline of Connecticut’s “revenue engine,” which produced steady growth in income tax receipts in the middle of the past decade, but is stuck in low gear for most of the current decade.

Phaneuf writes about the effects heavy retirement costs have had—and will have—on funding for the state’s “aging and clogged transportation network,” on Connecticut’s health care and social safety net, and on students and parents who are paying a lot more to public colleges and universities. Large fuel tax increases enacted in 2005 and 2007 were meant to fund transportation projects but were used for other purposes, he reports. He raised the question of whether Hartford, the capital city, would have to declare bankruptcy in the near future.

Facing a deficit of $3 billion over the 2018-2019 budget cycle, Connecticut could rely on higher taxes to shrink the gap. But Malloy is reluctant, having presided over major, broad-based tax increases in 2009 and 2011, totaling $3.8 billion a year, and, in 2015, another $675 million increase as well as repeal of $230 million in previously approved tax cuts.

In the fourth part of his series, Phaneuf takes a tough look at the state legislature, observing that its leaders have been willing to cede both power and transparency on unpleasant budget issues in exchange for political cover. A prominent technique has been the use of budget “lapses,” which are, Phaneuf writes, “somewhat nebulously defined savings targets that the governor must achieve.”

Lapse targets averaged $113 million from 2005 to 2009, then jumped to an average of $515 million in the next three years. And in his new budget for 2018-19, Malloy has included a huge “labor lapse” of $700 million in 2018 and $868 million in 2019, to be achieved through concessions by state labor unions or by laying off the 4,200 workers. The budget includes a detailed “illustrative distribution” of the layoffs, with the pain falling heavily on agencies dealing with corrections, judicial affairs, children and families, social services, transportation and education.

For fiscal 2018, in a $20 billion budget, Malloy lists spending cuts of $1.4 billion, including $700 million in “collective bargaining savings” (the lapse), $408 million by making municipalities contribute to the costs of teacher retirement programs, and $256 million in agency cutbacks--which do not entail layoffs.

Like the labor reductions, the shifting of teacher pension costs from the state to its municipalities is highly controversial.

Reaction to Budget

S&P Global Ratings, a major Wall Street credit rating agency, has paid close attention to Connecticut’s fiscal problems, and it quickly characterized Malloy’s new budget as “consistent” with the “negative outlook” it had earlier assigned to the state’s bonds. “Rising state pension and other post-employment benefit payments are colliding with weak revenue growth because of poor economic performance in the state’s financial sector,” the agency said in a Feb. 15 statement. “Nevertheless, the governor proposes to largely maintain structural budget balance through ongoing budget cuts, reduced local aid, and various minor revenue adjustments.”

These measures could maintain budget balance if “weak revenue trends” remain constant, S&P said, but “high fixed costs [such as pension funding] could quickly throw the budget out of balance should the economy take a downturn.”

S&P last October expressed concern about the financial condition of Connecticut’s municipalities, and Malloy’s new budget almost certainly would force some to increase their property tax rates. All municipalities would have to contribute to their teacher retirement funds. But through adjustments in education funding and other means, the governor would hold harmless against these increased costs big and financially troubled cities, including Hartford, New Haven, Waterbury and Bridgeport. These four cities already have both the highest pension and retirement health care obligations and the highest property tax mill rates in the state, according to Walker’s research. Waterbury’s mill rate, at 60.21 is at the apex. All four, Walker said, could be headed toward bankruptcy.

High property taxes, Walker observed, are a disincentive for businesses and individuals to remain in these cities, helping to make them uncompetitive as places to live and work.

Malloy has observed that the state has been picking up teacher retirement costs even though the actual union contracts were signed by local, not state officials. So it’s time that localities contribute, he argues. His budget would place the burden on relatively wealthy smaller towns and suburbs, where, he says, school populations have been shrinking even as tax bases were increasing. Redirecting resources—some $2.1 billion in education aid--to cities with impoverished communities is just, he says.

State representatives got an earful from towns in the northeastern region of the state in a meeting two days after the budget was released. “The poorest run, most fiscally uncontrolled and unaccountable Connecticut towns will be getting all the money being robbed from Connecticut’s well run and fiscally prudent towns,” complained a citizen in a letter to the Monroe Courier.

Many others have complained about the budget as well. The Connecticut Hospital Association has aired a television commercial opposing the governor’s proposal to allow municipalities to levy property taxes on nonprofit hospitals.

The president of the Connecticut public university system has decried proposed reductions in state aid. The Motor Transport Association of Connecticut is fighting Malloy’s proposal to save $534,000 a year by closing all seven rest areas along interstate highways in the state. The National Rifle Association protested the budget’s proposed hike in pistol permitting fees.

But the biggest wild card in the budget poker game is with the labor unions representing state and local employees. They may hold the high hand in light of a 2011 deal with Malloy that extended their benefits contract through 2022 in exchange for various concessions. To reopen the contract would not be popular with the rank and file, who might demand another extension of benefits.

Labor already reached one deal with Malloy to stretch out state contributions to pension funds, which were on a track to increase from $1.6 billion this year to as much as $6 billion a year over the coming decade and a half. The deal shifts an estimated $14 billion to $21 billion in costs to taxpayers between 2033 and 2047. The deal was nearly scuttled by Republicans, who have made substantial gains in the legislature since Malloy took office, now holding half (18) of seats in the Senate and 72 of the seats in the House of Representatives, to 79 for the Democrats. On Feb. 1, the House voted on a nearly party-line vote to ratify the deal, while the Senate split along party lines, forcing Lt. Gov. Nancy Wyman to break the tie and seal the deal. Republicans wanted labor concessions in exchange for their votes.

Now, labor is again in the spotlight, faced with negotiating new concessions or tolerating the layoffs. State AFL-CIO president Lori Pelletier on Jan. 4 declared she was disappointed with Malloy’s mention of labor concessions during his State of the State address that day. “There is not an appetite” among state workers for givebacks beyond the substantial ones they accepted in 2011, she said. And the state’s largest teachers union has aired commercials attacking Malloy for dividing “our local public schools into winners and losers.”

Today’s teachers and state employees, and Malloy and the legislature, all are victims of deplorable fiscal practices that happened long before their watch. Beginning in 1939, public union contracts promised retirement income and health and benefit plans that may not have been too far out of line but were never funded on a current basis. Their tens of  billions in unfunded liabilities are a plague on today’s leaders, and a dangerous threat to the economic health and wellbeing of the Nutmeg State. And today’s leaders, to their chagrin and that of their descendents, are uncomfortably forced to shift the burden forward to tomorrow’s generations.