Connecticut Budget Plan Sparks Big Rebuke From Major Employers

It’s rare that large, publicly traded corporations directly confront powerful state officials on matters of economic policy. But it happened in Connecticut on Monday as General Electric Co., Aetna Inc. and Travelers Insurance Companies Inc., three of the state’s largest employers, released statements opposing key elements of what had seemed a final version of the Connecticut state budget for the next two years.

This public revolt by three of the state’s largest employers sent Gov. Dannel Malloy and legislative leaders back to the drawing board on tax increases they’d designed. The protests also served to highlight the fiscal practices that have gradually made Connecticut uncompetitive in the interstate race for new business—including too-generous compensation packages for public sector employees and vastly underfunded pension and benefit systems.

At issue in the last few days has been a $40 billion budget that would hike corporate taxes, raise the personal income tax on the wealthy and legalize keno gambling. The budget covers the two-year period beginning on July 1.

Republican lawmakers have estimated that taxpayers would face up to $2 billion in added payments in the next two years, with $700 billion or more coming from the business sector. The budget included measures to require companies to pay tax based on income earned both in Connecticut and in other states; to continue a 25 percent corporate tax surcharge; and to increase taxes on data processing and digital downloads.

In their scramble to find monies to fund added spending, legislators had considered a variety of other tax hikes—some of which might be back on the table in light of the corporate revolt. They included raising the cigarette tax rate—already near the most expensive in the nation at $3.40—and applying the 6.35 percent sales tax for the first time to more than 20 services, including accounting, drafting, architectural, engineering, interior design, veterinary and dry cleaning.

The 10,000-member Connecticut Business and Industry Association in May protested the tax package unveiled by leaders of the state Senate and House of Representatives, both of which are controlled by Democrats. But Monday’s statements by the three major corporations went a step beyond the usual business opposition to taxation. Each of the three took issue with the tax hikes. More significantly, perhaps, General Electric and Aetna both suggested they might actually move operations out of the state.

"Connecticut is in danger of damaging its economic future by failing to address its budget obligation in a responsible way," according to the statement from Aetna, which is based in Hartford. "Such an action will result in Aetna looking to reconsider the viability of continuing major operations in the state.”

Fairfield-based GE was just as explicit: "Reports that Connecticut officials intend to raise taxes by another $750 million are truly discouraging. Retroactively raising taxes again on Connecticut's residents, businesses and services makes businesses, including our own, and citizens seriously consider whether it makes any sense to continue to be located in this state."

Spending Cap, Public Debt

One issue is whether the budget would violate the state’s spending cap, written into the constitution in 1991 as a quid pro quo for then-Gov. Lowell Weicker Jr.’s proposal to institute a state income tax.

The state legislature was assigned the job of defining the cap. It never passed such a law, so in lieu of a formal definition, state officials have used various measurements. For years “gross” state spending was used. Then, when the federal government began sending vast new subsidies to expand Medicaid, the definition shifted to “net state spending.” Inflation adjustments were also part of the mix.

As of June 2, details of the huge budget bill had not been released. But by any “reasonable definition” it will violate the state spending cap, said Connecticut civic activist David M. Walker, who served as comptroller general of the United States before moving to Connecticut.

Walker ran for lieutenant governor in 2014, losing in the closest three-way race for the GOP nomination in state history. Among gimmicks Walker thinks might be used to circumvent the cap: Not counting as “spending” a $1 billion contribution toward the state’s public pension obligations.

A partner with the big (now-defunct) Arthur Andersen accounting firm before becoming the nation’s top auditor, Walker has made a close study of Connecticut’s economy and government. His 2013 report, “Connecticut At Risk,” ranks among the most detailed examinations of the political economy of any state in the union.

Among many facets of the state’s economic condition the report examines, perhaps the most compelling in light of today’s budget debate, are the twin problems of unfunded public benefit programs and high public debt.

Walker’s 2013 report states:

Many are unaware of the state’s poor financial condition because it is largely off the state’s balance sheet, hidden from public view. Nearly all state governments, including Connecticut’s, require states to maintain a balanced operating budget. In form, Connecticut has had a balanced budget in past years, but not in substance.

The report covers the state’s growing bonded debt—noting that it has not all gone to the virtuous purpose of building infrastructure. But it says:

Of most concern are Connecticut’s large and growing unfunded liabilities and obligations, specifically employee and teacher pensions and retiree health benefit . . . Connecticut has some of the highest—if not the highest—total liabilities and unfunded obligations per taxpayer of any state in the nation [accumulated under] both Republican and Democratic administrations.

The Day, a newspaper serving New London and southeastern Connecticut, has covered both budget and pension issues in detail, and in this chart-based story published early last year, it reported on just how generous and how underfunded the state’s pension system is. The piece is headlined: “‘A financial time bomb’: State pension system is one of the country’s most underfunded.”

Using 2014 data, Walker now calculates Connecticut’s unfunded burden per taxpayer at $48,600, highest in the nation. Pensions, benefits and bonded debt account for about three-quarters of the total, with miscellaneous other liabilities making up the rest. Connecticut taxpayers carry a much larger burden than people in other states in the region—and more than four times the national average, as this chart shows.

Walker also cites figures showing that public sector compensation, including benefits as well as salaries, now runs at 142 percent of private sector compensation in the state.

Carol Platt Liebau, president of the Hartford-based Yankee Institute, a market-oriented think tank, has calculated that some “40% of the state budget goes to government employee compensation and benefits, including payroll, state pensions, teacher pensions and current and retiree health care,” according to a recent Wall Street Journal report.

The tax plan that was pulled back Monday would increase the top marginal income tax rate to 6.99 percent on singles earning $500,000 and couples earning $1 million. Perhaps that number appears a bit less burdensome than a flat 7 percent would seem but it’s a lot higher than what many other states charge, and wealthy people have begun voting with their feet.  

Census Bureau data show Connecticut as one of six states that lost population in fiscal 2013-2014, as The Wall Street Journal reported May 31. Its editorial added that “a Gallup poll in the second half of 2013 found that about half of Nutmeg Staters would migrate if they could.”

Walker calls Connecticut a “net outbound state, losing tax base every year.” High earners, he said, soon calculate that they can avoid the state income tax by spending 183 days outside of Connecticut. So they buy a second home in Florida or some other low-tax state.

Walker adds: “Then they stop giving to Connecticut charities, since that is one measure of residency.” Finally, when they retire, they sell their houses and leave, he concludes. Walker sent this chart, quantifying the state’s loss of tax base. Its plight is not yet as bad as that of  Massachusetts, Illinois or New Jersey, but it’s still among the top 15 in this dismal race to the bottom.

Public Sector Reforms

When Malloy was first elected in 2010, he engineered the largest tax hike in the state’s history; this year’s will rank as second-highest.

At the same time, he sought and reached an agreement with public sector unions. In exchange for modest concessions, the union gained a contract that lasts through 2021. It still carries compensation that’s higher than in most states. And it guarantees there will be no layoffs before 2017. Malloy was not so far out on a limb in reaching such long-term, costly labor agreements; his predecessor, John Rowland, did the same when he was governor.

Now, confronted with rebellion in the corporate ranks, and gradual out-migration of wealthy citizens, Malloy may need to think anew about the size of the public sector and its workforce.

According to Walker, the state cannot possibly afford to use tax revenues to bring its pension and benefit programs up to full funding. What’s required, he says, is to “open the labor contracts up again” to increase employee contributions and make other changes. With the state budget on the ropes, the threat of layoffs or furloughs beginning in 2017 might be enough to bring unions to the table.