Who Will Rescue Our State Economy?
photography by Bob Capazzo
Barron’s magazine, the business and financial weekly published by Dow Jones, may not be on everyone’s regular reading list, but a recent cover story should have caught the eye of newspaper editors throughout Connecticut. It received too little attention. Entitled “Best & Worst Run States,” it listed Connecticut as the very worst.
Citing mounting pension shortfalls and high state debt across the country, the study ranked the financial strength of states on the basis of their debt and unfunded pensions as a percentage of their gross domestic product (GDP). The state with the strongest fiscal position was South Dakota, where these liabilities amount to just 1 percent of its GDP. In contrast, Connecticut’s combined liabilities are 17 percent of GDP. Of this, 7.9 percent is debt, primarily capital debt comprised of general obligation bonds backed by the full faith and credit of the state. The capital debt of $19.5 billion inherited by Governor Dan Malloy at the beginning of 2012, but accumulated by Democratic-controlled legislatures over many years, places a burden of $5,569 on every man, woman and child in the state.
Unfunded pension obligations represent 9.2 percent of GDP and threaten to burden the budget, and ultimately the taxpayer, even more. Only $10.1 billion of the $21.1 billion (or 48 percent) is funded. And this does not include long-term obligations for retiree health-care coverage. An even more dismal picture: Savings for this did not begin until 2007 and only $50 million of the $17.9 billion obligation has been funded. According to Keith Phaneuf, Connecticut Mirror’s highly respected reporter on state budgetary matters, Governor Malloy has taken steps to address these fiscal problems. He has managed to win modest concessions from the unions—known to be the toughest, most intractable municipal unions in the country. State employees contribute 3 percent of their pay to a health-care account, with the state matching these payments in 2017. Other concessions include raising the retirement age for some classes of employees and modifying cost of living pension adjustments. Phaneuf also points out that Malloy has secured legislative and union approval for an added $3 billion in pension contributions between now and fiscal 2023 for an ultimate savings of $5.8 billion.
All steps in the right direction, says Senator Scott Frantz, but with unfunded liabilities in the tens of billions of dollars, it’s light years from solving the long-term problem. In spite of Malloy’s austerity program, spending has grown by 5 percent during his current term. Senate Minority Leader John P. McKinney says that Malloy and the Democratic majority in both House and Senate relied too heavily on taxes to close the budget gap, approving more than $1.6 billion in state and local taxes, a record increase. According to the Tax Foundation, Connecticut is no longer considered a tax-advantaged state over New York or New Jersey. We now have the third highest state and local tax burden in the country, at 12 percent of per capita income.
We have reached and gone beyond the limit of solving our fiscal problems by taxation. We are no longer competitive in attracting the business and industry desperately needed to halt declining employment opportunities. In 2010 more than 4,700 jobs were lost in manufacturing, marking the nineteenth straight year of such losses. Even our vaunted hedge fund industry was not immune, as Edward Lampert announced taking his $9 billion fund to Miami.
Faced with high taxes and overregulation, Malloy is paying an exorbitant price to attract new companies and retain existing ones. His “First Five” program provides forgivable twenty-year loans and tax abatements for companies relocating here and for others to remain. It has attracted or retained nine companies so far, but according to Senator Frantz, former chairman of the Connecticut Development Authority, the high cost per job created has saddled the state with even more long-term debt.
In spite of Connecticut’s great attractions, wealthy residents continue to opt for the sunshine solution. Three years ago a study documented the extent of this steady exodus. When they go, there go their contributions to taxes, to our social services, schools and colleges, and local communities. Gone too are the estate taxes they might have paid had the high rate not driven them from the state.
The chance of states going bankrupt may be slim, but according to the Mirror’s Phaneuf, state bonds are priced as though there was no risk at all. So, the downgrading of Connect-icut’s general obligation debt last January was unusual and should be a wake-up call.
The question is: Can a Democrat-controlled House and Senate ever have the political will to break the stranglehold of the municipal unions and special interests that have helped create such an onerous tax structure—one that involves 347 different sources of revenue?
Never has there been a greater rationale for a more balanced legislature. A fiscally responsible majority, especially in the Senate, is desperately needed, but is unlikely to be found in the ranks of an historically free-spending Democratic Party. Malloy might even secretly welcome a Republican Senate majority that would help him clean up our fiscal mess.