Editorial: Is There A Way Out?

editorial-way-out

This editorial originally appeared in the October issue of Greenwich magazine.

Is there anyone out there not aware that this state of ours, that we all love so well, faces unsurmountable fiscal problems? While Connecticut is ranked No. 1 in per capita income, it has the dubious distinction of having the highest debt per capita in the country, amounting to $5,491 for every man, woman and child. Simply put, the state has been spending more than it takes in, and because it has not adequately funded its retiree pension and health programs for years, it is now faced with unfunded liabilities totaling $23 billion, or 48 percent of the total debt. Declining revenues, increasing fixed costs of debt service and the political barrier to increase taxes on the heels of the two largest increases in the state’s history present a dim and challenging picture of Connecticut government’s ability to right the ship.

Is there anyone out there who has a feasible recovery plan? Well, maybe. But first let’s take a brief look at the mess we are in and some obstacles in the path to a solution.

The taproot of our fiscal dilemma is  the outsized employee pension and health care benefits forged by muscular municipal unions and compliant state legislatures that have too often caved to their demands over the years. The fact is, the state has not rejected a union contract since 1997. As a result, the average state employee pension at $39,172 is the highest in the country. There were 657 retired employees who received pensions of more than $100,000, and the top ten pensioners in 2013 averaged $230,000.

A recent study by the Yankee Institute compared total compensation for state employees with those of private sector employees. It revealed that when pension and health benefits were included, total average compensation for state employees was 25 to 40 percent above the average for private sector employees in the same jobs. This glaring, unfair imbalance between private and public compensation can no longer be ignored.

A major source of this difference is the fact that our municipal union pensions are “Defined Benefit” plans, totally funded by the state and with guaranteed benefits. It is the most costly type of pension plan available. The standard plan for most private sector companies is the “Defined Contribution,” typified by the familiar 401(k) plan that is generally funded jointly by employee and employer. An increasing number of states and municipalities have adopted these as well. While benefits of defined contribution plans are subject to market fluctuations, they are more flexible and less costly to the employer. And while the state has a statutory obligation to provide the “defined pension” amounts to retirees, what if the state has no money to pay it? The state cannot declare bankruptcy, yet there is no precedent to date for how a state in virtual bankruptcy can be resolved.

In 1991 Governor Lowell Weicker, facing a financial crisis, put through the first state income tax. As a quid pro quo and because the legislature feared this new flow of money into the state coffers would encourage run-away spending, a cap was created that limited spending by a formula based on what was spent the previous year. The legislators were prescient about the need to try to control a spendthrift administration. As it has turned out, whenever there was a budget shortfall, the legislators simply manipulated the formula to increase the cap to cover the deficit, a legally questionable act at best. This has even been done at times without the required vote of approval from the legislature with questionable legality.

While the spending cap was never effectively implemented, there is another cap— a statutory limit on debt that stands in the way of covering our budget deficits. Last year Malloy warned that the state was fast approaching it and would soon be unable to float more bonds.

Some of us had high hopes that a Democrat Governor presiding over a Democrat controlled House and Senate could flex his muscles and renegotiate our labor contracts with the unions, especially those that impose the most onerous financial burden.

Maybe it’s unrealistic to expect a governor to take a hard-edged negotiating position seated across the table from the same people whose vote he wants. However, Governor Scott Walker of Wisconsin did just that. He went head-to-head with the unions over the labor contracts and won a recall vote.

Perhaps Connecticut is different. There are 40,000 municipal employees in Connecticut. When family members, friends and relatives are included, they can represent a significant voting block. It’s doubtful whether Malloy would have been elected originally and won reelection without union support. Still, the long term good of the state would have been better served if he had taken a stronger stand with the unions. Instead, he gave them 90 percent of what they asked for, including guarantees of no change in contract terms through 2020.

It has become obvious that the costs of employee benefits and the mounting cost of servicing our debt are unsustainable. In the 2017-2018 fiscal year Connecticut is faced with projected deficits of $1.3 billion and $1.5 billion the following year. Meanwhile, the cost of bonded debt service keeps increasing. In 2017 it will cost the state $2.2 billion, or 12 percent of general fund expenditures, squeezing out money essential for local projects and needs. An increase in bonded debt is not an option.

In truth, the state has few options. Governor Malloy’s budget contained no new taxes as promised—not surprising since his last two budgets contained the largest tax increases in state history and did nothing to reduce those looming billion-plus dollar deficits in the next two years. If anything, the tax increases were counterproductive. According to the Yankee Institute, between 2011 and 2014 the state had an out-migration of 44,000 and took with them $5 billion in taxable income. This net out-migration has continued unabated. The state’s lack of fiscal discipline and integrity, perceived lack of economic opportunity and concern over still higher taxes and living costs to come have led to a massive exodus of the young seeking lands of greater opportunity, while older residents want to preserve their wealth and avoid Connecticut’s inheritance tax—a tax that is driving wealth out of state while contributing relatively little revenue to the state.

Included in the exodus are companies large and small citing high business taxes and the heavy and costly regulatory burden. Small wonder that business journals have judged Connecticut the country’s least business friendly state.

What can be done to turn us around and put us on the road to fiscal health and prosperity?

Raising individual and business taxes further is not politically feasible and is counter-productive, as noted. The loss of tax advantages over neighboring states discourages new industries from moving here. And we are maxed out on increasing our bonded debt.

What’s left is reduced spending. This is the route taken by the Malloy administration in the current budget, and probably in succeeding budgets as well. The effect on local enterprises and town services is already being felt, and it promises to be more painful as the state desperately tries to close the gap between projected revenues and expenses.

One of the first organizations to feel the axe was Kids in Crisis, a well-run operation serving a critical need. The entire supporting grant from the state, representing a third of its budget, was cut, and we fear there will be additional reductions in support of social services.

Fundamental areas of town responsibility are also being effected. We were recently informed that the state’s contribution to the Educational Cost Sharing fund would be cut by $2.7 million, leaving a hole to be covered by local property taxes. In addition to this loss of state revenue, it should be noted that the Malloy budget did not mention relief from the many financially burdensome mandates the state has levied on our towns.

Some creative minds have been working overtime on ways to restructure the debt. One of the most financially knowledgeable members of the legislature is Senator Scott Frantz, Deputy Republican Minority Leader and ranking member of the Finance and Commerce Committees. Now in his fourth term, he has fought valiantly for fiscal sanity and discipline in Hartford for many years. Faced with the Democratic majority in the legislature, it has been an uphill battle, especially to convince die-hard union supporters across the aisle that reform of our labor contracts and restructuring of the way our government operates is not only necessary but will be forced upon us by a fiscal crisis that is just around the corner. His warnings have mostly fallen on deaf ears.

Two experts in municipal finance, Andy Duus and Nancy Cooper, have developed a very creative and potentially workable plan for rescuing the state. While requiring more detail than can be included here, it essentially offers a way the state can get out from under its enormous unfunded pension liability. Employees would be asked to exchange their current Defined Benefit plan for a Defined Contribution plan. Closing out their current Defined Benefit plans would create a cash settlement that would become an incentive for pension holders to accept a trade. The cash could be used to replace their present plan with a Defined Contribution (401k) Plan and a major liability would have been removed from the state’s balance sheet.

Of course, there is no guarantee that the employees will accept the offer, and there is the rub. However, the key to most any rescue plan will depend on the exchange of the current plan for a 401(k) or other Defined Contribution type. What will it take? Duus and Cooper agree with Senator Frantz that it will take a fiscal crisis when the state is out of money with no place to go, and that looms close on the horizon.

While, governor Malloy’s budget contains no new taxes, he is applying patches to the problem by transferring state support of local services and programs to our towns and the financial burden to local property tax payers. Fairfield County will of course continue to be where upstate Democrats look for the golden eggs.

Most people will argue that one party rule as we have in Connecticut is unhealthy, especially when it’s in place for any length of time. It may not be the root of all our problems, but the fact is that both Governor Malloy and the state legislature have an abominably low approval rating of only 24 percent. A fresh approach through a viable and effective opposition party is long overdue.

Regardless of whom we vote for in the national arena, we believe it is time that we vote to end the Democratic monopoly on policy making in our state and allow a Republican voice to be heard in Hartford. We have a lot at stake in the forthcoming elections. We must find a way out of our fiscal dilemma with fresh ideas and achieving a better party balance in our state legislature.

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