The State of Connecticut ended the 2017 fiscal year on a note of financial doom. As of the end of December, 2017, the state had the most underfunded pension system in the nation with over $127 billion in government-worker pension liabilities and no viable plan to institute needed reforms.
Public-Worker Pensions – The BIG Problem:
Pension woes are not the state’s only problem that threatens the economy, but they are the worst. The problem is huge, made up of the following critical components: pensions for state workers, pensions for public school teachers, healthcare obligations for retired state employees and teachers and debt servicing for bonds taken out for capital projects.
In just one year, Connecticut’s unfunded pension debt went from $99.2 billion to $127.7 billion, a net increase of 22% between 2016 and 2017. At the end of 2017, the massive pension system – made up of government workers, public teachers, and retirees from both groups – was only nineteen percent funded (or rather, 81% unfunded).
Only the state of Alaska has a higher per capita pension debt-per-resident ratio than Connecticut; the debt for CT residents currently stands at $35,721 per person. Comparatively, a resident of Alaska’s share of their unfunded pension debt stands at $45,689 today.
A 2017 study of state pension liabilities by the American Legislative Exchange Council (“ALEC”) found that Connecticut recently fell behind two of the worst states in the nation – Kentucky and Illinois – vis-à-vis financial straits caused primarily by their pension systems. Previously, those two states were at the bottom.
Speaking mainly about issues of underfunding and bad investment strategies, the study’s co-author stated “These figures represent a history of pension fund mismanagement and an ongoing unwillingness to pursue meaningful reform.” (emphasis added) Keep the foregoing quote in mind – we’ll apply its underlying thesis to Connecticut’s so-called “leaders” at a later point in this article.
The percentage-of-funding levels vary widely from state-to-state. Wisconsin has the best-funded pension system in the nation at 61.5% (some 18.5% below the recommended minimum of 80% funding). Connecticut’s present fully-funded ratio figure is 19% (some argue otherwise, saying it’s more like 47% to 49%, but most agree the difference has to do with manipulating discount rates and other financial mumbo jumbo – the fact is, Connecticut is at a very low 19% and suffering because of it). Put another way, Connecticut’s funding is 61% shy of the recommended 80% standard that no state currently meets or exceeds.
In 2016, the Democrat-heavy legislature, at the behest of the Democrat State Governor, Dan Malloy, lowered the discount rate as a part of refinancing the pension debt. Basically, they rolled-over the existing debt that extends payments on existing debt only out to 2046 (30 years hence) instead of crafting a plan to “stanch the flow” and “stop the bleed”. A textbook case of “leaders” “kicking the can down the road”.
The pension problem in Connecticut (and, in all probability, in many other states) is two-fold:
First, there is a massive amount of existing or pre-existing debt that requires servicing on a regular, ongoing basis (the ‘paydown” phase).
Second, there is the present day build up of new debt that results from having state workers and public teachers participating in defined benefit pension plans that also require servicing on a regular, on going basis (the “future obligation” phase).
The first factor – the debt subject to “paydown” – represents a current debt that is a heavy burden upon the state’s revenues, tax structure, credit ratings and the like. The second factor – the debt that obligates the state in the future – represents a future debt burden, all the heavier if the existing debt is not paid down. At present, a significant reduction in such debt seems highly unlikely.
Today, the state’s annual state employee pension fund contribution is $1.5 billion. In four years (2022) that figure is expected to increase to $2.2 billion. The payment to the state teachers’ retirement system is expected to rise as well, and even more drastically – from $2.3 billion in 2017to $6 billion+by 2032, 14-years hence. Connecticut’s pensions are part of the state’s “fixed cost” obligations (pensions, healthcare for retirees and debt servicing) that presently account for fifty percent (50%) of the state’s budget.
This state of financial affairs signals future service cuts, layoffs and tax increases for the people of Connecticut.
In Connecticut, tax increases and service cuts are nothing new. The state’s taxpayers were hit with sizeable tax increases in both 2011 and 2015. Neither increase then was enough to offset the rising costs associated with state pensions, and both had little to zero impact on the financial crises. There is little to make one believe that further tax increases today, and in the future, will be any more successful.
Likewise, the state’s ability to negotiate its way to a solution with unions representing both state workers and teachers in public schools is limited. Lawmakers can take legislative action to change teacher pensions. That, however, in today’s political climate would likely be a foolish and ill-advised move on their part. Teachers in Kentucky, Oklahoma, and West Virginia have shown a willingness recently to “take it to the streets” and strike to protect their pension benefits. There’s no reason to believe that teachers in Connecticut would act any differently were the state’s lawmakers to attempt “pension reform” on their backs.
Public worker pensions are a different story. Those are set through a system of collective bargaining that has a long history in the state. The existing pension contract between the state and the State Employee Bargaining Agent Coalition (“SEBAC”) dates back to 1997. Set to expire in 2017, it was extended until 2027 through a union “concession” that the state’sgovernor made with the bargaining coalition. That deal means that state lawmakers are nearly impotent to make significant reforms to that pension system in the interim.
It is interesting to note here that Connecticut is one of only four states in the nation that set pension and related retirement benefits via collective bargaining rather than by statute. It is even more odd that Connecticut treats state teacher retirement benefits differently by setting them by statute rather than collective bargaining. The different methods for the state are historical and make little sense.
While some states – notably Michigan and Pennsylvania to name two – have recently taken steps to reform their systems, Connecticut is unable to do so because of the collective bargaining method that ties their hands – essentially, the state is stuck with costly and inefficient defined benefit plans long into the foreseeable future. Some states have managed to make recent reforms that have allowed them to structure new defined contribution (or, in some cases, hybrid defined benefit plans) for new hires and for teachers.
As with many other states and municipalities, Connecticut is burdened with a legacy of its adoption of Defined Benefit pension plans for government workers and teachers several decades ago. Today, such plans are highly eschewed as overly generous and costly to administer. A Defined Contribution plan is much preferred for several reasons, chief among them the fact that such plans do not require the governments to contribute up front or, in most cases, at all.The following comparison of the two plan types and their respective characteristics is illustrative:
Defined Benefit Plans:
- Primarily funded by employer contributions during employment per formulae and plan requirements
- Guarantee of specified payments after retirement (based upon retirees’ salary during employment, years of service, age at retirement, etc.)
- Creates future liabilities for the employer for current employees (who, in many cases take lower pay and reduced benefits now in exchange for post-retirement compensation in the future)
- Employer bears the investment risk of ensuring funds committed in the present will be sufficient to cover future retirement costs
- High cost of plan administration because investment risks require complex actuarial projections and calculations, and insurance
Defined Contribution Plans:
- Contributions to dedicated accounts (401K, IRA, etc.) are by employees (not the employer in most cases) for withdrawal post-retirement
- Accounts considered to be “fully funded” because post-retirement benefits equal the total value of the account (i.e. total contributions plus earned returns on the funds)
- Deposits made during employment via direct pre-tax payroll deductions from gross pay
- Employer has no continuing obligation regarding a fund’s performance once contributions are made – employee bears burden of maintaining the account and directing investments so that assets are sufficient for retirement
- Low cost of plan administration
At the end of the day, Connecticut’s pension crisis is similar to those in many other states. The ALEC study noted above found that the total liability for 280 state-administered pension plans nationwide covered by the study currently exceeds $6 trillion (and climbing). As ominous as that figure is, even more ominous is the “and climbing” note that all state-administered plans are also dealing with.
The fact that Connecticut is saddled mainly with onerous Defined Benefit plans is just one additional factor that ties the state’s hands and keeps it from enacting meaningful pension reform, try as the state’s leaders might.
At one point not long ago, Connecticut was the wealthiest state in the nation. Not any longer. For over eighty years, the state was a leader amongst states in income, wealth, and commerce. Today, by the measure of median household income Connecticut stands in 5th place amongst the 10 wealthiest states according to that measure.
Those ten – from bottom to top – are:
|State||Median Household Income|
|7. New Hampshire||$70,303.00|
|4. New Jersey||$72,222.00|
A little over a year ago, the Connecticut Mirror newspaper opined that “Connecticut is standing on its own fiscal cliff” as the state then, in the words of Mirror staff writer Keith Phaneuf “stood on the cusp of an unprecedented fiscal crisis”. Basically, Phaneuf was alluding to the “too little, too late” nature of the state’s Governor (and legislature) to deal forthrightly with the state’s deficits.
In February, 2017, Governor Malloy was going to attempt to close the gap in the pension deficit by allotting just $3 billion over a two-year period for such purpose. Keeping in mind that such unfunded debt is and has been growing annually, paying it down at the effective rate of $1.5 billion a year would take eighty-five years to reduce it to zero – again, without the added-on debt that accumulates annually.
No wonder, then, that the Mirror staff writer went on to say, “Simply, the bill is coming due in ever-increasing amounts for the 80-year failure… to adequately save for retirement benefits promised to teachers and state employees… Hobbled by debt 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”.
Politics At “Play”:
The state of Connecticut has a long history of democrat party control. Nationally, the state is considered to be a “deep blue” state. Its Governor is a democrat. Its entire congressional delegation to Washington, DC is entirely democrat, including its two United States Senators. In national elections, Connecticut has not voted for the Republican presidential candidate in nearly thirty years.
This has been the case for years and was expected to prevail into the future. But, the state’s republican party has been working hard – given the state’s financial peril and the impotency of the democrats – to change that in recent years.
Most recently, the state G.O.P. has made significant gains in the state legislature in an attempt to gain majority control in that one body in order to “remake” the state’s fiscal model into a more conservative one. Tracing the states financial straits to the 1991 adoption of an income tax, the state-level G.O.P. points to four tax increases in the last decade or so as a strong indication that the democrats have but one “solution” to the problems – raise taxes. Connecticut has a present marginal income tax rate at the highest level of 6.99% (nearly two points greater than neighboring Massachusetts).
A marginal tax rate is the amount of tax paid on an additional dollar of income. The marginal tax rate for individuals increases as their income rises. The purpose of marginal tax rates is to fairly tax people based upon earned income, with low-income earners being taxed at a lower rate and higher-income earners paying a higher “marginal” rate.
By another measure – the cost of living index – Connecticut ranks as #7 on a list of the most expensive states in the nation. In order on that list, from top-to-bottom- those states are:
|State Cost of Living||Index|
In Connecticut, the adoption of an income tax in 1991 was projected to raise in the neighborhood of $126 billion over the ensuing 25 years. That should have been sufficient to keep the state in the black and not on a precarious financial footing. The problem, however, turned out to be state-worker and teacher pensions, and legislators’ failure to adequately account for and service those benefits over the past two decades. Connecticut…? California? – pre-med… pre-law, same thing!
As it turns out, Connecticut’s financial crisis is somethingthat is also bad for business. In early 2016, the state’s largest private employer and economic powerhouse, General Electric, decided to move its corporate headquarters from Fairfield to Boston. Another big player in the state – Aetna – is also on the brink of moving out of the state. The state’s population has seen a net-loss of residents for the past three years running. On top of that, in four of the last six years, the state’s economy has been ranked among the five slowest-growing economies in the nation.
Governor Malloy – seen as a “progressive democrat” – is hard-pressed to deal with the state’s financial crisis. With a democrat-controlled legislature, he passed a law in 2017 to “restructure” Connecticut’s pension debt. It was a move that backfired. Instead of reducing pension debt in the long-term, the bill actually adds an additional $14 billion to the present total after the year 2033. Instead of dealing with the pension underfunding debacle in a positive manner, the Governor actually compounded the problem by legislating additional underfunding into the future.
In the state’s 2018 budget there were no new tax increases which came as a great relief to residents, business leaders and legislators There are, however, fairly heavy cuts in state aid to most cities and towns. This has been compounded negatively by the Governor’s proposal that all cities and towns should take over 1/3 of the current state expense for teacher pensions; not a “tax increase” but, rather a state burden passed down to the cities and towns across the state. A “tax increase by any other name…” is still a burden on already strapped municipalities.
Already, the machinations of the Governor are taking a visible political toll in this traditionally “blue state”. At one time, the Democrats held a 77-seat advantage in the lower house of the state’s general assembly. Between 2009 and the present that advantage has been reduced to 7 seats. In 2016, the state Senate count was an even number of seats for both parties after years of solid democrat majorities, with the G.O.P. poised to gain a majority in the senate during the next election cycle if things don’t change. Across the nation, the G.O.P. in 25-states holds control of the governorship and both houses of the legislature (the so-called “trifecta” of state political control). The outstanding question among pundits and analysts is – will Connecticut be the 26th state with total Republican control after the next mid-term election?
Earlier this month (April, 2018) a private equity firm based in Chicago floated an offer of $2 billion to purchase state and some city-owned (Hartford, CT) real estate – public office buildings, state-owned healthcare facilities, and transit-oriented properties. Some may see the sale of public properties as a foolish, shortsighted move; others see it as a way to raise much needed revenue. Whatever the outcome, the revenue generation will have been for naught should the state’s leaders not use the money to pay down debt.
The firm’s offer is contingent upon it receiving an annual return on investment of 7.25% (from leasing back purchased properties to the sellers), a figure that has raised concern in the state capitol. The state pays a yield of just 3.43% on 20-year general obligation bonds sold as recently as January of this year. The figure demanded by the prospective purchasers is nearly twice that percentage figure, something that may be sufficient to sink any putative deal. As one pundit put it after learning the scant details of the offer, “… buying in at 7.25%, the buyer is getting a better initial yield than the market on average…terms of the deal as it is proposed may favor the buyer…”.
Why Not Declare Bankruptcy…?
Last week, an irate caller to a conservative Hartford-based radio program said on air, “why the hell don’t we just impeach the governor?Let the state file for bankruptcy like ordinary people do when they are in over their heads in debt… God only, knows our state is way in over its head…”.
Sounds like a plan – but – there’s just one currently insurmountable problem. A state cannot,at present, file a petition for Chapter 9 bankruptcy because a state is not a “municipality” as defined by the bankruptcy code.
Chapter 9 of Title 11 U.S.C. is one of the more obscure and lesser known types of bankruptcy. Chapter 9 applies specifically to “municipalities”. The U.S. Bankruptcy Code narrowly defines a municipality as”…a political subdivision or public agency or instrumentality of a state.”
In context, “municipality” for Chapter 9 bankruptcy purposes includes: cities & towns; counties; taxing or special assessment districts; municipal utilities; school districts; and pension & retirement authorities. A municipality for Chapter 9 bankruptcy may also include a subdivision of one of the forgoing. The bankruptcy code as presently enacted and enforced does not further define the categories of “political subdivision”, “public agency”, or “instrumentality”.
The short-term prospects that the current Congress will change the bankruptcy code to allow a state to file for Chapter 9 relief are pretty much slim to none. Several states, including Illinois, have been poised to seek a change in the bankruptcy laws to allow for Chapter 9 proceedings on their level – none have taken that step as yet. With all such states, the primary driving impetusto seek such a change is their financial crises driven almost entirely by heavy and skyrocketing pension debt that has proven to be unmanageable and out of control.
The question remains: what’s the state going to do to relieve the financial pressures and stem the veritable race to insolvency?
Connecticut has the country’s highest per capita income and the second-highest rate of income-inequality. For decades, the state government has been “living large” like many of their wealthy residents. Over the years, that same government has been avoiding the responsibilities of good governance such as paying for ongoing infrastructure maintenance, keeping up with obligations to fully fund pension accounts and other retirement benefits, and the like. Today, those unpaid bills are coming due, and the revenue isn’t available by which to pay them.
A Tale of Four Cities:
In large measure, cities in Connecticut are at the root of the state’s fiscal mess, but their core problems are not necessarily of their own making. For one thing, the state’s budgets in recent years have been throwing more of the burden on urban centers in order to “protect suburban towns and areas with historically poorer populations…” as one aide to the Governor recently stated. Moves like shifting a substantial portion of the state’s obligation for teacher pensions and cutting state aid to cities are moves that signal sharp increases in local property tax rates. Not good for cities.
Governor Malloy has espoused a utopian “redistribution policy” that would call on wealthy households to fund safety-net programs for low-income residents AND have more affluent cities and towns send a portion of their general-treasury funds to less-wealthy, needier urban areas. As one pundit recently said,
“His urbanist vision is deeply flawed. Small-town Connecticut’s quality of life – the
high-performing schools, the classic housing stock, the opportunities for authentic
local self-government – stacks up with that offered by any other American jurisdiction.
Up to a point, it’s worth the price of tax bills that are higher than in most other states…
The erosion of Connecticut’s suburban tax base is a direr prospect than the continued
weakness of its cities.”
Point well-made, if not universally well-taken.
The following list – according to a recent study by the Yankee Institute policy and research organization – illustrates a large part of the problem that four of Connecticut’s cities are facing:
- The state’s four major poor cities owe about $4.8 billion in pension debt;
costs associated with servicing that debt are rising faster than revenues
- The same four cities spend heavily on retiree healthcare benefits (something
that has been all-but-eliminated in the private sector); the annual expense is
$120 million (and rising), while the unfunded liability is in excess of $2.7 billion
- All four have both reduced their reserve accounts and increased bonded debt
over the last 10 years
- The poverty rate in the four cities in question is well-above the national poverty
rate, despite the state being one of the nation’s wealthiest
In addition to those factors cited by the study, along with their high retirement benefit costs the four noted cities have restricted financial and fiscal flexibility due to: the employment of fewer workers today than in the past, rising mill rates that are among the highest in the state and weakened economies that reflect the national situation which limits the ability to absorb tax increases imposed by the state.
In short, the current situation in Connecticut makes it nigh on impossible for such cities to “grow their way out of their fiscal situations”.
Connecticut’s four major poor cities are Hartford, Waterbury, New Haven and Bridgeport. All four are officially considered “distressed” by the state government. Even in a state as wealthy as Connecticut, municipal insolvency has been an ongoing concern for at least the past thirty or so years.
As far back as 1988, the City of Bridgeport faced a $51 million one-year budget deficit. At the time, the state government authorized the city to sell $60 million in “deficit financing bonds” while guaranteeing a significant portion of that new debt. In return for that assistance, the state mandated a new Bridgeport Financial Review Board, a majority of whose members were appointed by the state. Three years later, that particular crisis was still fully abloom.
The state’s governor at the time, Lowell Weicker, pushed to raise taxes; the then-mayor of Bridgeport wanted to gain access to what remained of the $60 million in bond proceeds. An impasse ensued. The mayor then petitioned to file for Chapter 9 bankruptcy, a move that was vigorously resisted at the state level. The outcome was that Bridgeport’s Chapter 9 petition was denied on the grounds that it was not then technically insolvent (municipal insolvency is one of four requirements that must be met in order for a city to become a municipal debtor under bankruptcy law).
In the end, Bridgeport lost it’s fight to declare bankruptcy, but, in the long run it “won” the situation. In the ensuing years, reforms were instituted that led to a more efficient governmental operation with efficiency in such operations being the hallmark. Additionally, the number of departments reporting directly to the mayor were reduced from thirty-four to seven. The Financial Review Board was dissolved in 1995.
Waterbury also had its own “fiscal trial by fire” in the early 1990’s. The situation got so bad that it sought special state legislation to allow the city to issue deficit financing bonds, much like Bridgeport did several years previously. To no real avail. In December, 2001, Waterbury couldn’t meet that month’s (and future months’) payroll. They were forced to take on short-term bond debt in order to meet payroll. As a consequence, their bond rating was downgraded to “junk bond” status.
The toll imposed on Waterbury at the time was a heavy one. First, the state imposed an oversight body in exchange for arranging for a $40 million cash bailout and guaranteeing an additional $100 million in debt-financing bonds. The Waterbury Financial Planning and Assistance Board was given broad authority over the city’s finances – it could reject new budgets and union contracts, with the added power to hold sway over existing contracts.
Eventually, that crisis in Waterbury’s finances passed but not without additional pain. Within months after its establishment, the Waterbury financial board successfully obtained a thirty percent tax i
ncrease (that raised the city’s millage rate from 74.6 to a staggering 97.7). Today, both Waterbury and Bridgeport (as well as New Haven) are “out of the woods” but not “out in the clear”. At this juncture, none of the three would meet municipality bankruptcy eligibility requirements.
Hartford on the Brink of Bankruptcy:
The City of Hartford is another story entirely.
Hartford is the one Connecticut city that probably meets all four bankruptcy code requirements for a Chapter 9 filing.A Chapter 9 municipality must meet four (4) threshold requirements to be eligible to file for Chapter 9 bankruptcy – a municipality must be:
- Specifically authorized to file for Chapter 9 under state law
- Desirous of adjusting its debts
- Sanctioned to file by a majority agreement of a certain type of creditor or creditors
Hartford has been the subject of much speculation over the past two years as to whether or not it will become the latest major city to file for Chapter 9 reorganization. As of this writing it hasn’t filed; as of this writing, the situation in Hartford is still dire and Hartford may be the next major city to take the plunge into Chapter 9 bankruptcy.
In fiscal year 2017, Hartford’s budget deficit stood at $48.5 million. For the current fiscal year – 2018 – the projected deficit is $20 million, and for FY 2019, it is projected to be $50 million. Those represent “hits” on the budget that the budget can scarcely afford. And again, pensions are essentially at the heart of the matter.
A September, 2017, report out of Hartford, CT titled, “Hartford pension recipients are right to be worried about potential bankruptcy” led with “The I-Team spoke with a pair of retirees from Detroit who’ve been through it (i.e. bankruptcy) and they said people relying on a Hartford city pension are right to be worried.” As of this writing, Hartford has not filed for Chapter 9 bankruptcy protection – yet.
In that same month, rumors about a possible (probable?) bankruptcy filing loomed large in Hartford and throughout the state. At the time, Hartford’s Mayor, Luke Bronin, backed by the City’s Treasurer and the president of the City’s Court of Common Council, said that the City would likely file for bankruptcy if “…the state fails to pass a budget or doesn’t provide additional state funding.” Connecticut was then carrying a $3.5 billion budget deficit and there were no signs that the gap could be easily closed.
The Yankee Institute study noted earlier in this article spoke to the issue of a possible bankruptcy filing by Hartford, stating:
“Municipal bankruptcy can have advantages, most notably debt reduction.
Hartford would be much better positioned if it had more room I its budget
to invest in its future. In (FY 2017) Hartford is devoting over $70 million in
general fund spending to pensions…” (expected to increase by at least
$20 million in FY 2018) “…but it could be reduced substantially via
Bankruptcy. It would also gain leverage to restructure collective bargaining
contracts, which determines how and how much the city spends on salaries
and benefits for current workers, the largest expense of the budget”.
It’s inescapable that since late 2016, the U.S. economy has rebounded from the last recession and we are in the middle of an economic expansion that had persisted for the past ninety months. That is a post-WW II record. It is also inevitable that boom times lead to down times, and Hartford and other major Connecticut cities are ill-prepared to meet the challenges of the next downturn. That is true at both the state and local levels.
Locally, cities and towns should be focused on fostering steady and sustained growth – the focus should be on healthy, vibrant and meaningful city budgets. The times call for “budget stabilization” more than anything else, and that will require curbing and controlling present trends on spending for government employee benefits – pensions and retiree benefits included.
The leaders at the state level and in cities like Hartford must realize the dire straits their jurisdictions are in. The federal government is unlikely, at this juncture and under the current administration to offer a financial “life ring” to either Connecticut or Hartford. It will be up to future legislatures and a new governor (Dan Malloy has already announced that he will not seek a third term) to chart the course to recovery. In Hartford, that will be all the more difficult to accomplish given their shrinking tax base and resultant shrinking “own source” revenue for things besides pension and related debt.
For example, Hartford has approximately $8 billion on its property tax rolls – over 50% of that figure is tax-exempted properties. Second, the state does not allow for either local sales taxes or income taxes, something that puts a further crimp on Hartford’s ability to maneuver financially. Third, promises of certain funding levels from the state are often not honored. In the last fiscal year (2017), Hartford was slated to receive $89.5 million in pass-down state revenue – the amount actually received was $37.2 million, a shortage on the “promise” of $52.3 million.
An already financially strapped city like Hartford cannot meet its obligations when faced with such huge funding gaps, false promises and “hope”.
Hartford also struggles constantly with pension issues that plague many other municipalities. In Connecticut, as in just three other states, public employee pensions are governed primarily through collective bargaining between municipalities and worker advocacy groups such as unions. In nearly all other states, the state’s legislature plays a significant role and holds one distinct advantage – pension rights, benefits, and the like can be changed by laws enacted by the state legislature. In Hartford, the Mayor and Court of Common Council hold the power over employee pensions.
Like the city of Detroit, a municipality that filed for and exited bankruptcy not that long ago and that was heavily burdened with Defined Benefit retirement plans, Hartford offers its municipal employees a plan that burdens the city’s coffers greatly – the 2017 contribution was $41 million and the 2018 contribution is projected to be $3 million greater ($44 million). The current pension plan is, according to the Hartford mayor’s office, “one of the largest strains on the municipal budget”.
As recently as June, 2017, Hartford’s Mayor was considering a change in the type of retirement plan it would offer to city employees. The proposed plan is a based upon the Defined Contribution plan- model where participants would voluntarily invest a minimum of 3 percent of their gross salaries in exchange for the city matching any employee contributions up to a maximum of seven percent. The plan would affect new hires only; those under the current plan would be ineligible. Vesting in the plan – on combined employee and city contributions – would be after the fifth year of employment. The newly proposed plan would cover only non-union employees who make up just 10% of the city’s current workforce.
Response to the mayor’s proposal was tepid in the days following its preview. One councilman held firm to his criticisms – “I’ve said before, employees who do this are taking a risk of outcomes without any defined benefit, ultimately, without a traditional pension. Many people prefer a traditional pension because it is predictable, not subject to fund managers who want to gamble with investments.” A big question seems to center on how the city’s pension commission would, with reasonable safety, invest the Defined Contribution plan contributions.
Hartford, at this date, continues to struggle with financial uncertainty, mostly based on short-handed revenue projections, tight financial support from the state, and ever-increasing pension costs that, until now, the city’s leaders have been unable to adjust or change to a less onerous alternative. Hartford has narrowly avoided filing for Chapter 9 protection over the last year – and – it is still not out of the woods today.
Connecticut Was Warned:
Back in 1999, when the nation was on the cusp of the 21st Century, a prescient report set forth three reasons why Connecticut’s financial situation was rife with weakness: an aging transportation network, the lack of a single viable metropolitan center or strategy, and a fragmented political structure. Today, those weaknesses still exist. In the interim, they’ve been compounded by the state’s inability to use its wealth to get a grip on out-of-control pension and related obligations.
Back then, Connecticut was still viewed as being prosperous and a leader nationwide in economic growth and security. So much so, that in 1999, the state issued income tax rebate checks to its residents – $50 for individuals and $100 for couples. The total cost of the tax rebates was in excess of $100 million. In hindsight, most Connecticut residents wonder why the $100 million+ was not applied to the state’s huge (and ever-growing) pension debt.
The state’s income tax, when instituted in 1991 was not intended to be the state’s primary source of income. Today, the income tax is the state’s single largest revenue source. Being a “progressive tax”, the income tax generates much of its revenue from the wealthy and top wage earners. The state’s income tax has caused many wealthy people – including a large number of hedge fund managers and executives – to change their residency (and move their funds) to Florida, a state without an income tax.
During the FY 2018 budget talks last year, Governor Malloy worked hard to reach compromises that would help with the state’s financial woes. First, he proposed fairly massive spending cuts across the board. Second, he cut a deal with public employee unions to restructure the state’s public employee pension plan and other retirement-related obligations. In the deal, workers will bear a greater cost for their pensions and healthcare benefits. It also freezes state-worker wages for three years, at least to the year 2021. Finally, future state-worker hires will be offered less generous pension plans.
The projected savings from Malloy’s “budge deal” are significant – $1.5 billion over the current two-year budget cycle, and $24 billion through 2038. State-employee union representatives decry the “deal”, saying “State employees are basically saying ‘one full year of the budget, $24 billion, that’s on us’…”. Given the nature and extent of the “deal” as well as the seemingly insurmountable financial problems in the state, they are probably right in what they say.
Connecticut: Highest Average Income and on the Verge of Bankruptcy:
“The state with the nation’s highest average income grapples with a huge debt problem even as young people and big employers – Including Aetna – head for the exits”. So, said that lead to an article posted on thedailybeast.com website in mid-July of last year.
The nexus of Connecticut’s financial woes – like with many other states – centers on ballooning payments for public employee pensions and healthcare benefits, as well as underfunding that has continued unabated for years. Compounding those problems are the following additional causes:
- Jobs that were lost during the 2008 – ’09 recession have not returned
- Major employers – Aetna and General Electric – decamping to loci outside the state
- Younger residents – the future “tax base” of the state – leaving in droves
- Lawmakers who don’t seem to have a clue as to how to remedy the situation
- Four major Connecticut cities in worse financial trouble than the state (with little recourse, other than raising property taxes to deal with their mountain of problems)
But, it all goes back to pensions and how funding them has been mis-handled year-after-year for the past three or four decades. According to the state’s Office of Fiscal Analysis, the state’s debt obligations increased from twelve percent (12%) in 1997 to thirty-one percent (31%) in the current fiscal year. The situation is worse for cities like Hartford, New Haven, Waterbury and Bridgeport.
On the revenue side, tax revenues have risen by only about four percent (4%) per year since the end of 2009. Income tax revenues declined from $9.2 billion in 2016 to $9 billion in 2017 – not a big decline but a portent of things to come. State budget analysts have said that the state will collect about $1.46 billion less in income tax revenues over the next two years. Finally, for fiscal year 2018 the state proposed and is attempting to initiate about $700 million in cuts to state aid to cities and towns.
The tale of Connecticut’s “collapse” over the past decade or so is really the story of those four major cities and how the situation at the state level impacts their ability to deal with precarious finances. While the state has a lower-than-average credit rating of Aa3, the ratings of the cities in question are at the “junk bond” lever of Caa3. Their reliance on state aid has made them unusually vulnerable to the budget challenges faced at the state level. Statewide, the average municipality gets 22% of its revenue from the state. With Bridgeport, Hartford and New Haven, that figure is, on average, 47%.
The “jury is still out” as far as the future of Connecticut and its declining cities are concerned. The odds of Hartford filing for Chapter 9 bankruptcy protection or Connecticut seeking the right to do so in the near-term are probably less than 50/50. With state and local leaders coming up empty with viable and workable solutions, something out of the ordinary will soon have to occur lest the state and many of its cities collapse further into economic uncertainty and/or total insolvency.
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