Discussion leader: John Schlachtenhaufen
Everybody has an opinion – and someone to blame – but in this discussion we’ll dig deep into the data and look for realistic solutions.
Opening commentary:
CONNECTICUT FISCAL STABILITY AND ECONOMIC GROWTH
Connecticut has been amassing unfunded liabilities for decades and the amount today approaches $100 billion, primarily associated with employee and teacher pensions, and associated other post employment benefits (OPEB). Part of today’s problem is driven by an attempt to more fully fund this exposure.
As we try to understand how we got here, 2 years in recent history have had very significant impact, 1991 and 2008. After a bitter battle, CT enacted an income tax in 1991. The top rate was 4.5%, partially offset by a reduction in sales tax from7.5% to 5%. In 1990, the population was 3.29 million and the general fund expenses were $7.1 Billion.
By 2008, the year the deepest and longest recession in memory began, our population had grown about 7% to 3.5 million, and the State budget had doubled to $14.1 billion. A move to raise the top tax rate to 7.5% from 5% was vetoed and the sales tax was increased slightly to try to balance the budget.
In the last decade, the population remained essentially flat at 3.57 million while the proposed budget for 2020 has grown by nearly 50% to $20.9 billion. In the meantime, CT remains the only State to have lost jobs in that period, and only 10,000 jobs were added last year. In this last(lost) decade our Gross State Product (GSP) has declined 7%, while all surrounding States have seen an increase of from 3 to 7%. Connecticut ranks near bottom in terms of business friendliness. (tax & infrastructure)
The no growth problem is exacerbated by a demographic shift as older, wealthier people who do not tax the infrastructure are replaced by relatively younger, less established people who do. (schools, roads and affordable housing)
The bottom line is that expenses have been growing and are likely to continue to grow faster than revenues, given long term State employee commitments and dismal revenue growth prospects. New revenue sources must be tapped or expenses reduced, or preferably both.
GOVERNOR LAMONT’S 2020-2021 BUDGET PROPOSAL
With decisions made by last year’s legislature, CT faces a $1.5 billion deficit in 2020 and a $2 billion deficit in 2021, (the biennium), and that does not include the $400 million earmarked for transportation infrastructure. Gov. Lamont has submitted a budget that closes these gaps. Key elements of his proposal, which requires legislative approval are the following:
- Keep in place those policy items proposed to sunset this year. That produces just under $1 billion in revenue. Key items include maintaining the hospital surcharge and the concomitant Federal reimbursement it brings for a total of almost $800 million. Also, no reduction in corporate income tax, but phase out of gift tax and increased estate tax threshold plan stays.
- “Modernize” the sales tax to include many services not currently taxed. No tax on medical or grocery bills. 2020 impact is $292 million; 2021 impact is $505 million.
- Combine the State and teacher’s retirement funds, change teacher’s fund growth assumption to match State at 6.9%, and refinance these over 30 years, instead of eliminating unfunded liabilities in 12 years, which was the plan. 2020 impact is$365 million; 2021 impact is $467 million.
- Do not transfer $400 million per year out of general fund to the transportation fund, but finance these years from the current surplus. Develop a new revenue source for transportation via tolls on I-95, I-91, I-87 and the Merritt Parkway. Estimated cost for 50 gantries is $5 million each and 5 years before $1 of revenue. Bond this project to level the expense/revenue flows.
Governor Lamont’s proposed budget closes the gap and provides for balance in both years. He has accomplished this without any meaningful expense cuts and with no increase in tax rates, but choosing to tax new elements through broadening the sales tax and tolling major roads. His proposed budget includes a host of items which have minimal financial impact, but which informed citizens should be aware of, including the following:
1) Forced school regionalization to achieve economies of scale. This has been
modified to “encourage voluntary efforts by schools to seek procurement
savings, etc.”
2) A portion of teacher current new pension costs to be charged to Towns, by
formula. 5% of costs for troubled cities; 25% of costs for most Towns;
higher costs for Towns paying teachers over State median wage.
3) State employee and retiree health care prices to be tied to Medicare by
formula; doctors and hospitals to bear cost.
4) State to implement a “debt diet” to limit new bond authorizations.
5) New container deposit. 10 cents per bag; 25 cents per wine/alcohol bottle.
6) Tobacco & e-cig purchase age 21; tax e-cigs for parity with tobacco.
7) Tax of 1.5 cents on sugar sweetened beverages.
8) Increase CT minimum wage in steps to $15/Hr by 1/1/2023.
Unfortunately, with regard to proposed expenses, Connecticut does not employ zero based budgeting. In the governor’s proposal, all adjustments are shown as changes from the prior year, so it is difficult to know where the money is going. Here is the best I can do. Of the $21.2 Billion total, $19.3B is for the General Fund, up $.3B and $1.7 B is for the special transportation fund, up $.4B. The other largest categories are insurance at $105M and the tribal fund at $50M, unchanged.
Within the General Fund, assuming prior year breakout, 33.3%is for personnel, including fringes; 13.5% is for Medicaid grants; 5.5% for teacher’s retirement; 11.5% for education equalization grants; 3% for magnet /pilot schools; 11% for debt service; and 9% for other current expense and equipment. Examined by function, 28% is for education, museums and libraries; 17% is for human services; 10% for health; 8% for correction; 10% for government services, including judicial, protection, conservation and legislative. A very large 26% is for non-functional use.
CONCLUSION/CHALLENGE
Connecticut would have a temporary budget balance for 2020-2021, without trimming expenses or raising tax rates. Instead, new sales taxes on services and highway/congestion tolls would be imposed. However, in future, expenses would continue to rise faster than revenues in all likelihood with current trajectories.
Assuming most session attendees will have read this summary or are otherwise familiar with the issue, I would propose that discussion focus on creative ways to increase revenues, lower expenses and most of all, ways to encourage economic growth.
Lamont’s Budget Proposal: https://dariendma.org//wp-content/uploads/Gov-Lamont-FY20-FY21-Budget-Presentation-2-20-19.pdf
https://ctmirror.org/2017/01/30/a-legacy-of-debt-connecticut-standing-on-its-own-fiscal-cliff/
https://ctmirror.org/2017/01/31/a-legacy-of-debt-squeeze-on-states-priorities-only-getting-tighter/
https://ctmirror.org/2017/02/03/a-legacy-of-debt-when-fiscal-reality-meets-political-spin/
https://ctmirror.org/2018/11/30/can-efficiency-save-state-government-1-billion-per-year/
The Commission on Fiscal Stability and Economic Growth produced a bleak assessment of Connecticut’s fiscal health for the incoming governor and General Assembly https://ctmirror.org/2018/11/28/second-effort-sound-fiscal-alarm-connecticut/
https://ctmirror.org/2018/12/13/advocates-warn-fiscal-caps-tighten-social-services-local-aid/
https://ctmirror.org/2018/12/04/lamont-taps-hartford-budget-chief-solve-cts-fiscal-crisis/
https://ctmirror.org/2018/12/17/millionaire-suitcase-man-myth/
CT’S LEGACY OF DEBT WAS MALLOY’S ULTIMATE CHALLENGE: https://ctmirror.org/2018/12/26/cts-legacy-debt-malloys-ultimate-challenge/?utm_source=Connecticut+Mirror+Mailing+List&utm_campaign=c751074ff2-DAILY_BRIEFING_AFTERNOON&utm_medium=email&utm_term=0_571d22f8e4-c751074ff2-68155097
Another article about the wealthy leaving. This from the Yankee Institute: http://www.yankeeinstitute.org/2018/12/packed-up-and-ready-to-go-those-who-can-that-is/
Connecticut Commission on Fiscal Stability
Report 1.0
Report 2.0
Click on this URL GROWING JOBS AND CONNECTICUT’S TRANSPORTATION CRISIS to view the following documents:
- THE GEOGRAPHY OF JOBS NYC Metro Region Economic Snapshot
- Overview of the Business Council of Fairfield County
- Special Transportation Fund (STF) 2018-R-0088
- Assessment of Reason Foundation’s National Transportation Reports
Click on this URL NEW CANAAN BRANCH LINE – PROPOSED CTDOT ENHANCEMENTS to view the following documents:
- Connecticut State Rail Plan 2012-2016
- Next Steps on Implementing the proposed CTDOT Enhancements on the New Canaan Branch Line
- New Canaan Study Team Detailed Report on CTDOT Enhancements to the New Canaan Branch Line
Click on this URL HIGHWAY TOLLIING to view the following documents:
- CTDOT Study for Implementing Tolls in Connecticut
- Debunking the Myths about Highway Tolling
- Tolling the Freeway: Congestion Pricing and the Economics of Managing Traffic
- Dynamic Tolls for Congestion Control
Click on the following URL to watch a video of Jim Cameron and Joe McGee talking about how Jobs Growth in Connecticut is linked to significant upgrading of Connecticut’s Transportation Infrastructure: https://vimeo.com/258249483
Connecticut’s Commission on Financial Stability and Economic Growth (FSEG)
Click on this URL CONNECTICUT COMMISSION ON FISCAL RESPONSIBILITY & ECONOMIC GROWTH to view the following documents:
- FSEG Final Report with Appendix March 2018
- Lamont’s Recommended Budget for FY 2020 – FY 2021
- Robert Patricelli’s Observations on Lamont’s Recommended Budget for FY 2020 – FY 2021
- James C. Smith presentation on Stimulating Economic Growth through Private/Public Partnerships
Overview of the Fiscal Stability and Economic Growth (FSEG) Commission
Senate Bill No. 1502 June Special Session, Public Act No. 17-2 Sec.250 established a Commission on Fiscal Stability and Economic Growth which shall develop and recommend policies to achieve state government fiscal stability and promote economic growth and competitiveness within the state. The commission shall study and make recommendations regarding state revenues, tax structures, spending, debt, administrative and organizational actions and related activities, including relevant municipal activities, to (1) achieve consistently balanced and timely budgets that are supportive of the interests of families and businesses and the revitalization of major cities within the state, and (2) materially improve the attractiveness of the state for existing and future businesses and residents.
While the FSEG Commission was disbanded when it submitted their Report on March 1, 2018 it continued to function and on November 28, 2018 a second round of recommendations to curb the state’s multibillion-dollar deficit and jumpstart growth was issued by Patricelli and Smith. They billed the new recommendations as “Report 2.0” at the state Capitol building even though it is no longer operating under the state.
On March 13, 2019 Bob Patricelli and Jim Smith spoke to the Darien Men’s Association about the Connecticut Commission on Fiscal Stability and Economic Growth (FSEG) to the. Bob’s presentation gave his Observations on Governor Lamont’s Budget Proposal and Jim’s presentation gave his ideas on Stimulating Economic Growth through Private/Public Partnership. They also stated that they have been collaborating with Governor Lamont to agree on the best options for addressing Connecticut’s problems.
Click on this URL to view The Presentations of Bob Patricelli and Jim Smith.
Click on this URL BACKGROUND ON THE PENSION CHALLENGES OF CONNECTICUT to view the following documents:
- How Did Connecticut Become a Fiscal “Basket Case”
- SEBAC 2017 Agreement with State of Connecticut
- Stress Testing in Connecticut Shows Reforms Stabilizing State Pension System
- As Pensions Grow, State Struggling to Pay
- Has Connecticut Found A Solution to Underfunded Public Pensions
- Connecticut Pension Sustainability Commission Established
- Connecticut Pension Sustainability Commission Update