Connecting state and local government leaders

More Bad News as Connecticut Grapples With Its Deepening Budget Crisis

The Connecticut State Capitol in Hartford.

The Connecticut State Capitol in Hartford. Shutterstock

 

Connecting state and local government leaders

Revenue shortfalls put the state $5 billion in the hole against a $36 billion biennial spending plan.

BY TIMOTHY B. CLARK

As Connecticut’s political leaders grappled with the state’s unending fiscal crisis this month, an item of local news from New Canaan underlined the Nutmeg State’s struggles to remain a prosperous place.

Jeffrey Immelt, it turns out, has finally found a buyer for his house there, which has six bedrooms, six fireplaces and 11 bathrooms in 11,500 square feet of space on a four-acre lot.

Immelt, of course, is the chairman of General Electric Co., and he made big news last year when he announced that GE would move its headquarters from Hartford to Boston. It was a decision widely viewed as a protest against high-tax, business-unfriendly policies in Connecticut.

Immelt was paying some $65,000 a year in property taxes, listing agent Houlihan Lawrence estimated. He sold his house for a reported $4.7 million, $600,00 below the original asking price. And he has spent $8 million on his new abode, a condominium in Boston’s Back Bay neighborhood.

On May 8, as Connecticut Governor Dannel Malloy was poring over grim budget ledgers, Immelt was breaking ground in Boston for his company’s new headquarters in the Fort Point section of Boston. A futuristic new building, and two renovated brick buildings, will create a $200-million, 390,000-foot campus eventually slated to accommodate 800 workers. He was joined by Massachusetts Governor Charlie Baker and Boston Mayor Marty Walsh at the groundbreaking ceremony.

GE’s deal in Boston was sweetened with $145 million in government grants and tax incentives. The company has announced a $50 million philanthropic fund, half going to Boston Public Schools, and some funding to address the city's opioid crisis.

GE and two major insurance companies had staged a public revolt against the state’s high-tax policies in mid-2015, as Route Fifty reported then, and GE carried through on the threat to leave when Immelt announced in January of last year that the company would be leaving for Boston.

When Route Fifty last visited the Nutmeg State’s budget follies in March, the state appeared to be facing a $3 billion shortfall in its two-year, 2018-19 plan to spend $36 billion. But now, as spring’s daffodils and tulips brighten the New England landscape, the shortfall seems to have blossomed to $5 billion.

Trends we reported on then—including declining revenues from high-income taxpayers—have accelerated. Democratic Gov. Dannel Malloy has announced he won’t run for office again, and former U.S. Comptroller General  David Walker, one of the most vocal critics of the state’s fiscal follies, has announced that he will be a Republican candidate to succeed Malloy. Bond rating agencies, including Fitch and S&P Global, have given negative ratings to the state’s debt. And threatened layoffs more than 4,000 state workers have begun to be processed.

New Bad News

A heaping dose of bad news came at the beginning of May, when state authorities announced a precipitous decline in revenues during the month of April.

Estimates released by the state’s Office of Policy and Management put revenues at $413 million below expectations in the 2017 fiscal year, which ends on June 30. The office predicted shortfalls of $597 million in fiscal 2018 and $865 million in 2019.

The state’s $235 million rainy day fund will put only a minor dent in all that red ink, leaving the state with $5.2 billion in shortages over the remainder of 2017 and the 2018-19 biennium.

“The precipitous drop in revenue we experienced in late April creates major challenges for the state throughout the remainder of this fiscal year and into the next biennial budget we are currently working on,” Office of Policy and Management Secretary Ben Barnes said on May 1. “We need to take immediate action to reduce spending between now and June 30 to reduce our current year deficit as much as possible to prevent the need to borrow to meet expenses.”

Budget analysts said revenue from the state’s top 100 taxpayers was down 45 percent, and attributed much of that to lower receipts from levies on capital gains and investment income. Malloy has said that the top 1 percent pays about 30 percent of state income taxes.

“When you look at the top 75, top 50...this is a group of wealthy people who are dramatically less wealthy than they were before,” said Kevin Sullivan, commissioner of the Connecticut Department of Revenue Services,” told the Associated Press on May 7. “These folks, for a number of reasons, are either not realizing as much income or don’t have as much income.”

Some of the shortfall has come from problems with hedge funds, an important part of the state’s financial sector. Several international hedge funds have recently failed, and that has brought “significant retrenchment” from investors and less personal income subject to tax, Sullivan said.

Republican legislators in Hartford have argued that high taxes are causing wealthy people to move to other states, and Sullivan acknowledged that a “handful” of such cases had contributed to the revenue decline. A conservative nonprofit, the Yankee Institute for Public Policy, on May 2 posted a piece titled “As Connecticut residents flee fiscal mess, some take their jobs with them.”

A longer-range problem is that job creation isn’t producing as much income as in the past. Connecticut’s Commission for Economic Competitiveness last year reported that industries adding jobs in the state were paying an average wage of $54,018 a year, while those cutting back on jobs were paying an average of $75,246.

Connecticut remains a wealthy state, with the highest per capita income in the nation. But its government is reeling from past spending decisions. A new blow came on May 12 when Fitch Ratings Inc. downgraded the state’s bond rating from AA- to A+. That marked the fourth time Connecticut has been downgraded in the past year. Fitch and S&P Global Ratings downgraded the state last May, and Kroll Bond Rating Agency followed suit two months later.

And S&P Global Ratings on May 8 issued a new, lengthy report deploring Connecticut governmental finances. S&P reaffirmed its 'AA-' rating and negative outlook for the state’s general obligation bonds. Its report said that Connecticut and six other states are susceptible to "enough fiscal stress to strain their credit quality even as the broader economy shows signs of gathering momentum."  Other states confronting fiscal crises are Alaska, Illinois, Kansas, Louisiana, New Jersey and Pennsylvania, the ratings agency said.

Remedying the Problem

Malloy on May 10 unveiled a long menu of steps designed to close, if not eliminate, the gap between revenues and expenditures in the year ending June 30. He said he would withhold $19 million in municipal aid, make dozens of cuts in agency budgets and drain the rainy day fund.

The larger problem is with the 2018-19 budget. Malloy has demanded that state employee unions agree to $1.6 billion in concessions over the next two years or face the loss of 4,200 jobs. On April 20, saying the law required it, he gave notice to 1,100 employees who, it appears, will lose their jobs before the end of May.

The past week has been seen the opening of negotiations between factions in the legislature and the governor’s office about what to do. Previously announced proposals for dealing with the gap between revenues and spending ambitions are now $1.5 billion out of date as a consequence of the shortfall in receipts.

The governor has been against more tax increases, after major ones enacted earlier in his term. He has spoken out against ideas for taxing hedge funds, for example, saying he feared killing the golden goose. The Democratic leaders of the House Appropriations Committee included about $700 million in new revenues as part of a plan it unveiled, but the committee hasn’t brought it to a vote. Meantime, the Finance Committee recommended a net tax cut.

A highly controversial element of the Governor’s budget has been a scheme to make cities and towns contribute more than $400 million a year to help the state cover its payments to the teachers’ retirement fund. This line item in the state’s budget is slated to quintuple over the next 15 years to make up for decades of under-funding of the teachers’ retirement plans. It’s not clear whether Malloy’s proposal will weather heavy opposition.

Aside from labor concessions and possible new taxes, the municipal levy is probably the most contentious of many items in various budget plans. But there are many other, smaller items that have engendered plenty of debate.

For example, should Connecticut authorize a third casino, legally questionable because it wouldn’t be on tribal grounds, to protect its market share against encroachment by a new MGM casino that’s set to open next year in Springfield, Massachusetts? The Mashantucket Pequots and Mohegans, operators of Foxwoods Resorts Casino and Mohegan Sun, have proposed to  jointly operate a casino off Interstate 91 in East Windsor, just 20 miles from Springfield.  

This might protect some of the gambling tax revenues Connecticut now enjoys, say tribal leaders. “The state faces serious financial challenges. We can be part of the solution,” Rodney Butler, the Pequots tribal leader, said last week. The legislature has yet to act.

Timothy B. Clark is Editor at Large at Government Executive’s Route Fifty.

NEXT STORY Distribution of Grants Proposed for Elimination by White House Varies Widely