While the CPI's policy research involves proactive research-based recommendations for Connecticut government, the blog is a forum for shorter, reactive analysis and commentary on ongoing developments in Connecticut.
The Labor Day holiday was a time to celebrate American workers. Unfortunately, here in Connecticut workers have not had much to celebrate the last few years. As the chart below shows, Connecticut residents’ quarterly wage and salary earnings have actually dropped by .03% since December 2010. In contrast, wage and salary disbursements grew by 3.56% in New England as a whole and by 4.76% in the United States as a whole.
Meanwhile, Connecticut continues to have one of the worst job recovery rates of any state in the country. As the chart below shows, Connecticut has recovered only 64% of the non-farm jobs lost in the last recession. The United States has regained twice that percentage.
It is no secret that Connecticut’s fiscal condition is one of the worst in the country, but a new report by J.P. Morgan shows just how bad: Connecticut spends 20% of state revenues on debt service and payments into retirement funds for state workers – higher than any other state in the country. The chart below, reproduced from the report, has the details.
In spite of these large payments, Connecticut is not even close to fully funding its long-term debt obligations because those obligations are so large to begin with. As the J.P. Morgan chart below shows, fully funding our debt service and retiree benefit funds would cost just under 40% of the state budget, higher than every other state except Illinois.
Economic growth requires reasonable tax rates and a government that uses tax revenues to invest in the future. Until Connecticut gets its debt service and retiree benefit spending under control, it will have neither reasonable tax rates nor prudent government investment. Instead, we will see more of the same -- tax increases that don't address our underlying fiscal problems, and budgetary gimmicks that kick the can down the road. The legislature’s non-partisan Office of Fiscal Analysis (OFA) recently projected a $2.8 billion budget deficit for the fiscal biennium that begins next year, in spite of the state's $2.6 billion tax increase in 2011.
Several of the CPI’s policy papers include recommendations on how to end reckless borrowing and bring our retiree benefit costs in-line with more affordable standards.
CT Jobs Recovery Continues to Lag Nation
The most recent national jobs report generated attention for the fact that the U.S. non-farm employment has returned to its pre-recession levels. Largely because our high taxes are going towards legacy costs rather than investment in the future, this jobs recovery has passed Connecticut by. As the CPI chart below shows, Connecticut has regained only 55% of the nonfarm jobs lost during the last recession, and our pace of recovery has slowed. In 2011, CT non-farm employment grew by 1.18%, while in 2013 it grew by only 0.21%.
The 2014 CT legislative session ended last week. Here are some of the session's most important policy developments, including what was good, what was bad, and and what was just plain ugly (spoiler alert: it's the budget).
New Early Childhood Education Funding
The legislative session included several expansions to state education funding, most notably new funding for early childhood education. This is a positive development, though the state must do more to ensure that early childhood education funding is spent effectively. For more on how government can most effectively fund early childhood education, see this CPI op-ed in Education Week and this CT Mirror op-ed by Hope Child Development Center Executive Director Georgia Goldburn.
Reforms to Judicial Pension Guidelines
The legislature made a small but positive change to the eligibility rules for judicial pensions, reducing the standard pension (two thirds of salary) by ten percent per year for judges who retire before serving ten years on the bench. The change was inspired by judges confirmed to the bench this year who will receive pensions of around $100,000 per year after working as little as four years. These judges’ pensions, currently the leading vote-getter for the CPI’s 2014 Golden Fleece Award, will not be impacted by the changed eligibility rules as those changes only apply to judges appointed after July 1.
One Step Closer To State-Run Retirement Program For Private Sector Workers
One of the least advisable proposals of the legislative session was an attempt to establish a state-run retirement plan for private sector workers and require any business without a retirement plan to set up direct-deposit and payroll-contribution systems for the state plan. While this proposal did not pass in full, the legislature did pass a bill creating a new state board to design a mandatory state-run retirement plan and submit it to the legislature for final approval by April 2016. See this CPI blog post for more on why this is a bad idea.
Tax Breaks For Select Companies While Overall Business Climate Suffers
Connecticut’s government this session continued its pattern of offering generous tax breaks to select companies, paid for with higher taxes on everyone else.
Specifically, the legislature passed a bill providing UTC $400 million in tax breaks to support $500 million of facilities investments in the state. The tax breaks are tied to capital investment rather than job creation, so UTC could actually reduce the size of its Connecticut workforce and still receive up to 90 percent of the tax breaks.
The problem with incentives like these is that they have to be paid for with higher taxes on everyone else, contributing to the poor business climate in Connecticut that leads companies like UTC to consider leaving in the first place. For instance, $118M of spending in the current budget is paid for by a 20% corporate tax surcharge that the legislature could have repealed. And the legislature failed to act on a proposal to repeal the state’s business entity tax, which raises only $40M per year in revenue yet is a major deterrent to small business creation in the state, forcing companies to pay a fee even if they are not yet turning a profit. For CPI's award-winning analysis on when state incentives for business are a good idea – and when they are not – see this CPI policy paper and op-ed.
The Connecticut government began the legislative session debating what to do about a projected $500M surplus. But when income tax revenue came in at much lower levels than the state had projected (something the CPI warned about in January), the legislature had to resort to more than $180 million in budget gimmicks to keep the budget “balanced” at all. These gimmicks included:
These new questionable budget moves come on top of $625 million of borrowing to cover operating expenses and $400 million of unsustainable, one-off revenues included in the budget when it was first passed last year. Unsurprisingly, the legislature’s Office of Fiscal Analysis projects annual budget deficits of over $1 billion per year going forward.
Governor Malloy’s senior criminal justice advisor, Michael P. Lawlor, testified before the legislature’s judiciary committee on Friday about a new report on state crime trends. His testimony focused on several positive statistics in the report, including a 5-year drop in overall crime rates. Left unspoken was that this reduction did not reflect a drop in violent crime.
The chart below, which is taken directly from the report, shows that violent crime in Connecticut has remained relatively stable over the last ten years in spite of a nationwide decline. The chart also shows that Connecticut’s violent crime rate has actually increased since 2010.
Violent crime rates in Connecticut as a whole remain below the national average. But violent crime in Connecticut’s cities exceeds crime rates in urban areas elsewhere in the country and has remained stubbornly high. For more on urban crime in Connecticut, including recommendations to reduce and prevent crime, see this recently released CPI policy paper.
Connecticut’s unfunded retiree healthcare liabilities grew by $3.3 billion from 2011 to 2013. A new actuarial report released last month valued the 2013 unfunded liabilities at $19.5 billion, while the previous actuarial report, released in April 2013, had valued the 2011 liabilities at $16.2 billion.
The following chart shows the changes in unfunded retiree healthcare liabilities from 2006 to 2013.
In 2011 the state changed its accounting assumptions by raising the interest rate used to discount future payments to retirees from 4% to 5.7%. This made the “present value” of those future payments – i.e., the state’s current liability – appear smaller on paper, but did not change the state’s actual underlying financial stability. When consistent accounting assumptions are applied, Connecticut’s unfunded liability in 2013 was higher than at any point during the prior seven years.
This data reinforces the inaccuracy of the Malloy administration’s assertion that unfunded retiree healthcare liabilities fell by $15 billion during his administration. For more on the problems with that assertion, see this earlier CPI post.