Blog: Taxes & Government Spending

Jobs & the Economy, Taxes & Government Spending

CT Debt Service & Retiree Benefit Spending is Highest in Nation

  • Jun 10, 2014
  • by Ben Zimmer
CT Debt Service & Retiree Benefit Spending is Highest in Nation

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%. 

About the Author: Ben Zimmer is the CPI's Executive Director

Jobs & the Economy, Taxes & Government Spending, Education, Legislation

2014 CT Legislative Session: The Good, The Bad, and The Ugly

  • May 14, 2014
  • by CPI Staff
2014 CT Legislative Session: The Good, The Bad, and The Ugly

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).  

 

The Good

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. 

The Bad

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 Ugly

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:

  • $75M in projected new revenue from "enhanced" tax collection techniques, even though the state's largest 50 business tax delinquents owe only $9M in combined unpaid taxes;
  • Failing to budget for $52M of expenses related to an expected surge in worker retirements that Comptroller Lembo says will be needed (the Malloy administration says the workers won't retire even though they are eligible);
  • $20M in fictional spending reductions from yet to-be-identified efficiencies, rather than actual cuts;  
  • $35M in transfers from one-time money in dedicated use funds to pay for ongoing programs.

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.

Jobs & the Economy, Taxes & Government Spending, Healthcare

Unfunded Retiree Healthcare Liabilities Grew By $3.3 Billion From 2011-2013

  • Mar 26, 2014
  • by Ben Zimmer
Unfunded Retiree Healthcare Liabilities Grew By $3.3 Billion From 2011-2013

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.   

About the Author: Ben Zimmer is the CPI's Executive Director

Jobs & the Economy, Taxes & Government Spending

State-Run Retirement Plan For Private Sector Workers A Bad Idea

  • Mar 17, 2014
  • by Ben Zimmer & Helen Fang
State-Run Retirement Plan For Private Sector Workers A Bad Idea

The Connecticut General Assembly is considering a bill that would 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.  The mandate would apply to businesses with five or more employees.

Proponents of the bill have relied on a misleading claim from the AARP that “more than 600,000 workers in Connecticut have no access to a retirement plan” beyond Social Security.  It is true that many Connecticut residents do not have access to employer-provided retirement plans, but any employed Connecticut resident can set up a tax-preferred Individual Retirement Account (IRA) through one of many private financial companies.  For instance, Charles Schwab offers an IRA with no annual fee, a minimum account balance of $1,000, and an option to automatically transfer funds each month from a checking account.

In addition to being unnecessary, this bill would have several adverse impacts.  For example, the costs of managing the state-run plan would fall on taxpayers as Connecticut faces ongoing deficits averaging more than $1B per year beginning in July 2015.  And the fees associated with mandatory payroll-contributions to the state plan would add to Connecticut’s already unfriendly small business climate, stifling job growth.

Connecticut’s government has shown little ability to design and manage effective retirement plans for its own employees.  As the charts below show, Connecticut’s unfunded public pension liabilities have grown by 65% since 2006 and are among the highest per capita in the country.  Fixing this should be the state’s retirement security priority.

About the Author: Ben is the CPI's Executive Director; Helen is a CPI Policy Analyst

Jobs & the Economy, Taxes & Government Spending, Education, Healthcare

Analysis on Tax, Healthcare, Education Bills From First Week of CT legislative session

  • Feb 11, 2014
Analysis on Tax, Healthcare, Education Bills From First Week of CT legislative session

The 2014 CT legislative session opened last week with a flurry of proposed bills from legislators.  Most bills proposed in the first weeks of the session include very little detail about what they will actually do – rather, they serve as placeholders that are referred to committees where they may be fleshed out in greater detail.   But a few bills did include specific proposals – here are a few of the most consequential for economic and education policy, accompanied by brief policy analysis:

H.B. 5012 and 5021, proposing to repeal the state’s Business Entity Tax 

Connecticut’s business entity tax imposes a $250 biannual fee on any company doing business in Connecticut.  The tax 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.  The tax is not a major revenue source for Connecticut, bringing in about $40M per year of revenue.  That’s or less than a quarter of one percent of overall state tax revenue.  Repealing it is good policy.

H.B. 5003, proposing to repeal the state’s Earned-Income Tax Credit (EITC)

The Earned-Income Tax Credit (EITC) is a federal program that provides a tax-credit to low-income workers.  For any Connecticut taxpayer eligible for the federal credit, Connecticut provides a state tax credit equal to 27.5% of the federal credit.  The EITC has generally drawn bipartisan support as a way to provide work incentives and keep low-income families out of poverty.  There have been a number of good proposals to simplify the administration of the tax credit, but repealing it is not good policy. 

SB 5, 8, and 10, proposing new coverage mandates for health insurance plans

As of 2012, Connecticut already imposed 65 mandates on health insurance plans, the fourth most in the country and well above the national average of 43. Connecticut’s large number of coverage mandates is one reason it trails only Massachusetts and Alaska in per capita healthcare costs.  At a time when health insurance premiums are already facing upward pressures and the state is struggling to grow jobs, adding yet more mandates may not be the best idea. At the very least, the legislature should carefully study the costs of these particular mandates before passing them.

H.B. 5005, proposing to increase state aid to towns that pay for inter-district magnet schools

When students choose to attend a magnet school in another district, the state provides a grant to that district to help defray the cost of the students’ education.  However, that grant does not fully compensate the receiving district for those costs.  The best way to address this challenge is to adopt a student-based funding model in which students “carry” an allotted per-pupil funding level with them to whichever school they attend. The allotted amount per student should be based on a weighted student formula that allocates more state money for students whose education is more costly, such as those in extreme poverty, English Language Learners, and special education students.  HB 5005 should be amended to enact student-based funding in Connecticut, which would improve equity and accountability in state-funded public schools.

Here is a full list of bills introduced so far in the CT Senate and House.