Did Connecticut’s Governor Just Admit His State Is Bankrupt?
Bits and pieces of his bi-annual budget address to the joint session of the legislature had been leaked for days, but on Wednesday Connecticut Gov. Dannel P. Malloy (D) formally proposed billing the state’s 169 towns and cities for a third of the annual $1.2 billion cost of funding the Teachers’ Retirement System. Connecticut has the third worst-funded public pension liability of any state in the U.S., and efforts to keep it solvent have contributed to a projected $1.7 billion deficit over the next two years.
Republican State Senator Len Fasano, GOP leader from North Haven, has called the Governor’s proposal an unacceptable “burden on the towns,” which could boost local property taxes by as much as 10 percent. Democrat Senate President Pro Tem Martin Looney also believes that Malloy’s idea “will hurt middle-class families.”
But perhaps the most accurate description of the Governor’s plan is a thinly disguised admission that Connecticut is functionally bankrupt.
After years of struggling with an overall fiscal situation that the Mercatus Center at George Mason University has ranked as the worst of any state, the ability of the legislature to close further deficits with higher income taxes or fees has gone about as far as the public will accept. The uproar over last year’s decision by General Electric to move to lower-tax Massachusetts produced a massive November rebuke of liberal politicians, with Republicans managing a tie in the State Senate and leaving Democrats in the House with their smallest majority in three decades.
At the same time, Connecticut continues to experience the accelerating erosion of its taxpayer base. The Nutmeg state is one of only seven with negative population growth, decreasing by 19,581 residents since 2013. Even traditionally affluent communities have predicted telling declines in school enrollment: Lyme down 21.9 percent by 2020, Simsbury 25 percent by 2021, Litchfield 18.5 percent by 2022, and Easton 27.4 percent by 2024.
For decades Connecticut’s wealthiest residents have avoided income and estate taxes by retiring to Florida, South Carolina, Tennessee, and Texas. Now professionals and entrepreneurs with families are abandoning the state as well. A 2015 study of IRS data by the Yankee Institute found that the state lost a stunning $3.8 billion in taxable income between 2011 and 2013.
Of course, Gov. Malloy would never use the actual word bankrupt to describe Connecticut’s finances. Instead, he has been reduced to promoting a budget gimmick that no thoughtful observer on either side of the political spectrum thinks likely to be enacted: asking municipalities to help subsidize the state budget in return for fewer mandates on local government, a modification of prevailing wage laws, and ending the requirement for small school districts to hire a superintendent.
While town and city leaders have long desired such changes, their constituents would unlikely deem them valuable enough to justify dramatically higher property taxes. Even the most obvious beneficiaries of Gov. Malloy’s proposal – the public employees whose pensions would be better secured – have made it clear they will fiercely oppose any legislative gifts to local officials that would weaken their unions’ bargaining power. Public workers are especially worried that localities might use any newfound immunity from state mandates to trim government payrolls.
“The unintended consequence could be that cities and towns cut their education spending to pay for this,” says Mark Waxenburg, executive director of the state’s largest teacher union.
Even if, by some miracle, the legislature could offer localities a reason to raise property taxes that does not offend public sector unions, any agreement could potentially be voided by the pending resolution of CCJEF v. Rell, an 11-year-old lawsuit that initially sought increased subsidies for state’s worst performing schools. In September, 1916, Connecticut Superior Court Judge Thomas Moukawsher issued a surprise opinion in which he said the real problem with Connecticut failing schools is not funding, but accountability, and in a lengthy opinion ordered the Hartford legislature dramatically restructure public education.
The case is now on appeal to the State Supreme Court. And the fact that no one can predict the outcome means that towns and cities could go ahead and raise property taxes only to find that the Governor’s promised concessions, even though approved by the legislature, have been summarily invalidated from the bench.
The more one looks at Gov. Malloy’s proposal, the more it really seems designed to hold out an illusory hope against the state’s bleak fiscal condition a little while longer – until the 2018 election, when Connecticut’s de facto bankruptcy will be another governor’s problem.