Things to Watch in Malloy’s Budget Proposal – Municipal Aid

Governor Dannel Malloy recently signaled that he plans to cut $2 billion dollars from Connecticut’s next state budget.

State Aid (courtesy of CT Mirror)

At the same time, he and his Administration have also pledged to do their best to refrain from dumping the state’s problems onto the cities and towns – signaling to the towns that they will not be the target of major reductions in municipal aid.

During the gubernatorial campaign Malloy even promised not to cut the Educational Cost Sharing Formula – the state’s primary mechanism for providing towns with funds to support local educational expenses.

Behind and underneath the debate about what Connecticut can “afford” to transfer to its cities and towns is the even more complex issue of how the formulas that distribute those funds are constructed.

Over the past twenty years, some of Connecticut’s most important funding formulas have been so corrupted (aka modified) by political maneuvering that they no longer reflect the underling goals for which they were created.

As discussed in earlier commentary pieces, the $1.9 billion ECS formula is a case study about how a formula can change over time to address political rather than policy goals.

With Republican Governors and increasing numbers of Democrats representing wealthier Fairfield County communities, the ECS grant has been changed significantly since it was first adopted about twenty five years ago. 

Over the past decade, Greenwich’s ECS grant has increased by 1,002 percent (from $310,000 to $3.4 million) while the grant for New London has gone up by 20.1 percent ($19 million to $23 million).

A similar pattern true across the state; 

Hartford’s ECS grant has risen by 19 percent and Windham’s is up by 25 percent

Yet Darien’s received a1,532 percent increase in the ECS grant over the past 10 years, Westport’s a1,320 percent increase, Weston’s is 858 percent higher and Wilton’s is up 3,212.

Connecticut’s poor communities still get the vast majority of state funds but wealthier towns have done a good job in ensuring that the rate of growth has favored them.

The original goal of the ECS formula was to target state aid to poorer communities so that they had the funds necessary to provide their children with a quality education (a policy that is constitutionally mandated in Connecticut). 

The amount towns received was driven by a formula that took into consideration the town’s wealth and the level of student need (as defined by the level of poverty, standardized test results and the need for English as a second language).

Widely recognized as a “national model” when it was created, Connecticut’s public officials have adopted various changed to the formula in almost every legislative session since.

The changes that were made in the late 1990s and early 2000s were “institutionalized” in 2005 when the Legislature started determining a town’s ECS grant allocation by simply adopting a set annual increase over the grant the town received in the previous year.  By applying an across the board percentage increase for each town’s grant year after year there is no longer any on-going consideration of the underlying issues that were supposed to be addressed by the formula.

Some public officials, perhaps none more than Nancy Wyman, have recognized and articulated the need to return to the fundamental issues that the ECS formula was intended to address.

Considering state government lacks sufficient state resources to maintain the present – albeit broken – educational funding system, let’s hope that the Malloy Administration uses this extraordinary opportunity to actually restructure and redirect scarce resources to where they are most needed. 

Simply capping the level of municipal aid – and maintaining the present distribution formula – disproportionately hurts the very towns that need the aid the most while protecting the towns that have the least proportional need.

When it comes to ensuring a good educational system, Connecticut’s constitution is one of the most clear and direct in the nation.  State government MUST help towns provide each child with a quality education.

As Governor Malloy tackles the state’s fiscal crisis, he has the moral and legal obligation to adopt a budget that is fair and equitable and that means going beyond simply addressing the level of municipal aid but addressing the funding formulas that distribute those funds.

Connecticut’s state pension fund in its worst shape since the state began saving for pension obligations in the mid-1980s.

There are times when a news article is so good, so complete that nothing more needs to be said, no analysis is needed.  This article by Keith Phaneuf is exactly that.  I’ve been writing and yelping about this subject a lot over the last few years.  This article really nails the problem. 

This is definitely a must read story.

http://ctmirror.org/story/11341/wall-street-taking-closer-look-connecticuts-ailing-pension-fund

Connecticut has about $9.4 billion in its pension fund and $21.1 billion in obligations

This translates to a “funded ratio” of 44%.  (80 percent is considered fiscally healthy).”

The ratio was 52% percent in the 2008,  but has plunged as  a result of the drop in the stock market and investments, the decision by the Governor, state unions and legislature to defer $214 million in required pension payments and the increase in the number of retirees due to the unending use of early retirement incentives to “reduce the state payroll”.

One of the most critical issues is that “Further complicating matters, state employee unions agreed in 1995  with then-Gov. John G. Rowland to shift the pension contribution system from a level-funded 30 year schedule to a back loaded system that will force dramatic increases over the next few decades.”  In essence the Rowland, the Legislature and the state and unions decided to go with a massive balloon payment system that allowed smaller payments in the short term in return for much more massive payments ‘down the road’. 

Later has now arrived. 

The required annual contribution is on pace to grow by 50 percent by 2017, double by 2026 and triple by 2038.  Needless to say it is impossible to imagine a scenario in which Connecticut could make those payments without undermining the rest of the budget.

This year, as Governor Malloy is suggesting the need for record budget cuts, the state will need to dramatically increase its state pension payments just to keep the pension disaster from getting even worse.

This article should be mandatory reading for every single person associated or interested in budget, tax and policy issues.

Senators offer Malloy more power to cut budget…

Last week Brian Lockhart of the Stamford Advocate identified a 2011 proposed bill that deserves more attention – followed by a quick defeat.  

Proposed Bill No. 187, sponsored by Senators Bob Duff (Norwalk), Joan Hartley (Waterbury) and Gayle Slossberg (Milford) is called An Act Granting Power to the Governor to Balance the Budget

It is a vehicle for giving the Governor more “budget authority” by allowing him to make even deeper cuts to the state budget without legislative approval.

Our (well-meaning) elected officials would do well to remember the important words of Thomas Jefferson when considering giving the Executive Branch powers that rightfully belong to the Legislative Branch. 

 “If the three powers maintain their mutual independence on each other our Government may last long, but not so if either can assume the authorities of the others.” – Thomas Jefferson

Concepts like the line item veto or granting the governor greater ability to refuse to follow a budget that has been passed and duly signed into law is a bad idea – regardless of who serves as Governor (or President). 

I remember strongly opposing the concept when Bill Clinton asked for and received line item veto authority in 1996.  After watching the Bush years in Washington and the Rowland/Rell years in Connecticut, I’m more convinced than ever that instead of trying to duck the issue of fiscal responsibility, we do better to simply hold legislators accountable if they fail to do their job and fulfill their duties.

I’m very glad to see Governor Malloy is quoted as saying that this legislation is not needed.  The fact is, it is simply not appropriate for the Legislative Branch of Government to grant the Executive Branch this additional authority.

Brain Lockhart’s blog can be found here: http://blog.ctnews.com/politicalcapitol/2011/01/28/senators-offer-malloy-more-power-to-cut-budget/#comment-8044

This proposal mirrors the debate in Washington….where President Obama has actually asked Congress to pass a modified and more extensive line-item veto law.

Here are some other interesting thoughts about the Legislative Branch abdicating its authority by giving the Executive Branch more power (such as through the line item veto or greater rescission authority).

“…[T]he line-item veto is a convenient distraction. The vast bulk of the deficit is not the result of self-aggrandizing line items, infuriating as they are. The deficits [have been] primarily caused by unwillingness to make hard choices on benefit programs or to levy the taxes to pay for the true costs of government.”  USA Today, March 23, 2006

 “Such tools, however, cannot establish fiscal discipline unless there is a political consensus to do so…. In the absence of that consensus, the proposed changes to the rescission process …are unlikely to greatly affect the budget’s bottom line.  –Former CBO Director Donald Marron, Testimony before Congress’s House Rules Committee

 [The line item veto] “would aggravate an imbalance in our constitutional system that has been growing for seven decades: the expansion of executive power at the expense of the legislature.” – George Will, The Washington Post 3/16/06

Oh….wait! You actually thought helping cities and towns was a priority? The incredible story of Connecticut and its casino revenue.

Or “We are from the (State) Government and we are here to help”;

In the fall of 1992, discussions between Governor Lowell Weicker and Pequot Tribal Chairman Skip Hayward led to a landmark agreement in which the Pequot Tribe would share 25% of its annual slots revenue with the state of Connecticut in return for the exclusive rights to have slots within Connecticut’s borders.

The agreement, which was expanded to include the Mohegan Tribe when it opened the Mohegan Sun, was the most generous revenue sharing agreement in the country.  For Weicker the deal was especially beneficial since it provided the state with a major new revenue stream and gave him a new and effective weapon in his on-going effort to stop other casino operators from coming to Connecticut.

Having been in and around those negotiations and discussions, I can attest to the fact that political players recognized that the “icing on the cake” was that the new funds would be distributed to Connecticut’s hard-pressed cities and towns to help support local services and provide property tax relief for Connecticut’s overburdened middle-income families.

Initially ALL OF THE MONEY was to be used for municipal aid, but even as the program was introduced the state needed to skim off about $30 million or so to help balance the FY1994 budget.  That said, Connecticut’s elected officials proclaimed that a new day had arrived, that they were (in fact) serious about property tax relief and from that day forward 85% of the slots revenue would be passed on to the municipalities via the newly created Pequot Slots Fund.

Since then, the Pequot and Mohegan tribes have more than fulfilled the state’s wildest dreams and transferred more than $5.3 billion to the state’s general fund.

However, each year, as slot revenues grew, Connecticut Governors and legislators determined that it was necessary to keep more and more of the incoming revenue at the state level rather than pass it along as promised.  The unspoken rationale was that since the state needed additional revenue to pay for existing and expanded programs it was better to utilize the slot funds rather than increase taxes – even if the net impact was that local property taxes would need to go up even more sharply.

Whereas 85% of the slot funds were passed on to the cities and towns in 1994, that percentage has tumbled year after year after year.

This year, the budget approved by the Democratic legislature and allowed to go into law by Rell allocates a paltry $61 million of the tribal slots revenue to Connecticut’s cities (An amount that equates to 16% of this year’s slot revenues).

So when politicians (of both political parties) talk about their deep commitment to municipal aid and reducing the pressure on local property tax payers, it would behoove everyone to remember that of the $5 billion that has come in via the Pequot/Mohegan Fund over the past 18 years, less than $1.5 billion actually made it to the promised destination – Connecticut’s cities and towns.

The story will remind the old timers among us of Ella Grasso’s famous promise that the Lottery revenue would go for education.

Or in other words – never forget that old adage – “Fool me once, shame on you; fool me twice, shame on me”.

But no really, providing sufficient municipal aid will be a TOP priority for Connecticut State Government.  I know because I heard them say it would be.

More on the issues underling Connecticut’s State Employee Pension System

Here is the problem:  Connecticut’s State Employee Pension fund is significantly underfunded. 

 

Back in 2000 Connecticut had put enough money aside to meet more than 63% of its state pension obligations. 

 

However, repeated decisions by Governors Rowland and Rell with help and support from the Connecticut General Assembly and SEBAC (the state employee bargaining coalition) not to make necessary pension payments or reduce the level of pension payments that were made (along with early retirement incentives that pushed more people into the pension fund) reduced Connecticut’s funded pension ratio down to 44%.

 

Today, the State’s unfunded pension obligation is over $11.7 billion. (Or roughly a debt equal to $3,333 for every Connecticut resident).  Connecticut owes that money.  It will have to pay that money and it has not put aside the funds necessary to make those payments.

 

Connecticut’s system is one of them of the most underfunded systems in the nation. 

 

Despite this situation, much of what we hear about Connecticut’s state employee retirement system is so laced with partisan rhetoric and false statements that makes it almost impossible to have a meaningful debate about the problem and it’s vital that the state engage in an honest discussion about the pension system and its problems based on the facts and not the hype…

The real facts are these.

Connecticut has 57,825 state employees enrolled in the state’s employee retirement system.  Within that system are four separate pension program.  The old Tier 1 state employee pension program, which was closed to new enrollees in 1984.  Next the state adopted the Tier 2 program that began in 1985 and was then replaced by the revised Tier 2A program.  Finally, the Alternative Retirement Program provides a retirement system for faculty and selected staff at Connecticut’s public colleges and universities.  Instead of a pension these state employees receive what is in essence a 401(k) contribution that they can then take with them as their careers take them to other universities around the country.  Members of the Alternative Retirement Program do not receive a Connecticut state pension.

Of Connecticut’s active employees, the distribution of retirement plans is as follows;

 

Tier 1       4,569

Tier 2     19,298

Tier 2A   26,345

ARP         9,613 

 

Meanwhile there are 48,127 state retirees that receive some sort of pension and/or health benefits that they earned by fulfilling their legal requirements when they served as active state employees.  The following breakdown lists retirees by the retirement program the participate in;

 

Tier 1      29,888

Tier 2     10,986

Tier 2A       862 

ARP            391

 

As I reported in an earlier blog post, it is fair to say that the old Tier 1 pension program was pretty generous.  It is also vital to understand that of the 34,457 people participating in the Tier 1 system, 87% of them have already retired.  Only 13% or 4,569 active state employees remain in the Tier 1 system.

The average annual pension for Tier 1 employees is $34,917. 

However, since the benefit is calculated on the total number of years worked multiplied by the employees’ highest three years of income, some employees have managed to acquire large pensions either because they actually had high salaries or they used over-time to push up their salaries prior to retiring.  There are a total of 1,780 retirees with state pensions of $75,000 or more and 365 enjoy pensions of over $100,000.

Of the total 30, 284 people who are in the Tier 2 retirement program, 64% have retired and 36% remain in active service.   The average annual pension for Tier 2 retirees is $21,335.  The way Tier 2 pension is calculated it is more difficult for artificially pushes up one’s pension.  As result, there are 76 Tier 2 retirees with pensions of $75,000 or more and 15 with pensions of over $100,000.

The Tier 2A, the present retirement program for new state employees includes an even more limited pension program.  As of now, only 3% of the 27,207 Tier 2A employees have retired and the annual pension for these 862 individuals is only $11,289.  Of the Tier 2A retires one has a pension of over $75,000 and none have a pension of 100,000.

The bottom line is that new state employees and the vast majority of present state employees will not be receiving so-called “excessive” pensions when they retire. 

And while the state may want to explore creating yet another – Tier 3 – pension category, the real issue facing Connecticut IS NOT “reforming” the level of pension benefits for incoming state employees but how to deal with the obligation the state created under its older and now closed pension categories.

On a related front, there are some who want to explore the possibility of Connecticut reneging on its legal obligations by retroactively changing pension benefits or somehow defaulting on future payments. 

However, it is highly unlikely that the federal courts would allow a state to do that. Legal rulings to date are pretty clear.  While a private company can use bankruptcy to modify or avoid debts, states, with their taxing powers, do not have the ability to do that. (Although some states like California are or may seek ways to put that question to the test). 

Putting aside the moral question, the reality is that Connecticut will not be able to modify pension levels for those who have already retired and so we return to the fundamental problem of the fact that Connecticut obligated itself to future pension payments and then failed to set aside the funds to meet those obligations.

Furthermore, even if the state and unions could agree on legally allowable changes for present employees (and that is something the new Governor and the bargaining process can definitely explore) the bulk of the future obligations for retirees and future retirees are already in place. 

The failure of Connecticut state government to put aside the necessary funds simply can’t be undone.  The pennywise and pound foolish decisions of our elected officials have come to haunt us and separate of any discussions on “reforming the system”, the State must act by dramatically ramping up the level of funds it sets aside for obligations that are and will continue to come due.

When it comes to blame, there is certainly enough blame to go around but the burden now rests on Governor Malloy and the Connecticut General Assembly to respond to those mistakes and set things right.

Wait, What? Connecticut has more public employees than most states?

A reasonable and “grown-up” discussion about Connecticut’s fiscal crisis requires that politicians use data in an honest and appropriate fashion and not seek to mislead the public.

Yesterday New York media outlets were reporting that newly inaugurated Governor Andrew Cuomo is “getting ready to announce layoffs of 10,000 to 15,000 employees.”

Meanwhile, here in Connecticut, the CTMirror ran a story two days ago entitled “For the first time, Malloy talks of cutting rank-and-file workforce”.   The CTMirror was covering a conference in which Governor Malloy reinforced his commitment to reduce the number of state managers but then went on to imply that he may be proposing deeper cuts that would reduce the number of non-manager employees. 

At that same conference, Republican legislative leaders once again made the claim that when it comes to the number of state employees, Connecticut is bloated and way out of line compared to other states.  

The Republicans have been making the same claim during the last few legislative sessions and especially during last year’s legislative and gubernatorial campaigns.

The fact is – their statements are simply not true.

That is not to say we shouldn’t demand and expect greater efficiency, but to suggest that Connecticut’s state government is especially bloated or that we have more public employees than most states is a lie.

The U.S. Census Bureau compiles a wide variety of data including information on the number of federal, state, and local government employees.  The most recent data available is for payrolls as of March 2009.

According to that information, Connecticut  had 57,117 full time employees and 24,139 part time employees for a total of about 66,500 full-time equivalent (FTE) public employees. 

This number translates to approximately 19 state employees per 1,000 population.  Of this number 28% work for Connecticut’s colleges and universities and are thus primarily funded from student tuition and fees.

As observers know, the problem about comparing information state by state is that different states utilize different models to provide government services.  Many states use county governments and regional entities, as well as state and municipal governments to provide public services whereas Connecticut only utilizes two vehicles – state government and municipal government.

To get a sense of the real number of state employees involved in providing government services it is more useful to look at state, regional and local spending.  This data provides a more honest assessment of where Connecticut stands compared to other states.

Using the most recent Census data, Connecticut has a total public employee workforce of about 187,000 FTE positions at the state and local level or about 54 public employees per 1,000 population.

Compare that number to New York which has 64 public employees per 1,000 population, New Jersey with 58 public employees per 1,000 and Massachusetts with 49 public employees per 1,000 population.

While the political rhetoric would lead us to believe that Connecticut is especially bloated when it comes to public service workers that fact is we rank in the middle to lower half of the states.

More honesty and less rhetoric is what is needed going forward.

You can access the public employees information at : http://www.census.gov/govs/apes/

FOOTNOTE:  The key problem with comparing states is that here in Connecticut we don’t have county governments — so we “appear” to have a larger state because most states provide some “state-like” services at the county level – that’s why one really has to look at a combination of state and local units. 

A prime example is public safety – Connecticut would appear to have a lot more state police because we don’t have county sheriff departments like NY, etc.

Another example is correctional officers.  CT has 7,931 FTE correctional officers or about 2.3 per 1,000 citizens.  Compare that to NY who have 33,739 FTE state correctional officers (1.73 per 1,000) but you then have to add in the county/local correctional officers to get the picture of how many correctional officers are needed to run their prison systems.  In this case there are another 24,929 FTEs at the County/Local level so in total NY has 59,000 FTEs correctional officers 3.0 per 1,000.  If you did just the state calculation you’d say CT had way too many but we actually have significantly fewer.  

Interestingly if you do the same calculation or MA and NJ they come out with fewer total correctional officers MA is 1.4 per 1,000 and NJ is 2.0 per 1,000.

Gas Prices in Connecticut – A Classic Wait, What? Moment:

As Connecticut’s political and business leaders renew their call for dramatic action to rebuild and enhance the state’s economic and job situation, state law continues to promote an exponential growth in gas prices – a situation that disproportionately hurts middle class families while increasing the cost of energy – a major cost factor limiting business and job growth in the state.

Connecticut’s growth in gas prices are a direct result of two factors – the manipulation of supply and demand by big oil and the oil-producing nations and the impact of Connecticut’s ill-conceived gas tax policies. 

As we know, the net result is that consumers are standing at the pump watching in disbelief as their vehicles swallow up more and more of their limited incomes. 

What they may not appreciate is that Connecticut gasoline tax policy is actually designed to promote an increase in gas prices. 

Perhaps even more insulting, and even less understood is that the “extra” money raised from Connecticut’s gasoline taxes do not go to support transportation or mass transit but are instead dumped into the state’s General Fund where they are used to cover other government expenditures.

 How does the Connecticut Tax System Work? 

In addition to the basic 25 cents per gallon state gasoline tax that is posted at the gas pumps, state law levies a gross receipts tax on the wholesale price of gasoline sold in Connecticut.  This tax increases the cost of gasoline by about 7.5% or, at today’s prices, about 19 cents per gallon.  As wholesale prices go up, the wholesale tax increases the retail price of gasoline exponentially.  As a result, Connecticut consumers traditionally pay some of the highest gas prices in the country.

While gas taxes are not classically “regressive” in that the burden does not automatically fall heaviest on the poor (since many urban poor do not have cars or drive greater distances to get to work), the gas tax does fall disproportionately on the working and middle class, especially in a state like Connecticut with its limited mass transit system. 

According to the US Energy Information Agency, the financial burden of gasoline expenditures falls heaviest on those making between $25,000 and $75,000 and those households with children.

With all of that, the real “Wait, What? Moment” comes back to the fact that while the state’s 25 cents per gallon gas tax is dedicated to the state’s Transportation Fund, a majority of the funds raised by the 2nd gas tax (the ever-expanding gross receipts tax) does not go to help pay for transportation related expenses.

The history dates back five years when Governor Rell proposed an expanded transportation initiative.  Rell called for increasing the gas tax by 1 cent per year for a number of years to pay for the new program.  However, rather than add to the very public (and arguably unpopular gas tax), the Democrats decided to dramatically increase the gross receipts tax on gasoline.   This strategy not only provided a revenue stream for the Transportation Initiative but generated “excess” revenues that could be diverted to other expenses.

Since Fiscal Year 2006, Connecticut’s expanded gross receipts tax has brought in more than $1.7 billion dollars but only about $700 million or so has gone to help renew Connecticut’s transportation infrastructure or help support Connecticut’s mass transit programs.  The rest – about a billion dollars – was used to fund non-transportation programs.

During last year’s gubernatorial campaign Dan Malloy made it clear that while he supports gasoline taxes he believes the funds should be used to improve Connecticut’s out-dated transportation programs.  It will be interesting to see whether the Malloy Administration follows through on those comments and re-directs all of Connecticut’s gasoline related revenues so that they actually support transportation programs.   It would actually be a relatively easy task.  The new Administration could actually shift all transportation and transportation related public safety costs to the state’s Transportation Fund and then apply all gasoline revenue to those activities.  While it wouldn’t change the overall bottom line it would ensure that consumers knew that they gasoline related tax dollars were actually going for their intended purpose.  

Finally, it would be very refreshing if upcoming Malloy budget made middle-income families a priority by dropping the complex gross receipts tax on gasoline and instead bit the bullet and went with a simple expanded flat rate gasoline tax that raised the necessary revenues.  By taking such an action Malloy could ensure that programs were properly funded while ending the state’s role as a factor in promoting the further increase in gas prices.

A Tax By Any Other Name is Still A Tax…

As the Great Storm of 2011 bore down on Hartford (not to mention the big  snow storm that hit on Wednesday night), Keith Phaneuf had a fantastic story in the ctmirror about the massive unemployment tax hike that will hit Connecticut businesses this year.

Full Story: http://ctmirror.org/story/11150/businesses-say-unemployment-tax-hike-goes-unnoticed-capitol

While some legislators and lobbyists for the business community are pointing to the issue as a reason for the state NOT TO ADOPT mandatory sick leave benefits that would impact a select number of Connecticut businesses, the mandatory increase in the unemployment tax is really a much more significant issue and should be considered as part of the overall tax debate in 2011.

Phaneuf’s article should be mandatory reading for every legislator.

The key facts are as follows:

Businesses pay a tax to the Connecticut Unemployment Compensation Trust Fund for every one of their employees.  The fund is used to pay benefits to any employee who is laid off or otherwise qualifies for unemployment benefits.

Since it is a mandated tax based on the employee’s salary, businesses appropriately consider this as part of the employee’s total wage and benefit package.

Due to the massive rate of unemployment, Connecticut’s Unemployment Trust Fund has been “insolvent” since October 2009.  When a state fund becomes insolvent it has to borrow money from the Federal Government.   

Connecticut has borrowed about $530 million to date to cover unemployment benefits for Connecticut residents. States are required to pay the Federal Government interest on any loans plus, over time,they must pay back the full loan.  In this case, due to the extent of the recession the Federal Government delayed the time period when states were required to start making interest payments on their loans.  The waiver period has ended and interest payments must begin this summer. 

The Connecticut Department of Labor has informed business that a new assessment (tax) will be implemented on August 1, 2011 to raise the funds necessary to start paying the Federal Government the interest Connecticut owes on the funds it has borrowed to date.  The new tax is expected to equal to about $40 per worker. 

As Phaneuf notes the new tax “which doesn’t even reduce the $530 million debt principal, is equal to roughly $53 million when projected over nine months. That’s about $12 million greater than the last tax hike the business community faced, a 10 percent surcharge on the corporation tax first imposed in 2009 and set to expire in 2012.” 

Making matters worse, the story goes on to report “State labor officials estimate the unemployment trust fund will need roughly $500 million more in loans over the next 12 months, despite two existing assessments on business that normally provide enough revenue to fund jobless benefits.”  This means the interest assessment will need to be increased at a later date, not to a significantly higher tax in the future to bring in the funds needed to pay the Federal Government back the $1 billion dollars Connecticut will have borrowed to pay unemployment benefits during this recession. 

Finally, in response to these issues, Phaneuf reports that Governor Malloy has said that he hopes Congress will extend the “interest waiver” since 40 other states are facing this problem.  An extension would allow Connecticut to postpone having to address this problem for year or more but the interest and loan will still need to be paid in the relatively near future.

 The bottom line is that an increase in the unemployment tax is needed – sooner or later – and elected officials, the business community and everyone involved in the budget making process must recognize that the upcoming unemployment tax surcharges are, in fact, very real tax increases and must be part of the overall tax plan to get Connecticut out of this fiscal crisis.

State Government – The Challenge of Facing Reality in These Economic Times…

Christine Stuart has an article today in ctnewjunkie that indirectly highlights the challenge that faces Connecticut.

Yesterday, as California’s new governor announced what could only be described as draconian cuts (along with a plan to raise taxes), Connecticut’s Finance, Revenue and Bonding Committee announced that it will raise a bill to un-due a portion of last year’s budget that undermined Connecticut’s efforts to promote energy efficiency.  The bill would seek to re-allocate funds for an important state program.

As Stuart writes, “Environmentalists and small businesses are hopeful that since the state doesn’t have to borrow as much money as it initially expected when it passed the budget last year that it will restore some of the $28.5 million it planned on taking annually from the Energy Conservation and Load Management Fund.”

The full story can be found using the following link: http://www.ctnewsjunkie.com/ctnj.php/archives/entry/finance_committee_may_restore_conservation_funds/

Legislators and advocates point out that this program was important because “The fund helps pay contractors to visit homes and businesses to conduct energy audits then figure out how to make the structures more energy efficient. It also helps residents receive rebates for purchases of energy efficient appliances.”

There is no question that is program is a prime example of how government can successfully play a role in helping to overcome the challenges that threaten our society, our state and its citizens.  Through programs like this, we can become more energy efficient, become more energy self-sufficient and do more to protect the environment and deal with the growing crisis associated with global warming and climate change.

It is a program that deserves support.

Yet at the same time, Connecticut, like so many other states is moving closer and closer to the proverbial cliff face as our state government races toward fiscal catastrophe.

One need only look to California to see what can occur (while Connecticut’s economic position is not as bad as California’s, the two state’s are facing similar situations). 

In California, despite having a new Democratic progressive governor, the proposed state budget there includes a $1.5 billion cut to welfare programs, a $1.7 billion cut to the state’s health care Medicaid programs, a reduction of $750 million to programs for the developmentally disabled and a half a billion dollar cut to the University of California system even though their public higher education system is already in deficit.  Brown’s budget also CUTS state employee take home pay by 8-10%.

This is not to say that the Finance Committee should not discuss re-funding the State’s important energy efficiency programs, but it is to highlight the challenge the Malloy Administration and the Legislature faces over the next few months.

Will forcing Connecticut’s wealthy to pay their fair share persuade them to leave Connecticut?

RAISE TAXES – THE RICH WILL MOVE…

It’s an argument we’ve heard in Connecticut a number of times.

 

Just last year, State Representative Lile Gibbons, the Greenwich Republican whose district includes the Greenwich homes with waterfront views, warned that if the legislature increased the estate tax “People just aren’t going to stay” in Connecticut.  Over the years many other Republican elected officials, including Jodi Rell, and business organizations have said the same thing.

Their argument is that if Connecticut raises the income tax or the estate tax on the wealthy the result will be that many wealthy taxpayers will simply shift their tax homes to locations with lower taxes.

Connecticut Republicans are not alone in making these dire predictions.  Conservative commentators are constantly making similar claims.  At the end of December 2010, an editorial in the venerable Wall Street Journal once again opined that the direct result of higher taxes on the wealthy is that many of them decide to sell their homes, leave their communities and flee to lower tax jurisdictions.

The editors of the WSJ used a recent report in the state of Oregon to back their claim, In 2009 Oregon, with a majority vote of its state legislature and the approval of its voters in a state-wide referendum dramatically increased its state income tax.  The rate for those making more than $500,000 was raised to 11% and the rate on those making $250,000 to $500,000 increased to increase to 10.8%.

A year later, when a report was released that Oregon has collected less revenue than projected, the WSJ wrote that Oregon’s wealthy had “fled the state”. 

But wait, it turns out that nothing of the sort occurred.  Rather than a wholesale dash for the border, the number of tax returns filed in Oregon actually went up.  That said, as a result of the deep recession that is dragging down the country, it turns out that a number of Oregon’s wealthiest taxpayers where no longer as wealthy as they once were and thus fell below the new “soak the rich” income tax rates.  

The “if you tax them, they will flee” myth was further busted in 2010, when a major international financial firm that tracks the marketing behavior of millionaires released their most recent report.  According to Phoenix Affluent Market’s data, the overall number of households making more than a million dollars actually increased by about 8% to 5.6 million.

The report, which measures the number of millionaires per capita in every state, discovered that “two of the states with the “highest marginal income-tax rates” also had the highest number of millionaires per capita.” 

The author of “The Wealth Report”, Robert Frank, who writes for the news division of the Wall Street Journal (rather than the editorial department), wrote “Hawaii, with the greatest number of per capita millionaires levies an 11% tax rate on those earning $200,000 or more.  Maryland, the state with the 2nd greatest number of millionaires targets its wealthy with a special millionaire’s tax rate of 6.25% and New Jersey, the state with the 3rd largest number of millionaires has a rate of 10.75% on those households earning more than $1 million a year.

Frank went on to “This isn’t to say that taxes don’t matter to the wealthy. They do. A lot.” But he also noted that “some states with very low marginal income tax rates, such as Connecticut and Alaska, also ranked high on the density list.”

To explain the apparent paradox that many wealthy people live in higher tax jurisdictions, Frank’s piece quotes the Managing Director of the Phoenix based consulting firm that released that study.  According to them, “…Hawaii, Maryland, New Jersey, and Connecticut all share some important distinctions: they are small states with large concentrations of highly educated professionals and business owners, which are key ingredients to growing wealth…in general, most high-net-worth households don’t base their living decision on tax rates, but on things like quality of life, access to good education, infrastructure and culture.”

Connecticut’s wealthiest citizens presently pay a 6.5% income tax, far below what they would pay if they moved to New York or New Jersey (not to mention if they decided to live in New York City.  Even if Connecticut raised its income tax on those making more than a million dollars by a whopping 50%, the rate paid would increase to a point where it is on par with the other jurisdictions in the tri-state region.

To suggest that if we increase taxes on the wealthy they will flee is not only not true, but intellectually dishonest.  Even studies produced by our own state government reveal the truth.  In 2007 the Connecticut General Assembly examined out-migration.  While it found that the “largest number of individuals leaving Connecticut — 27,773 — moved to Florida” it also revealed that those who moved into Connecticut during the same period “had, on average, higher incomes” and “second-favorite destination for residents leaving the state was North Carolina, which has an estate tax and an income tax”  that is on par with Connecticut.

Oh and what are the state’s with the highest number of millionaires? Hawaii with 6.93%, Maryland 6.79%, New Jersey 6.69%, Connecticut 6.65%, Massachusetts 5.98%, Alaska 5.97%, Virginia 5.94%, New Hampshire 5.79%, California 5.66% and Washington, D.C. with 5.53%

For more information on this issue check out the following sources:

 Wall Street Journal:   http://online.wsj.com/article/SB10001424052748704034804576026233823935442.html

WSJ’s Robert Frank; http://blogs.wsj.com/wealth/2010/09/28/high-tax-states-still-grow-millionaires/,

 Citizens for Tax Justice: http://www.ctj.org/taxjusticedigest/archive/2011/01/more_on_the_journals_bogus_ore.php

 And: http://www.phoenixmi.com/images/uploads/pdf_upload/StateRankingsMillionaires20062010.pdf, http://www.offthechartsblog.org/many-wealthy-moving-down-not-out/