Tuesday, June 9, 2015

"Connecticut's Budget - Sign of Failure"

                                                                                                                       Sydney M. Williams

Thought of the Day
Connecticut’s Budget – Sign of Failure”
June 9, 2015

The truism expressed by Arthur Laffer’s “curve” a little more than forty years ago is as relevant today as it was then. It is obvious that tax rates of zero and 100% yield zero. The “curve” was an attempt to find the optimum rate. Economics are elemental to politics. In general, the Left wants government to assume a bigger role, which requires higher taxes. The Right argues for more limited government and, therefore, less need for revenues. That is the essence behind all political debates and partisan bickering that we see in Washington and State Capitals. Logic tells us there are certain societal functions that can only be handled by government. Common sense tells us that the more government takes, the less there is for consumers and businesses to spend and invest. That, in turn, leads to less economic growth – fewer jobs and lower standards of living. It is a self-perpetuating cycle. The role of Governor or President is to find common ground.

There is a natural propensity for institutions to expand and for individuals to want more, and what is true for for-profits is true for government. Government is supposed to be servant to the people, but that does not detract from its natural inclination to serve itself. Constancy is not natural to bureaucracies. Managers want more power, higher salaries and better benefits. The only governor on its expansion is the electorate. Four factors have accentuated the problem: unionization of government employees, an inclination on the part of both political parties to kick hard decisions down the road, low interest rates, and an increase in those who are dependent on the state.

Some states have handled their finances well. Others have not, nor has the federal government. They are all subject to the irresistible force paradox known to students of physics: What happens when an unstoppable force (promised retirement benefits to government employees) meets an immovable object (a lack of money)? In the instance of Connecticut and other bureaucracies, the unstoppable force is strengthened by guaranteed union contracts. Nevertheless, the immovable object is seen as less threatening because of low borrowing costs, thereby deferring the inevitable. It is like crossing the bar, when the flood tide rises to meet a river’s current. Some of these concerns are reflected in the recent budget proposed by my state of Connecticut. It is a small state, comprising just over one percent of the nation’s population living on about .0015% of the country’s land mass. Yet its story is a morality tale that has yet to be played out.

Connecticut is a rich state. It ranks fourth in terms of household income, fifth in terms of GDP per capita and third in terms of taxes paid per capita. It is eleventh in terms of household net worth. Yet it is essentially broke, with total liabilities, which are comprised mainly of pension and healthcare obligations, exceeding assets by about $62 billion, or $17,000 per person. Connecticut ranks among the top in terms of debt per capita and among the worst (45th according to “CEO Magazine”) in which to do business. The only states to fare more poorly were such infamous anti-business states as California, New York, Illinois, New Jersey and Massachusetts. Connecticut has the dubious distinction of being bundled with seven states that collectively have lost 42 headquarters of Fortune 500 companies, along with 645,000 jobs since 1995. Between 1990 and 2010, Connecticut lost 138,400 manufacturing jobs. Only five states lost a larger percentage.

High taxes and a poor business climate are chasing people out of the State. About 25% of retired Connecticut State employees, for example, have moved out of state. Allied Van Lines reported that of moves involving the State, 60% are outbound, while 40% are inbound. Between 2013 and 2014, the U.S. gained two million people; Connecticut lost twenty thousand residents.

The principal culprit for budget woes and personal dissatisfaction can be traced back to rising taxes due to pension and health liabilities, and the negative drag they have had on economic growth. According to a study by New London’s “The Day,” the average state employee retires at age 57.1, with a pension (numbers as of 2012) of $31,666. Given actuarial tables, his (or her) lifetime pension is expected to be $987.243. Yet she (or he) contributed only $20,355. The numbers for retired state teachers are slightly different, but still require massive inflows from taxpayers. The system, according to “The Day,” is the second most underfunded in the United States. The gap, including both pension systems, is $44 billion. Part of the problem is a common one – the assumption of too-high annual returns. Actual returns over the past ten years averaged about 150 basis points below the assumed rates. Taken together, the two pension plans were funded at 49%, when they should have been funded at 80 to 100%, according to experts.

Retirees’ health benefits are in equally bad straits. According to an actuarial report by the consulting firm The Segal Group, the health benefits program was funded at just 0.31% as of 2011. Total unfunded liabilities for the two healthcare plans (state employees and teachers) were just under $20 billion. The unfunded liabilities of both health and retirement plans amount to 189.7% of revenues, second only to that of Illinois, again a disturbing comparison.

Unfortunately Connecticut’s problems do not seem to have alerted legislators; though some in the liberal press have begun to take notice. The two-year budget, recently negotiated and approved in both houses of the state’s legislature, calls for a 4% increase in spending in each of the next two years, double the state’s growth in GDP. Republicans were not invited to participate in the proceedings. Unilateral legislative actions do not make for good legislation. Additionally, the threat of another tax rise caused General Electric’s Jeffrey Immelt to write an open letter to employees. In it he warned, GE may be forced to move to a more business-friendly state.

The problems Connecticut faces are not unique. Greece’s problems have similar parentage – government spending that exceeds revenues and hampers economic growth. The cold, hard truth is that nothing is free. There exists in modern government an unhealthy symbiotic relationship. Union leaders see strength in numbers and demand unrealistic benefits. Legislators acquiesce, as they are dependent on union money for their offices. The goat is the taxpayer.

While Connecticut’s budget calls for another $1.9 billion in additional taxes, the State is talking about increasing its take from gambling – a regressive tax I wrote about a few days ago. The State needs a wake-up call. Something should happen to cause taxpayers to recognize they are being played for a patsy. Maybe Mr. Immelt will take GE out of Connecticut? Perhaps markets will be less friendly to the State’s indebtedness? Maybe band-aids will not staunch the bleeding? Unless conditions are addressed, a day of reckoning is coming. It requires a brave politician to stand up and say, enough!

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