"Connecticut, Wherefore Art Thou?"

Sydney M. Williams

Thought of the Day

“Connecticut, Wherefore Art Thou?”

June 13, 2016

“You can’t depend on your eyes when your imagination is out of focus.”

                                                                        Mark Twain (1835-1910)

                                                                        “A Connecticut Yankee in King Arthur’s Court” – 1889

Connecticut is one of the country’s most beautiful states. The people who live here once felt they were favored by God. (And some still do!) Its beaches, hills, world-renowned universities and well-regarded public schools are attractions. There was a time, not long ago, when it was seen as “little Switzerland” for those commuting to New York City – an income-tax-free haven between the heavily-taxed states of New Jersey and New York. Its history, in terms of European explorers and settlers, goes back four hundred years, to when Dutch sailor Adriaen Block first explored the mouth of the Connecticut River. By the 1630s, the first English settlements were established in Windsor, Hartford, New Haven and Saybrook.

I do not praise Connecticut just because I was born in New Haven seventy-five years ago and have lived in five different towns over the past fifty-one years, or that my ancestors were among its earliest settlers; it is meant sincerely. From the hills of Litchfield County, to the beaches in Southeastern Connecticut, the state offers a variety of leisure pursuits: kayaking on the Connecticut River’s estuary; rowing on the Thames; rafting on the Housatonic; horseback riding in Fairfield County; hayrides in Windham County; hiking the nearly 3000 acres of protected land in Lyme, and paddle boarding along Connecticut’s 618 miles of coast.

The state encompasses distinct urban areas – Stamford, Bridgeport, New Haven and Hartford – along with 15,615 farms, which work 233,000 acres. Almost 20% of its 3.6 million acres are in some form of conservation – always a bi-product of wealth. In terms of geography, the state is the Union’s fourth smallest, but, in terms of population (about 3.6 million), the 29^th largest. Even with GE’s departure to Boston (and the loss of an estimated $600 million in tax revenues), it is still home to 16 of Fortune’s 500 companies.

But this is more a dirge than a paean. Connecticut ranks high in ways that speak to its potential: fourth in terms of those with a college education; fourth in terms of household income; and third in wealth per household. However, it also ranks high in ways that demonstrate it has fallen victim to greed and waste: it is first in terms of bonded debt per capita ($22.4 billion, equal to just over $6000 per individual); it ranks second – behind Illinois – in un-funded state pensions - $26 billion; it ranks second to New York, in terms of state and local tax burdens, and fifth, when total debt obligations are measured against personal income.

Connecticut lost 95,000 of its 1.4 million taxpayers, between 2011 and 2013, while 78,000 moved in. But it is the only state in the nation where those moving out have higher incomes than those remaining – $112,000 versus $101,000. Connecticut was one of only six states that in 2015 suffered a net exodus. Its population declined by over 2000. Capital is mobile and Connecticut is vulnerable. Keep in mind, the western half of Fairfield County contributes over a third of the state’s income tax revenues.

Absent economic growth, societies wither, as can be seen in Venezuela today. Sadly, capitalism is taking a beating, especially on college campuses – with students seemingly unaware of the irony of their position: that they are in college and can afford to protest because of the capitalist system. Capitalism has been the fairest and most productive economic force the world has ever known. It has given us universities, libraries, museums, parks, and environmentally protected rivers, forests and estuaries. Capitalism has done more to reduce poverty than any other system. But something has gone wrong in the ‘Nutmeg’ state. A recent document on Connecticut’s budget prepared by the League of Women’s Voters in Greenwich quoted a University of Connecticut study, which found that the state has not created and sustained net new jobs in almost three decades. Among the reasons – burdensome regulation, usurious taxes and the high cost of energy. Since recovery began eight years ago, economic growth around the country has been barely able to absorb new entrants into the labor force. In fact, nation-wide, while unemployment decreased from over 9% to 4.7%, since recovery began in June 2009, labor force participation declined to 62.6% from 65.6%. Last year, U.S. GDP growth was 2.2%: 1.6% for New England, but only 0.6% for Connecticut.

The state spends about $20 billion a year, of which a third is paid, in wages and benefits, to 50,000 state employees (90% of whom are unionized). It sponsors pension benefits for the state’s 50,000 public school teachers. Connecticut’s state workers are the best paid in the United States, and its retirees have the highest pension benefits of any state employees in the country. There is a cost. Connecticut’s deficits are projected to be $266 million in the current fiscal year, $552 million in fiscal 2017 and $1.7 billion in the following year. The latter would be about 60% higher than the federal deficit, when measured against GDP. The main problems are wealthy taxpayers who are leaving the state, spending that is divorced from revenues, and the fact that the state is contractually committed to fully fund its pension obligations by 2032, a commitment that dates back to 2008 when the state issued pension obligation bonds. In the meantime, State legislators have taken a Walter Mitty-like position, assuming personal taxes will rise 14% between 2015 and 2017, with debt service expense expanding by only 13 percent – projections divorced from reality.

What can Connecticut do? They could issue new pension obligation bonds, taking advantage of lower rates and extending maturities, thereby forestalling the day of reckoning. But is that a real answer? With the state already heavily indebted and in an environment that suggests rates may rise, what would be the costs? They could (and should) move new and recent unionized employees from defined benefit plans to defined contribution plans. But what about legacies? The best answer would be to adopt a pro-growth economic strategy of lower taxes and simplified regulation. The state should end corporate welfare and payments to special interests. They should eliminate the inheritance tax and reduce corporate, personal income, gasoline and energy taxes – making the state more attractive to families and businesses. They could privatize highways and prisons, and should raise the retirement age for employees from 62 to 65. They then would be able to entice immigrants from places like New York, New Jersey, North Carolina and Texas.

A major tax and regulatory overhaul would, of course, initially worsen the state’s financial plight, as benefits would not kick in for a year or two, which is why politicians, reluctant to imperil comfortable lives and chances for re-election, fail to take such actions. But, in a year or two such decisions would result in higher economic growth, which, in turn, would increase tax receipts. Such decisions demand politicians who speak honestly to the people about problems ahead and the tough solutions necessary. Connecticut’s high taxes and onerous regulation have damaged its economy and chased away wealthy individuals and corporations like GE. Without a radical change, things will worsen. The situation is not the fault of one party. It has been a collusive effort. State leaders have forgotten, (or more likely, never heeded) Mitch Daniel’s (former governor of Indiana) maxim: ‘You, the state employee, are servant to the taxpayer.’

As the title of this essay asks, to whom should Connecticut’s politicians have allegiance – to themselves, their party, or the people? The imaginations of our state legislators may not be out of focus, as Mark Twain intimated. It is more likely they know what they are doing – that public service has become a sinecure. We, the voters, should be cognizant that they are leading us down a deceptive and dangerous path.