A new analysis says every taxpayer owes $41,000 to pay down Connecticut’s debt, the nation’s worst
Connecticut is in the worst financial position of all 50 states, a “sinkhole” costing each taxpayer a burden of $41,200 to pay down the state’s outstanding debt of more than $63 billion, with only $10 billion in liquid assets available, according to a report recently published by the Institute for Truth in Accounting (IFTA).
The state is in worse financial shape than New Jersey, Illinois, Hawaii and Kentucky who are listed at Nos. 49, 48, 47, and 46, respectively. Even traditionally “poor” states, including Maine (No. 38), Mississippi (37) and Alabama (34), fared better. Only four states — Utah, Nebraska, North Dakota and Wyoming — were in the black.
The report goes on to say that the Nutmeg State “has $29.4 billion worth of assets, but most of these assets are not available to meet the state’s obligations. Almost $14.9 billion of these assets is infrastructure like roads, bridges and parks, which cannot realistically be used to pay bills. The use of $4.4 billion of the assets is also restricted by law or contract. Only $10.1 billion of the state’s assets are available to pay $63.4 billion of bills as they come due.”
Connecticut state statutes require that the legislature pass a balanced budget biennially, but the report notes that “one of the reasons Connecticut is in this precarious financial position is that state officials use antiquated budgeting and accounting rules (‘political math’) to report Connecticut’s financial condition.” Gov. Dannel P. Malloy had campaigned during his election bid to rid the state of these inefficient accounting methods and convert to generally accepted accounting principles, or GAAP, to more accurately reflect the state’s true financial condition. But implementation of GAAP has been stalled and can’t be implemented for the current budget cycle, according to Watertown State Sen. Robert J. Kane (R-32), ranking member of the Appropriations Committee, who is familiar with the IFTA report.
“For years, we’ve kicked this can down the road as far as we could, but at the same time, we continue to extend the deeds of previous administrations,” says Kane, who pointed out the that 20-year contract created in 1997 as part of the recent concessions by state employees’ unions was extended for another five years. “All we’ve done is extend that bad agreement that we already had in place for another five years.”
Adds Kane: “The point is, we need real reform and when it comes to our pension liabilities, how we offer benefits to state employees, the spikes [in payouts] that occur when individuals get ready to retire — there’s a whole host of things that we need to address and reform that we have yet to do. We’ve never reformed the actual weight that we’re going to collapse under.”
Beyond the existing fiscal sinkhole, big spending projects continue to be added to Connecticut’s debt burden. On September 30, Malloy announced that the state would lend some $400 million, which includes debt service, to Jackson Laboratories of Maine to develop a bioscience facility adjacent to the University of Connecticut Health Center in Farmington (BNH, November). On November 21, Malloy announced that the New Britain to Hartford busway would move forward, with the state covering $112 million of the total cost of $567 million for the project.
Kane agrees that the recently announced $100 million surplus won’t help much to pay down the $63 billion in state debt nor the $53.4 billion of the state employees’ retirement funds and related pension costs that the IFTA report cites.
“We have failed to fund these obligations for many years,” says Kane, noting that last year’s deficit mitigation special session called for $100 million to be set aside to pay down some of the debt. “We deferred that,” notes Kane. “We keep deferring, deferring, deferring, and sooner or later this ‘credit card bill’ is going to come to bear, putting that weight on the next generation and on the next, until each one of us has that obligation of $41,200 cited in the report.”
“I do believe that we are the worst in the country,” says State Rep. Sean J. Williams (R-68) of Oakville, ranking member on the legislature’s Finance Committee. “For all the talk of Connecticut’s new enlightened path, where we’re playing nice with big labor and we ask for more from taxpayers, in order to attempt to sustain an unsustainable level of spending, in that process we add to our ever-growing debt problem.”
Williams notes that other states have gone the route of cutting spending and taxes to create economic activity. “Investors and the business community will never take a state like Connecticut or New York seriously unless and until we start creating an environment where they want to be here to create jobs. Every time we run into a little fiscal ‘hiccup,’ we look to raise taxes instead of looking to cut spending. We had a huge ‘belch’ this year and instead of cutting spending — we not only raised taxes, we raised spending. And that in and of itself adds to our debt problem.”
In an e-mail response to questions submitted by BNH, state Treasurer Denise L. Nappier noted that “The Institute for Truth in Accounting (IFTA), in its characterization of Connecticut as a ‘sinkhole’ state, may succeed in prompting a comprehensive response to the issue of Connecticut’s debt burden. That kind of attention is a long time coming.”
Nappier said she has raised concerns “about one of the fastest-growing aspects of our state’s debt burden, its obligations to fund pensions and other post-employment benefits. For example, in 2001 I testified that ‘No single issue facing our state pension system — and the fundamental integrity of future state budgets — is more important than fully funding the state’s annual pension contributions.’ Since then, Connecticut has taken important steps to correct its debt profile going forward.”
Nappier noted that the IFTA’s assessment of Connecticut’s total bonded indebtedness at $22.7 billion was more than what she had found it to be: $19.2 billion, or “some $3.5 billion less than stated.”
Nappier pointed to the fact that when Connecticut’s high per-capita wealth, the most in the nation, is compared with other states in terms of total debt, “We actually are about average and in the middle of the pack. Given that Connecticut has no county form of government, and most of the bonding, particularly for schools, is done at the state level, we think that comparisons with other states should take that into account. So by comparing apples to apples, so to speak, we believe that the total amount of debt our government has borrowed against our citizens’ revenue is a key credit consideration and better measure of our ability to pay.”
“I am a proponent and have always advocated for truth and transparency in the budget process, including the use of Generally Accepted Accounting Principles [GAAP],” added Nappier. “Connecticut is currently transitioning to GAAP accounting and beginning this fiscal year, a portion of the budget surplus is directed to funding the GAAP conversion.” She noted that GAAP will afford a more accurate reporting method of the state’s fiscal situation “and give policymakers and citizens the best information with which to debate and determine our future.”
“Is there room for additional improvement? Absolutely,” she added. “The new administration headed by Gov. Dannel P. Malloy has, in a short period of time, demonstrated the will and discipline to chart a more fiscally sound future for Connecticut.”
“I applaud the desire of the governor to implement GAAP. It’s something that we should have done many years ago, but he hasn’t done it yet,” counters Williams. “That’s because he recognizes that implementing GAAP will show an even larger deficit than we show now. He claims that his budget contains no gimmicks, but by not implementing GAAP, his budget inherently contains gimmicks.
“Now that this budget has been passed into law,” Williams adds, “we are finding that many of the savings we expected will not exist so we’ve gotten ourselves into a worse problem. We have a no-layoff clause built into the budget [for unionized state employees]. If the savings doesn’t materialize and we can’t lay off a single employee, what do you think is going to happen? We’ll have tax increases.”
As for the Malloy administration’s focus on the shortcomings identified in the IFTA report, Kane says, “Let’s hope that they’re noticing this report and willing to address it, because that’s where the real reform is going to come from. Because the legislature certainly doesn’t have the wherewithal to tackle it.”