STUMP » Articles » Connecticut Finances: Running Out of Other People's Money, Looking for Cuts » 23 May 2017, 12:52

It’s been a couple weeks since my last CT finance post, and it’s not getting any better.

Speaking of…

“THE WORSE, THE BETTER”

Chris Powell writes:

‘The Worse, the Better’
Could Be the Greeting
At Collapse of Connecticut
By CHRIS POWELL, Special to the Sun | May 18, 2017

Governor Malloy says negotiations over the state budget, which began this week, have a long way to go, but after wobbling on taxes he has accomplished something remarkable. He has pushed his party’s majority in the General Assembly, the Democrats, to agree that state government’s financial collapse must be fixed mainly by cutting spending, and has induced the Republican minority, which is just a few votes short of displacing the Democrats, to propose cutting spending even more and to get specific about some spending cuts.

It’s amazing what a Democratic governor can accomplish when, forswearing re-election, he no longer must play the tool of the special interests that run the party, the state employee and teacher unions, and can pursue the public interest instead.

Of course the unions, working through Democratic legislators, will try to induce the governor to go wobbly on taxes again. After all, government in Connecticut long has been less a mechanism of public service than of financing the Democratic Party, keeping the party’s most active members on the government payroll. This makes ironic the Republican opposition to the Citizens’ Election Program, which makes all election campaigns, not just campaigns supported by government employee unions, eligible for government funding.

…..
That’s because so much is wrong about the premises of public policy in Connecticut that only collapse can force elected officials to make the necessary changes, which are far more profound than transitory spending reductions. The big money is in getting rid of those mistaken policies themselves. Cutting spending while leaving those policies in place only guarantees that the money will be spent mistakenly again someday.

In their negotiations the governor and legislative leaders are looking at the budget largely as a matter of line items. More importantly they should be asking: What is the cost of forfeiting the public’s authority over government employment through collective bargaining and binding arbitration of contracts?

…..
So why is no one talking about University of Connecticut President Susan Herbst’s $900,000 in annual salary and benefits, which doesn’t count her two university mansions? Especially in higher education, state government is full of similarly overpaid executives.

If I have my understanding correctly, the point of a university president is to raise funds for the endowment and to make sure the undergrads don’t get up to anything too stupid (and to make sure the faculty stay quiet except for approved political stances).

From last year: UConn Foundation Reports Strong Fundraising In 2015-16: “The UConn Foundation had its second-most successful fundraising season, logging $78.3 million.” Now it seems the president of that foundation isn’t Herbst, but whatever.

So what kind of stuff does this foundation fund?

The foundation, a private, nonprofit organization that supports the university, was the target of criticism for helping to underwrite a speech by Hillary Clinton in 2014. The foundation paid Clinton more than $250,000, using money donated by the Fusco family of New Haven, which established the Edmund Fusco Contemporary Issues Forum to bring “outstanding scholars, leaders and policy makers” to Storrs.

Seems to me Herbst’s pay could be supported by the Foundation.

Still not sure what the President of the University is supposed to do. Looking at the communications page, it seems all about civility, diversity, and inclusion. Or something.

In any case, I doubt Herbst’s pay has anything to do with collective bargaining. Unless there is a union for State University Presidents, but not sure how that would work.

CONNECTICUT DEBT LOAD

Governing Magazine claims that states are debt-shy. Could’ve fooled me:

Still Debt-Shy

The amount of debt states are carrying remained relatively flat for the fourth consecutive year, according to a new Moody’s Investors Service analysis. Tax-supported bond debt increased in 2016 just slightly — by 0.8 percent — to total $517 billion. (Tax-supported debt includes most types of bond debt paid back from state tax collections, but does not include self-sustaining bonds that are paid back from revenue generated by the project they finance.)

The outstanding median debt per capita fell by about $20 to $1,006 per person. That shift reflects the fact that population growth exceeded debt growth in some states, Moody’s said.

The states with by far the highest debt per capita are Connecticut ($6,505) and Massachusetts ($5,983). A notable exception to the flat trend was Alabama, which increased its outstanding debt by 21 percent partially due to a large issuance of highway revenue bonds and another large sale of bonds secured by BP settlement revenues.

The Takeaway: If you’ve read the first two items in this piece, then this trend makes sense: States are simply unwilling to increase their debt load in this climate of fiscal uncertainty. Moody’s found that states are shifting toward paying for more capital projects with cash-on-hand (also called pay-go) as a way of avoiding new debt. The agency expects the trend to continue over the next year thanks to “continued modest revenue increases, higher interest rates, and uncertainty over federal fiscal policy and Medicaid funding.”

Note: that’s bond debt, not pension debt.

If you throw in the pension debt, that per capita amount is a lot larger.

Using the numbers from the Public Pensions Database, the unfunded pension liability as of FY 2015 was $25.5 billion. With a state population of 3.591 million in 2015, that adds $7000/person.

That more than doubles the per capita debt.

And that’s using the “nice” assumptions.

RUNNING OUT OF OTHER PEOPLE’S MONEY

It’s nice to see that some reality is being recognized here:

Connecticut, Nation’s Wealthiest State, May be Tapped Out on Taxing the Rich
Connecticut’s budget office expects 2017 income-tax collections to fall for the first time since the recession

The wealthiest state in the U.S. is having trouble collecting enough money to pay its bills, and the Democratic governor doesn’t think taxing the rich is the answer anymore.

After two decades of robust growth, Connecticut forecasts it will come in $400 million short in income-tax collections this fiscal year, worsening a budget crisis that has prompted all three major ratings firms recently to downgrade the state’s credit rating. Connecticut’s budget office estimates that income-tax collections will fall in fiscal 2017 for the first time since the recession.

About $200 million of the drop in receipts came from the state’s closely watched top 100 earners, who are the source of an outsize proportion of the state’s revenue. Many of the state’s richest residents work for hedge funds, which have been hurt by a downturn in the industry.

Gov. Dannel Malloy has twice before bet that taxing the wealthy would help solve the state’s fiscal problems. But neither increase resulted in sustained revenue growth, according to his administration, which says it would be a mistake to do it a third time.

…..
Connecticut is one of seven states, including Pennsylvania, New Jersey and Illinois, that is vulnerable to fiscal stress “even as the broader economy shows signs of gathering momentum,” the report concluded.
It’s a strange turn for Connecticut, which has the highest per capita income in the country, according to the Bureau of Economic Analysis, and is home to hundreds of hedge funds, Yale University, and businesses like insurer Aetna Inc. and industrial giant United Technologies Inc.

The state projects a $5.1 billion budget deficit over the next two fiscal years, fueled by increases in fixed costs over that period including pension obligations, health-care expenses and debt servicing.

In its recent downgrade, which landed Connecticut with the third-lowest rating for a state, Moody’s Investors Service flagged the state’s shrinking population since 2013—the current population is 3.58 million—as contributing to an underperforming housing market and weak labor-force growth.

Governor Malloy had declared that he’s not running for governor again (though he could).

I can’t imagine anybody really wanting to deal with this. The individual legislators can dodge to a certain extent… but wait… is this a hero coming over the horizon?

ONE NEAT TRICK

No, no it’s not.

Lowering Borrowing Costs Through One Neat Trick:

Fresh Off Another Downgrade, Connecticut Has a Plan to Lower Borrowing Costs
But observers disagree about whether it will work.

Besieged by budget shortfalls, Connecticut’s credit rating was downgraded in recent days by Fitch Ratings and Moody’s Investors Service. The downgrades were the state’s fourth and fifth in the past year alone. But if State Treasurer Denise Nappier gets her way, that credit hit might not matter the next time Connecticut goes to sell bonds.

Nappier wants the state to start offering investors revenue bonds that are paid back directly from the state’s income tax revenues. Called tax-secured revenue bonds, these new bonds would be offered in place of general obligation bonds, which are backed by the state’s general revenue collections. Nappier’s office believes the dedicated income stream would mean the bonds would fetch ratings as high as AAA, resulting in a better interest rate and lower debt service costs.

The idea has received mixed reviews.While some observers call it a product that will offer comfort to bondholders wary of Connecticut’s troubles, others say it’s a “financial engineering gamble” designed to game the market. “To create something out of nothing — they’re not being more fiscally responsible by doing it this way,” says Municipal Market Analytics’ Lisa Washburn.

In the past year, Fitch has downgraded the state’s credit rating twice, and Kroll, Moody’s and S&P Global Ratings have each downgraded it once. The latest action puts the credit rating at A+. It is the result, in part, of the state’s third straight budget shortfall. Currently, Connecticut is facing a $2 billion hole over the next two fiscal years. The deficits, caused mainly by weak income tax revenues and burdensome debt costs, have all but drained the state’s rainy day reserve and made it difficult to keep up with its mounting pension obligations.

Deputy Treasurer Lawrence A. Wilson says the tax-secured bonds will insulate investors from the budget and pension concerns they have expressed. Instead, the bonds are “focusing on one of our highest credit positives, which is the high wealth of our state.”

If approved by the General Assembly, the state would issue about $2 billion in revenue bonds a year. Any interest rate savings would be directed into the state’s rainy day fund. Wilson says he expects those savings to total $980 million in fund deposits over 12 years.

When asked if state lawmakers would be tempted to keep raiding the rainy day fund, given the state’s deficit struggles, Wilson acknowledged that was a possibility. “This is the part we can control,” he says. “It’s still a positive contribution.”

Revenue bonds are common with lower levels of government and with housing and transit authorities, but are rarer at the state level. In 2001, New York state created a revenue bond program for streamlining purposes. Rather than having a handful of state authorities individually issuing tax-backed debt, New York’s program created sales and income tax-backed bonds for them.

When it comes to assuring investors they’ll be paid back, most states tend to opt for statutory or constitutional pledges. Illinois, for example, hasn’t passed a budget in two years and has also suffered multiple ratings downgrades. But its constitution contains a “non-impairment” clause that prohibits action by the General Assembly that would damage the state’s ability to pay back bondholders. State law also allows bondholders to sue the state to compel payment.

Well, we shall see. Ask the sales tax revenue bondholders of Puerto Rico how well this “one neat trick” is safeguarding their own investment:

The COFINA group, whose bonds are backed by sales tax revenue, have asked a federal judge in San Juan to deny the G.O. group’s effort to stop Puerto Rico’s government from paying COFINA debt in favor of paying G.O. debt. The bondholders filed the legal brief in U.S. District Court in San Juan late Saturday night.

The bonds were legally structured similarly as what’s being proposed in CT. If they get sucked into the bankruptcy, which the governor of Puerto Rico is trying to do, boy howdy the muni market is going to be a mess.

PITY THE POOR HEDGE FUND GUYS

Or rather, pity the poor state that tries to base its budget on the income of a handful of hedge fund guys, when the ehdge fund guys have down years — CT Hedgie Makes ‘Only’ $1 Billion Down From $5B…CT Solvency How?:

Ray Dalio, Owner of the worlds largest hedge fund, Bridgewater Associates located in CT, made $1 billion last year. This is down from the $5 billion he made the year before.

…..
It gets better. Dalio also received over $5 million dollars last year and another $17 million in low interest loans from CT Governor Malloy to remain in CT. What billionaire needs a loan? The billionaire who doesn’t have to pay it back, with you on the hook, that is who.

…..
Here are some actual suggestions by Malloy to increase revenue. Our comments in bold

Increase income tax on wealthy. – less wealthy means those that remain pay more BRILLIANT. FLA here we come!
Increase the sales tax to 6.99 percent from 6.35 percent. – Tax the poor when you cant tax the rich
Bump the bottle deposit fee to 10 cents from 5 cents.- less homeless people eat and live. That helps.
Add tolls to highways. – Merrit Parkway will become I-95 with trucks
Impose a “soda tax” that would add 1-cent-per-ounce to drinks with added sugar. – Long Beer distributors, short Coke?
Another proposal would allow municipalities to tax property at 100 percent of assessed value instead of 70 percent.

Meanwhile, Malloy is seeking state employee union concessions of $1.57 billion in the next biennial budget, breaking down to $700 million in savings in the 2017-18 fiscal year and $869 million in 2018-19. Up to 4,200 layoffs are possible in the near future.

It’s all fun and games until you run out of someone else’s money

Ayup.

MORE ON HARTFORD

Hartford Discusses the ‘B’ Word:

Budget Shortfalls Roll Downhill

On the heels of Connecticut’s multiple downgrades, its capital city also took a credit hit this week. S&P Global Ratings flagged Hartford’s reliance on state aid as a major concern when it downgraded the city’s credit rating to one notch above junk status. Half of Hartford’s $612 million budget for the next fiscal year relies on state funding.

The downgrade was based on “the heightened uncertainty” as to whether the state could boost financial aid or otherwise lend the necessary support to prevent Hartford from further fiscal deterioration. Connecticut has suffered under chronic budget shortfalls and is facing a more than $2 billion deficit for the next two years.

Adding to rating agencies’ concerns was Mayor Luke Bronin’s open acknowledgment this month that his office is seeking advice from municipal bankruptcy lawyers. “While a bankruptcy filing remains distant, in our opinion, by raising the possibility, we believe that elected officials are seeking to better understand the legal qualifications, process and consequences associated with this action if there is no budgetary support at the state level,” wrote S&P’s Victor Medeiros and Geoffrey Buswick.

The Takeaway: Connecticut’s budget crisis will likely be solved, in part, on the backs of local governments. In his proposed budget, Gov. Dannel Malloy would make local governments pick up a third of teacher retirement contributions (a collective $400 million alone for the upcoming fiscal year). For already dire places like Hartford, such an action would push local officials into new territory: Officials are already less gun shy about publicly discussing the “B” word.

While bankruptcy is still everybody’s last choice, the experience in places such as Detroit; Central Falls, R.I.; multiple cities in California; and most recently Puerto Rico; have seemingly made the process less taboo.

The state can’t bail them out. So.

STATE FINANCES SUCK

Sorry for using such technical terms. Connecticut State Finances get a Grade of F!:

A new study by Truth in Accounting finds that Connecticut state finances continue to be in terrible shape.

Repeated decisions by state officials have left the state with a staggering debt burden of $63.6 billion, according to Truth in Accounting’s (TIA) analysis of the most recent financial filings for 2016. That burden equates to $49,500 for every Connecticut taxpayer.

These statistics are troubling, but what’s more troubling is that state government officials continue to obscure large amounts of retirement debt on their balance sheets, despite new rules to increase financial transparency. This skewed financial data gives state residents a false impression of their state’s overall financial health.

Truth in Accounting is a Chicago-based nonprofit think tank that analyzes state financial reports when they are published. According to their report, Connecticut has $11.3 billion available assets to pay $74.9 billion worth of bills. This means the state has a $63.6 billion shortfall and a $49,500 taxpayer burden™, which is each taxpayer’s share of state bills after its available assets have been tapped. TIA’s Taxpayer Burden™ measurement incorporates both assets and liabilities, not just pension debt.

Remember how I estimated the per capita debt above?

That was for each individual, which obviously included children and other people not paying taxes.

Here’s Truth in Accounting’s CT report. They had more updated pension info, and they included retiree health care liabilities (which I did not).

Reverse engineering their calculations, TIA is saying there are 1.3 million taxpayers (versus the 3.9 million in total population). That sounds about right.

Compilation of Connecticut posts