Debt & Inequality

Why Connecticut Is Collapsing

The state with the nation’s highest average income grapples with a huge debt problem even as young people and big employers — including Aetna — head for the exits.

The land of steady habits has a money problem.

Connecticut, the richest state in the nation, has racked up $74 billion in debt. Its finances have more in common with Puerto Rico than Massachusetts, as the home of America’s financial wizards struggles to pay off its massive obligations big as the bills come due on decades of mismanagement.

While ballooning payments for  public employees’ guaranteed pension and health benefits for public employees and teachers are the main cause of Connecticut’s fiscal misery, the state continued borrowing with the abandon of a teenager let loose in a Forever 21 with her parent’s credit card. Jobs lost during the recession have not returned. Its youth and future tax base is fleeing for New York and Boston. Fortune 500 companies are following them out of town.

And it could get worse before it gets better.

Lawmakers, who have been bickering with Gov. Dannel Malloy for months over how to clean this mess up, missed a July 1 deadline to pass the state’s $40 billion budget. There are currently four different proposals circulating, and Malloy predicted there won’t be an agreement until September or October.

At that point, the state will likely be operating with a deficit that could climb to $5 billion over the next two years.

But with no budget in sight, Hartford, a microcosm of the state’s troubles, is contemplating bankruptcy. The state’s four major cities, Hartford, Waterbury, New Haven, and Bridgeport, have accumulated a combined $4.8 billion in retirement benefit obligations and may need future intervention from the state to handle its debts.

And the most frustrating thing about Connecticut’s struggles are that they never had to occur.

“A lot of what is going on now could have been predicted 30 years ago,” said state Comptroller Kevin Lembo. “Revenue was flowing into state coffers but politicians never did the hard work to make sure the retirement system was funded. They did the opposite and had them underfunded.”

For 80 years the state failed to properly save for the cost of pensions promised to its public employees and teachers. Its spendthrift decisions led then-Gov. Lowell Weicker to enact a state income tax in 1991.

Soon buckets of revenues from the new tax and from the state’s passage of legalized casino gambling began to flow into state coffers. State’s leaders went on a spending spree.

Then-Gov. John Rowland made deals with unions delaying the bulk of benefits payments for decades while increasing borrowing to pay for glitzy capital projects like Adriaen’s Landing, new school buildings and dorms at the University of Connecticut’s campus, and a new football stadium designed to lure the New England Patriots from Massachusetts.

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The Patriots never came but a much larger “Bill” arrived years later.

The state’s debt obligations rose from 12 percent in 1997 to 31 percent by 2018, according to the state Office of Fiscal Analysis. Those costs rose about 10 percent a year between the end of the recession in 2011 and this year, according to a CT Mirror analysis.

Meanwhile the state’s revenues have flattened.

Total tax revenues went by by only about 4 percent a year since the end of the recession and budget analysts believe they’ll stay at about 3 percent through 2020

Income tax revenues — the golden goose of Connecticut’s treasury — had its first major decline since 2009, from $9.2 billion last year to under $9 billion this year, state records show. Budget analysts believe Connecticut will collect $1.46 billion less cash over the next two years.

Malloy, a Democrat, said he has spent his term in office “undoing the harm” of his Republican predecessors, Rowland and M. Jodi Rell.

“[Rowland] basically increased the state’s obligation by giving more benefits in pursuit of re-election and a desire that he had that he wouldn’t have to pay any of that and kick the can down the road 20 years,” Malloy said in an interview. “Guess who is the first governor who had to deal with that 20 years later?”

Rowland, currently serving the second of two non-consecutive terms in federal prison, was not allowed to return a phone call. Rell did not return messages.

Critics say Malloy did little to tackle spiraling pension and benefit costs in his first term.

“Malloy’s first budget when he took office in 2011 was a great failure and much of his other public policymaking was a failure,” said former gubernatorial candidate Bill Curry. “He didn’t deal with the pension crisis then and he reneged on healthcare reforms he promised. He could have made the government more solvent and the economy more vital and he didn't do any of that.”

A string of unpopular moves including tax hikes, spending cuts, and state worker layoffs has eroded Malloy’s approval ratings.

Only 29 percent of voters approve of his performance while 64 percent disapprove according to a July Morning Consult poll, third-lowest among all governors in the country.

Malloy has been sanguine about difficult decisions he made in his career.

“If I had a magic wand I would have done much more,” he said. “I spent six-and-a-half years dealing with these issues and will continue until the last day of office. I think we’re getting better but we may not be getting better fast enough.”

This year Malloy proposed to slash funding for social services and education. He has already negotiated a deal with state employee unions that called for a two-year wage freeze in exchange for four years without layoffs and extending benefits for five additional years -- which could save $1.57 billion over the next two fiscal years.   Another tax hike is a non-starter but there could be cuts of  $700 million in aid to towns and cities.

*****

That could spell doom for Hartford’s teetering fiscal health.

The city is facing a projected $65 million deficit in its $613 million budget next year thanks to rising pension obligations and debt costs. Sound familiar?

Connecticut’s other cities are bracing for cuts. New Haven Mayor Toni Harp announced a budget freeze for the last six weeks of the fiscal year when Malloy proposed eliminating $1.9 million in local aid for the city. New Haven planned to receive $31 million from the state for its $555 million budget next year but Harp said she did not expect the money to materialize.  Hartford officials expect to receive $258 million from the state next year. Mayor Luke Bronin has asked for an additional $40 million to help close the budget gap. He also wants the state to bump up its “Payment in Lieu of Taxes” to Hartford, since state government office buildings, hospitals, and schools sit on half of the city’s taxable property, but that’s a long-term solution.

Bronin has already eliminated about 100 jobs and shaved $20 million from the budget, but he refuses to raise taxes and has gotten nowhere so far in his budget stalemate with his equally tapped-out state. So he is conferring with a team of Greenberg Traurig lawyers about about financial restructuring.

No one wants to see Hartford declare bankruptcy, which would be a nationwide embarrassment. But the city is running out of options.

“While we’re not afraid of touching third rails there’s a limit to how much to cut before defaulting on our basic obligations,” he said. “We cannot tax or cut our way out without damaging city’s ability to retain and attract residents and businesses.”

*****

The state boasts the highest per capita income in the nation at $71,033 per year, Bureau of Economic Analysis records show.

Well-heeled hedge funders in enclaves such as Old Greenwich, with an average household income of $341,401 in 2015, and Darien, with an average household income of $331,277, keep the state on top.

But Connecticut has always been a place of paradoxes.

Hartford, which is grappling with a poverty rate of 28 percent and a 9 percent unemployment rate, has a median income of $28,970 and the average taxpayer contributes $903 to the state in 2015. A Darien resident earned an average income 11 times higher than a Hartford resident while the average Greenwich taxpayer paid the state roughly the same amount in income tax revenue as 27 Hartford residents combined.

The rich-poor divide isn’t just between its wealthiest towns and its most impoverished cities. The state has the highest income gap in the country between its top taxpayers and everyone else.

The top 1 percent earned an average of $2.7 million per year compared with $52,000 for the rest of the state, a 51 to 1 ratio, according to a 2015 Economic Analysis and Research Network report.

The state’s top taxpayers largely work in the finance sector. Connecticut’s fiscal health is so intertwined with that industry industry that when the market falters and bankers’ earnings dip, its tax revenues decline in response.

But Connecticut, whose cities for centuries were bastions for manufacturing, also resembles struggling Rust Belt states.

Workers in the fertile Farmington River Valley made cabinets, pistols and rifles, brass buttons and bells, felt hats, clocks, screwdrivers, textiles, thermoses, and bicycles well through the 20th Century.

Today high-end manufacturing and aerospace companies including United Technologies, Pratt & Whitney, Electric Boat, and Sikorsky Aircraft call the state home.

But manufacturing’s national decline since the 1970s has hollowed out the state’s cities. And as they sputtered, the suburbs flourished — and became destinations in their own right

When President Ford told New York City to “drop dead,” General Electric decamped for Fairfield where it built a boxy half-million square foot complex on 67 acres in 1974. Union Carbide left two years later and built its 2-million square foot lair in Danbury 1982. Aetna even added a 1.3 million square foot suburban outpost in Middletown in 1984.

Financial firms began flocking to Fairfield County in the 1980s, making the famed Gold Coast even wealthier.

But two recessions in the early 1990s and late 2000s jolted the state.

Connecticut lost 119,100 jobs from 2007 to 2010, and has only regained only 83,800 of them, or 70%, since, according to 2016 state Labor Department figures.

The jobs that did return paid lower wages than those lost and were concentrated in the service, leisure and hospitality, and healthcare industries. The state eliminated thousands of public-sector positions. Banking openings have ebbed. Some manufacturing may be gone for good.

Connecticut’s population has churned as its youth chase opportunities elsewhere and retirees fled to warmer climes.

Its total population fell to 3.576 million in 2016 from 3.596 million in 2013 and is now below 2010 levels, according to U.S. Census records.

The decline is largely due to domestic outmigration, or residents fleeing for other states. Records show 135,684 people left from 2010 to 2016, although foreign immigrants and births have replaced some of those losses.

Young adults (age 18 to 29) are leaving the state at a higher rate than other groups, according to state revenue records analyzed by CTdata.

The largest number of people leaving the state are primarily from the lowest income brackets, although CTdata found a significant level of churn among those earning $5 million or more.

Most of these Connecticut residents have moved to New York, Massachusetts, or Florida, although some New Yorkers have settled in Connecticut after being priced out of their state, according to IRS records. That’s no surprise as New York and Boston are in the midst of renaissances.

Companies are following the talent pool from the suburbs to the metropolis.

GE announced it would leave Fairfield for Boston last year. UBS put its Stamford-based trading floor up for sale and bolted to New York in December. Even Aetna, which has called Hartford home since 1853, announced last month that it was rejecting various enticements from the state to stay and instead moving its headquarters to New York City.

Aetna’s CEO Mark Bertolini, took a parting jab at Connecticut on his way out.

"We have continued to work with the governor and mayor of Hartford to try and improve the quality of life in the Hartford area, but that is too slow in coming,” he told the New York Times.

“New York City is a place where prospective young employees want to be,” he said, and it is "very hard to recruit people like that to Hartford.”