States Under Fiscal Pressure: Connecticut

Letting automatic raises go through, when the state can't afford it

This one, like New York, will have a direct effect on me. As I remarked on Friday, Connecticut was already in a bad place, fiscally, before COVID-19 hit.

I actually started this post a month and a half ago, so let’s step in the time machine and go to the beginning of May.

May 2020: Governor of CT to make certain cuts, allow state workers to get automatic raise

Many states have had to revisit their budgets, and most states are required to have “balanced” budgets [though said “balanced” budgets often exclude key items such as pension contributions. Skip a contribution? No problem! It’s a future cost, not a now cost! [though it is a now cost]]

In May, the governor of CT did the following: Lamont to cancel tax relief, seek labor savings to shrink $2B deficit in July

Gov. Ned Lamont warned Friday he will cancel tax relief and impose $400 million in emergency spending cuts to mitigate the multi-billion-deficit projected for the upcoming fiscal year.

Lamont also hinted he is considering both a gasoline tax hike to bolster transportation funding and another round of state employee givebacks — though he later deflected questions about both subjects.
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One of the first steps, according to the governor’s budget director Melissa McCaw, is to cancel about $100 million in previously approved tax cuts Connecticut no longer can afford.
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McCaw also said the administration would work with legislators to find at least $400 million in spending cuts next fiscal year. The goal is to hold a special legislative session in late June.
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Connecticut, which currently has about $2.5 billion in its rainy day fund, expects to have $1.8 billion-to-$1.9 billion left by July 1 after closing another deficit this fiscal year.
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Is Lamont ready to ask unions for concessions?

“We’re going to have to streamline things, make some cuts [and] work in collaboration with our *friends in labor,” Lamont said Friday.

When asked whether that meant reopening contracts, he said “No, I am going to sit down with our friends in labor.”

Friends, huh?

I bet you guys are all just chums.

Absent layoffs, the only way to reduce labor costs substantially and quickly involves renegotiating wages and benefits fixed by contract. When asked how he could achieve savings without renegotiating contracts, Lamont responded: “Can I get back to you on that?”

Yeah, you’ve really thought this one through, knuckleknob.

Gasoline tax hikes — possibly tolls — under discussion

The governor also hinted at — but made no definitive statement — about raising fuel taxes to bolster Connecticut’s transportation program.

Oh dear lord, this is dumb. Back in May, the only people driving were essential workers — delivery trucks, people like that. Where I used to gas up three times a week, I was getting gas about once every 2 to 3 weeks.

Lamont, who spent much of his first 14 months in office trying to convince legislators — unsuccessfully — to order tolls, didn’t respond directly when asked if he would try a third time.

Here is a prior post with tolls idea. It’s not popular.

Back to the gas tax:

Connecticut already has two taxes on gasoline. A retail excise tax imposes a flat charge of 25 cents per gallon. A second tax adds 8.81% to the wholesale price when gasoline is delivered to local retailers, who’ve long acknowledged they then build the cost of that tax into the retail price charged to motorists.

And here’s the kicker [for me]: I used to buy gas primarily in CT, because it was cheaper than NY. I barely go to CT now, except to get to the Trader Joe’s right across the border from me. There’s a gas station right next to it. I have used it once in the past 3 months.
Okay, that was the state of play at the beginning of May. Lamont needed to talk with the CT public employee unions and get back to everybody.

So let’s see what came of Lamont talking with his “friends”.

In June: Governor says my buddies said no to postponing raises

Lamont says state employee unions won’t postpone raises

Gov. Ned Lamont said Tuesday that the state employees’ bargaining coalition has rejected his call for workers to forgo raises owed them at month’s end and help the state cope with financial pressures caused by the COVID-19 pandemic.

“I would have put it off, and I think we should put it off,” Lamont said of the raises. “I think we’re in an economy where you’ve got close to 20% unemployment. I think you’re in an economy where you see a lot of people on furlough.”

Under the public health emergency declared in March, Lamont has sweeping powers to set aside state laws and regulations, but he said he has no authority to unilaterally abrogate a contract and postpone raises.

“No, I tried,” he said. “No, we can’t find any way I can do that.”

Mmmhmmm.

Daniel Livingston, the lawyer who represents SEBAC, the State Employee Bargaining Agent Coalition, had no comment on Lamont’s announcement other than to refer to a statement the labor group posted on May 9 after the coalition’s only meeting on the topic of COVID-related givebacks:

“Of course, state employees are already sharing the state’s fiscal pain. Those raises are due in accordance with the 2017 SEBAC Agreement, where state employees to date have received one general wage increase in the last four fiscal years. Meanwhile large corporations and multi-millionaires and billionaires have done little to help address state fiscal issues. Their state and local tax rate remains below that of working families.”

Oh, bullshit.

SEBAC with the “Let’s tax the rich more!” slogan, which is always their fallback.

The state is already too dependent on taxing rich people. And, we will see below, rich people can be very volatile in their income and spending habits.

But back to the piece:

Senate Minority Leader Len Fasano, R-North Haven, among the first to publicly call for a postponement of the raises, said he hopes that the legislature and public remember the unions’ refusal when the contracts expire.

“When they raise this issue tomorrow in a new contract, I hope people remember they wouldn’t even postpone the raises,” Fasano said. “I just hope they remember that at a time when we all could use a break, they weren’t willing to sit with the governor, a Democratic governor, to work with him.”

And perhaps voters should remember how useless all these politicians have been when election day rolls around.

The $530 million shortfall projected for the fiscal year that ends June 30 has grown to about $900 million, a result of a delay in federal Medicaid payments. But bigger problems lay just over the horizon.

Simply put, from 2021 through 2023, the state’s revenue craters. State budget analysts project shortfalls ranging from $2 billion to $2.33 billion in each of those three fiscal years.

OH THAT WILL BE FUN.

The rich retreat during COVID crisis

Wow, even the NYT has discovered the trickle-down economy: The Rich Cut Their Spending. That Has Hurt All the Workers Who Count on It.

The recession has crushed this kind of work in particular: service jobs that depend directly on the spending — and the whims — of the well-off.

Economists at the Harvard-based research group Opportunity Insights estimate that the highest-earning quarter of Americans has been responsible for about half of the decline in consumption during this recession. And that has wreaked havoc on the lower-wage service workers on the other end of many of their transactions, the researchers say.

“One of the things this crisis has made salient is how interdependent our health was,” said Michael Stepner, an economist at the University of Toronto. “We’re seeing the mirror of that on the economic side.”

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Mr. Stepner and the economists Raj Chetty, Nathaniel Hendren and John Friedman have collected data from credit card processors, payroll firms and other private companies tracking how and where people spend their money, and how businesses and their workers have been affected as a result. By tying debit and credit card spending back to the home ZIP codes of millions of anonymized cardholders, they estimate that households in the bottom quarter of ZIP codes by income cut their spending by about 30 percent from pre-coronavirus levels at the lowest point in late March. Now, with the help of government stimulus, low-income spending is down only about 5 percent.

For the highest-income quarter, spending has recovered much more slowly, after falling by 36 percent at the lowest point.

This accords with my own experience: I checked my changes in expenditures:

— January: +13% [that is mostly a tax timing issue]

— February: -26% [again, tax stuff]

— March: -36% [this is not tax stuff]

— April: -25%

— May: -64% [May 2019 was higher than usual, due to car stuff…which we’ve put off in 2020]

— June [so far]: +25% [we had work on Stu’s truck, and my turn will come in July]

So there you go. And I’m definitely in a top 25% ZIP code.

The apples-to-apples comparison of January-May 2019 against January-May 2020 showed a 38% drop in spending for me.

There are a bunch of services I used in Hartford, when I went into the office: lunches, chiropractic/massages/acupuncture, gas, etc. And I’m not paying for them now. And the state of Connecticut is not getting sales taxes off of those services.

Drop in State Revenues

This is from the end of April: Report: State revenues crater amidst COVID-19-induced economic chaos

The coronavirus-induced recession would rip an unprecedented $7 billion from Connecticut’s coffers by 2023, fiscal analysts warned Thursday, quickly consuming a record-setting rainy day fund and triggering another major debate over tax hikes.

The economic chaos also would shrivel gasoline tax revenues and accelerate the transportation program’s march toward insolvency, approaching the brink in 2022, according to the consensus report from Gov. Ned Lamont’s administration and the legislature’s Office of Fiscal Analysis.
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Revenues for the budget’s General Fund, which covers the bulk of operating costs, should come in almost $1 billion under budget when the fiscal year ends on June 30. Just two months ago, no erosion was projected.

At first glance that contradicts the $530 million shortfall Lamont projected just two weeks ago.

But most of the bad news involves accounting. About $370 million in federal Medicaid payments expected before June 30 now won’t arrive until November.

But that $530 million-to-$1 billion problem is small to what Connecticut faces next.

Simply put, from 2021 through 2023, the state’s revenue craters.

Analysts project shortfalls ranging from $2 billion to $2.33 billion in each of those three fiscal years. And the gaps would be even larger were one type of revenue — additional federal aid — not offsetting some of the massive erosion in tax receipts.

Analysts say tax revenues in 2022 should come in under $14.6 billion, down $2.5 billion, or 14%, from pre-pandemic levels.

The report of April 30, 2020 is here.

I went looking for any estimate updates, and I can’t find any (yet). Everybody’s attention has been whipsawed away from the state fiscal crises and onto other matters. That said, eventually the reality of much lower state revenues will start to bite.

I expect to be hearing more about this in September, when people get serious again, even though all our cycles have been disrupted.

Twitter interlude

Recommendations for Actions (or Non-Actions)

Op-ed in the Hartford Courant: We have a once-in-a-lifetime opportunity to fix Connecticut. Here are four things we have to do.

First, cancel the $353 million pay increase to state employees scheduled for July 1. Even the most hardened union leader surely sees the inequity of working from home for weeks, with full pay, the most generous benefits in the world and now a big raise — when the mom or dad next door has been furloughed without pay, left wondering how to afford this week’s groceries.

Second, enact an immediate freeze on any discretionary spending across every department of state government. Businesses and families across the state are cutting costs to the bone to survive — why can’t our government officials do the same?

As just one example, why did we pay $2 million to a bunch of out-of-state-consultants to assist in reopening our state?
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Third, start being transparent. People will be more understanding if they are given the facts and have a voice in the conversation. It’s hard not to sympathize with hair stylists who faithfully prepared their shops for weeks, then booked dozens of appointments, only to be disappointed just days before re-opening.

And finally, use this crisis to make fundamental changes to the cost structure that legislators have not had the courage to make for decades. The governor’s emergency powers, the harsh reality of a pandemic and the renewed will of residents for change provide Mr. Lamont with a real chance to fix the largest impediment to economic growth in Connecticut — a $130 billion under-funded pension plan.

That would be nice, but the governor has shown a deep unseriousness with respect to state finance in general. If he can’t say “Oh yeah, we need to stop those raises for a bit,” do you think he can tackle pension reform?

Or the CT state legislature?

Bah.

Yankee Institute Statement: Gov. Lamont must demand shared sacrifice regarding state employee raises

I don’t think Lamont knows how to demand anything,

At his press conference today [June 9], Gov. Ned Lamont insisted that he has no power to suspend a scheduled wage increase for state employees at a time when Connecticut is facing unprecedented unemployment and budgetary problems. He’s essentially telling us state government unions are so powerful – and their perks so ironclad – that no elected leader can review them even in a time of unprecedented economic crisis.

That’s not good enough. The people of Connecticut deserve fairness during this crisis. New York Gov. Andrew Cuomo suspended a scheduled state employee wage increase in April and Pennsylvania Gov. Tom Wolf froze the pay of 9,000 state workers. If the governor has the power to suspend legislative actions and regulations, to close over 36,000 businesses in Connecticut and put hundreds of thousands out of work, then he has the power to suspend state employee raises that will further strain Connecticut’s budget. Shared sacrifice during this time has to be shared by all — including government employees who have not missed a paycheck during this pandemic. This is more evidence of Connecticut’s government unions’ stranglehold over state government. Gov. Lamont should do what’s right and take the steps that he knows are necessary to put this state on the right path to recovery.”

Statement attributable to Carol Platt Liebau, President of Yankee Institute

The Yankee Institute is realistic. The day after that specific blurb-release, they posted this: Gov. Lamont folds on state employee raises as union airs commercial supporting wage increase

Oh, wait – they had an ad? Let’s see it.

and here’s the text from the Yankee Institute:

State employees are scheduled to receive the second half of a roughly $353 million pay raise in July, the start of a fiscal year that is already estimated to be facing a $2.2 billion deficit.

The commercial comes as Connecticut faces an projected $7 billion budget deficit over the next three years and 531,000 state residents filed for unemployment claims amid the coronavirus shutdown of non-essential businesses.

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The 2017 SEBAC Agreement negotiated between Gov. Dannel Malloy and the State Employee Bargaining Agent Coalition, offered the raises and layoff protection for state employees until July of 2021 in exchange for increased medical premiums and copays and a new retirement tier.

New York Gov. Andrew Cuomo temporarily suspended a 2 percent pay increase for state employee in April and Pennsylvania Gov. Tom Wolf froze the pay of roughly 9,000 state employees, saying they could take vacation time or unemployment.

There have been numerous actions by states and state universities across the country to reign in labor costs as they face difficult budgetary problems due to the pandemic.

The commercial that just began airing on June 8 certainly appears to be a rejection to the idea that state workers might have to wait for raises.

Yeah, a lot of people are seeing decreased incomes in 2020, or anticipating decreases. A huge portion of CT’s income tax take is from people like me, who get some variable bonuses, and if our companies aren’t doing well, we know we could get bupkis.

Bonus season differs by company – some at the end of the calendar year, but many/most in the financial biz do it in the 1st quarter, after they’ve finalized their accounting for the prior year.

Maybe financial services, a huge industry for CT, will be recovered by December. The CT politicians had better hope so.

Many people are rethinking their assumptions

I pay a lot of taxes to both CT and NY. At least, I do get a lot of services from NY for our family (specifically our kids, and most specifically, our autistic son), but the services I get from CT are mainly road-related, especially making sure roads are cleared after snow. They’ve gotten a little better these last couple years.

CT gets about as much out of me in taxes as does NY, and both takes put me over the SALT cap (and still I say the SALT cap should be zero!)

For right now, due to our son in particular, I’m not thinking of moving.

But I have had various friends think it through, including one who has finalized a move back to Canada in July.

The lockdown and other reactions are having an effect, and many people are rethinking their assumptions about where they need to live. Many people are rethinking the attractiveness of living somewhere near New York City… and for Connecticut, they’re in an even less envious place.

When you realize that maybe you can do all your job remotely… you realize you can get even more remote than you had originally thought.

I have no idea how my taxes are going to go next year when I file. I live in New York, and I work for a company based in Hartford, CT. I haven’t been back in Hartford since mid-March. I don’t expect to be back there before September, and that’s dependent on whether NY schools open up again.

In any case, it looks like CT is going to be getting less money from the likes of me, and hiking up the taxes will definitely not bring me or others similarly situated back. Many of us realized that, once certain expectations were blasted away, that maybe we could do something different.

On September 12, 2001, I started rethinking many things. I ended up dropping out of grad school and going down a path I had never expected. Many people changed their paths in response to 9/11.

I didn’t see it so much with the Great Recession, but I think that was a slower process.

But what’s going on this year? Yeah. A lot of people are making big decisions in a short amount of time, as they’re doing cost/benefit analyses with new sets of assumptions… and coming up with very different answers from where they were before.

The government planners of Connecticut, and many other states, should realize that conditions already may be pushing current residents to become former residents. Increasing taxes will just cement that decision.