Despite being rejected by the state appropriations committee and denounced by municipal leaders across the state, Gov. Dannel Malloy’s plan to transfer one-third of teacher pension costs onto towns and cities is still being considered during budget negotiations.
The governor’s plan, which was presented in February, was widely criticized as a “colossal cost transfer” onto towns which would drive up property taxes.
However, during a June 22 press conference, House Speaker Joe Aresimowicz, D-Berlin, and House Majority Leader Matthew Ritter, D-Hartford, floated the idea of raising the state sales tax to 6.99 percent and using the increased funds to help municipalities pay for teacher pensions.
Aresimowicz said the increase in sales tax would bring an additional $460 million in revenue, more than enough to cover the projected $407 million in teacher pension costs to towns and cities.
“So that would cover the $400 million into the teachers retirement that the governor has proposed,” Aresimowicz said.
Ritter added, “we don’t know that we’re going to do that, but any increase you would make to that would be locally diverted.” Ritter said that towns would only be eligible to receive the increase sales tax revenue if town residents voted in favor of it.
“Otherwise you get nothing,” Ritter said. “Its time. If we’re all going to share, we’re going to share.”
But Joe DeLong, executive director for the Connecticut Council of Municipalities said his organization would be “vehemently opposed to that concept for a variety of reasons,” including the effect such a cost-transfer could have on local property taxes.
“Nobody is having the right conversation,” DeLong said. “If the system is broken, what do we do to repair it going forward, rather than just throwing more money at it?”
Local leaders may be right to be skeptical of such proposals. If history is any lesson, making a deal with the state of Connecticut to “share” can turn out poorly.
In 2011 during a major budget crisis, Connecticut enacted a new provider tax on hospitals which increased the amount of federal Medicaid funding received by the state. The federal funds were supposed to be used to reimburse hospitals for their tax costs through supplemental payments.
According to a report by the Office of Legislative Research, hospitals paid $349 million in FY2012 and received $399 million back from the state for a gain of $50 million.
However, after that initial increase, the state began to raise the tax on the hospitals and slash reimbursement payments. By 2016, hospitals paid $556 million in taxes and only received $164 million in supplemental payments.
At one point the governor withheld those supplemental payments in order to deal with a midyear budget deficit before finally agreeing to pay a reduced amount.
The Connecticut Hospital Association filed a petition with the Department of Social Services and the Department of Revenue Services challenging the tax but the CHA’s argument was rejected.
The CHA then petitioned the federal government to declare the practice illegal and claimed the funding cuts resulted in the loss of nearly 1,400 jobs.
The result of that petition remains undecided and this year the CHA had to face down Malloy’s plan to let municipalities charge property taxes on hospitals.
Connecticut has a long history of raiding dedicated funds in order to balance budgets. The state has regularly raided the school bus seatbelt fund, the tobacco fund and the transportation fund to help balance the budget.
If the sales tax/teacher pension plan were enacted, there is little guarantee the state would hold up its end of the bargain, particularly because the sales tax increase may not be able to keep up with the growth in teacher pension costs.
Connecticut will have to pay $1.3 billion into the teacher pension system during FY 2018 but due to the $10 billion in unfunded liabilities those payments will continue to grow - and so will the municipalities’ contributions.
According to the governor’s estimate, the initial cost to municipalities in 2018 would be $407 million. The very next year that figure increases to $420 million.
The Center for Retirement Research at Boston College estimates the cost of teacher pensions will grow to $6.2 billion by 2032, which would leave municipalities on the hook for $2 billion annually.
Not all cities and towns would see a loss from the pension costs, at least not at first. Distressed municipalities like Hartford and Bridgeport would receive more aid from the state in order to cover their share of the pension costs.
Of the 169 municipalities in Connecticut, 25 were considered distressed by the Department of Economic and Community Development in 2016 and would likely see no increased costs as they would receive more state aid.
As the teacher pension burden grows, however, it is questionable whether the state of Connecticut would be able to provide enough aid to make up the difference for those distressed municipalities.
Municipal aid is a frequent target for budget cuts, particularly through education funding and construction grants. In December of 2016 this year Malloy cut $50 million in municipal aid and constructions grants and cut education funding by up to 90 percent for wealthier towns.
Connecticut municipalities already receive a portion of sales tax revenue through grants from the Municipal Revenue Sharing Program.
This year marked the beginning of the Municipal Revenue Sharing Fund with an initial $185 million transfer from the General Fund into the Municipal Revenue Sharing Account. Beginning July 1 of this year, the MRSA will receive 7.9 percent of all state sales tax revenue.
The governor’s budget estimates the MRSA will have $330 million in 2018. That money will be used for grants to cities and towns, payment in lieu of taxes for state owned property, regional service grants to councils of government and motor vehicle property tax supplements.
But DeLong worries that a sales tax/teacher pension deal would suffer the same cuts experienced by municipalities over the years. “There is not a doubt in my mind that would happen if it was done like the MRSA account.”
The MRSA comes with strings attached as well. Besides the cuts to municipal grants that can come during budget deficits, the MRSA also imposes a municipal spending cap - a spending cap that is more stringent than Connecticut’s own constitutionally mandated spending cap.
Municipalities cannot increase their expenditures by more than 2.5 percent over the previous year or else they will receive a reduced amount of funding.
Although budget talks are still ongoing, Aresimowicz has repeatedly said that revenue increases are on the table and the governor has not backed down from his initial proposal to shift part of the teacher pensions onto municipalities.
Even if the state raises the sales tax and transfers the new revenue into the MRSA, municipalities will still have live under the threat of future state funding cuts and the inevitable increase of teacher pension costs if the system is not reformed.
The state of Michigan reformed their teacher pensions this year in an effort to curb the growing costs of its underfunded teacher pension system, and a 2017 study showed that reforms will be necessary if Connecticut hopes to stabilize the Connecticut Teachers’ Retirement System.
“You have a broken system,” DeLong said. “We need to have a real conversation about the system going forward.”