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Is Connecticut Insolvent? Does Anyone in Hartford Care?
This piece appeared in the (Waterbury) Republican-American on January 31, 2007.
There's a new fiscal monster stalking Connecticut taxpayers -- and its name is GASB 45.
In 2004 the Norwalk-based Governmental Accounting Standards Board, which establishes reporting rules for state and local public-sector entities, issued Statement No. 45: "Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions."
The rule requires governments to document the promises made to their retirees beyond the generous pensions politicians procure for public employees. These extra benefits include subsidized healthcare, long-term care, and life insurance.
Governments aren't required to fund these commitments, but they must calculate and report them. One estimate puts the GASB 45 bill for all state- and local-government employees in the neighborhood of $1.4 trillion.
In Connecticut, a report that will soon be released by the Office of the State Comptroller pegs the figure for state employees at $21.5 billion. According to U.S. Census Bureau statistics, over 60 percent of Connecticut’s public-sector employees are on municipal payrolls. Thus, the total non-pension retiree obligation that will be met by Connecticut taxpayers' wallets may approach $60 billion.
It gets worse. The GASB 45 rule does not apply to the paid vacation and sick days that are "purchased" by government entities when employees retire. In contrast to the "use-it-or-lose-it" policies generally followed in the private sector, Connecticut government employees regularly receive large payouts for paid leave they do not use. For example, a 2005 investigation by Waterbury's Republican-American discovered that retiring government-school teachers in the Brass City were "owed an average of $38,542 each for unused sick days." Last fiscal year, taxpayers in the City of New Britain paid a total of $674,000 for unused days off.
And remember, these figures are for the cost of retiree perks beyond the defined-benefit pensions guaranteed to government employees. These wildly generous, taxpayer-financed annuities are currently funded through investment vehicles. But the state-employee fund has an outstanding obligation of $6.9 billion. The teacher account is unfunded by $5.2 billion.
Local governments can be just as irresponsible with pension funds as the fiscally challenged solons in Hartford. Waterbury has the mother of all unfunded municipal-pension obligations: $468 million. The value of securities in Hamden's pension fund has dropped by a third since 2000, and that town now has an unfunded obligation of $196 million.
There's one final component of Connecticut's long-term fiscal nightmare worth examining. The state's bonded indebtedness is now at $14.2 billion. Even adjusted for the state's higher-than-average income, Connecticut has the fourth-highest debt obligation among the states. And how are Nutmeg State politicians planning to pay the GASB 45 bill? You guessed it -- by floating even more government bonds.
Boston University's Laurence J. Kotlikoff, who studies the federal government’s trillion-dollar unfunded liabilities, has developed a concept he calls the "fiscal gap." It's a way to measure "the extra burden that would need to be imposed on current or future generations, relative to current policy, to satisfy the government’s intertemporal budget constraint."
Translated from economist-speak, the fiscal gap represents the massive revenue grab that is likely to result from the failure to pre-fund long-term obligations. In Connecticut, which already has the highest tax burden in the nation, that failure is likely to sting far worse than it will elsewhere.
The situation would not be so dire if the Nutmeg State were booming. But Connecticut's population growth is glacial, and job creation is stagnant. (Believe it or not, the state has fewer jobs in 2007 than it did in 2000.) Young adults leave Connecticut in huge numbers, and the state's increasingly elderly population will likely demand even more "services" from the public sector. Is that an economic environment likely to grow its way out of tens of billions of dollars in unrealistic long-term promises?
There is a way to escape this semi-insolvency, of course. Right-sizing Connecticut government, with particular focus on bringing public-employment compensation in line with private-sector pay and benefits, is long overdue. Sweeping tax and regulatory relief would make major contributions to reviving the state’s economy, and thus generate additional tax revenue.
In the short term, though, fiscal sanity is not on the agenda in Hartford. No, increased state spending appears to be the priority, including expensive and unproven "universal preschool" initiatives and greater healthcare expenditures. A legislature completely in the thrall of government-employee unions is not likely to tackle the state’s unsustainable long-term commitments anytime soon.
And every day legislators wait, the burden of the state's massive unfunded liabilities grows heavier.
D. Dowd Muska is the Philip Gressel Fellow for Tax and Budget Policy at the Yankee Institute for Public Policy.
D. Dowd Muska is the Yankee Institute's Philip Gressel Fellow for Tax and Budget Policy.
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The Yankee Institute for Public Policy, Inc. is a nonpartisan educational and research organization founded more than two decades ago. Today, the Yankee Institute's mission is to "promote economic opportunity through lower taxes and new ideas for better government in Connecticut." The Yankee Institute for Public Policy, Inc. is classified by the IRS as a 501 (c) (3) public charity. Contributions are deductible to the extent allowed by law.
