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by Stephen D. Eide
Senior Fellow, Manhattan Institute

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Letter from The Yankee Institute

For too long, some of Connecticut’s largest cities have languished. Not only do their residents suffer from high rates of poverty and crime, the cities have also endured periods of serious fiscal insecurity. Everyone in Connecticut has an interest in seeing our urban areas revitalize, but the reasons for the cities’ struggles – and therefore the solutions to them – are under dispute. Although many attribute urban challenges to insufficient tax revenues, this report demonstrates that there are significant problems with how city leaders have chosen to spend taxpayer dollars – particularly when it comes to employee retirement benefits.

This report is especially timely given that the city of Hartford will likely face bankruptcy unless the state intervenes in the coming months. That is why the solutions offered here by author Stephen Eide are so important: If state lawmakers treat Hartford’s problems as though they merely stem from a lack of revenue, the city will continue to struggle to achieve long- term fiscal health. But if the issues identified in this report are acknowledged and addressed responsibly by both local and state leaders — for example, by reforming binding arbitration laws – it will help every Connecticut municipality achieve greater fiscal stability.

Executive Summary

Connecticut’s major poor cities now face significant fiscal challenges. The budgets of Bridgeport, Hartford, New Haven, and Waterbury are weaker than they were prior to the 2008-9 recession. To varying degrees, retirement benefit costs have escalated, reserves have been depleted and services slashed. Employee headcounts are down even while tax rates are on the rise. Taxpayers are paying more but getting less, and some cities are nearing insolvency.

This report will analyze these four cities’ fiscal conditions and consider what the most appropriate solutions should be.

Findings Include:

  • Connecticut’s four major poor cities owe about $4.8 billion in retirement-benefit related debt, according to official estimates. Costs associated with servicing this debt are rising more rapidly than revenues, creating a “crowd out” effect in budgets. Had Hartford and New Haven’s pension costs risen at the same rate as property tax revenues over the decade prior, they would have had about $36.8 million in additional revenues to devote to basic municipal services in FY15.
  • All four spend heavily on health insurance for retired workers, a benefit that has been almost completely phased out in private industry. The four cities’ annual expense on retiree medical is $120 million and the unfunded liability is $2.7 billion
  • Along with retirement benefit costs, these cities’ fiscal flexibility is currently restricted for four additional reasons. First, all four now employ fewer workers than before the last recession. Declining headcounts raise questions about service quality levels and the practicality of further spending reductions. It is much easier to eliminate positions than to reduce salaries and/ or benefits.
  • Second, their mill rates rank among the highest in the state, and have been rising in recent years.
  • Third, all four have reduced their reserves and/ or increased their bonded debt burden over the last decade.
  • Fourth, poverty is highly concentrated in these cities. Since 1970, their populations have declined and the number of people living in poverty has risen. The impoverished, weak character of their local economies means both that they have limited ability to absorb tax increases and are unlikely to grow their way out of their debt struggles.
  • Though all four cities are fiscally weak, Hartford stands out for its high mill and poverty rates, and its escalating deficits.

Recommendations are as follows:

  • State government is almost certainly going to have to get involved in the case of Hartford. In the near-term, Bridgeport, Waterbury and New Haven will not need extraordinary assistance in the way that Hartford will. All these cities have problems, but only Hartford is in a state of crisis.
  • The persistent weakness of the urban Connecticut economy means that state and local leaders should focus more directly on fiscal, rather than economic, policy. Government has far more control over employee salaries and benefits than middle class jobs and outside investment.
  • Any revenue-based solution, at the state or local level, should be accompanied by spending- related reforms.

Introduction

The budget and debt struggles of Connecticut state government are now almost as notorious as those of New Jersey and Illinois. State government has finished both of the last two fiscal years in the red and, according to the most recent, official projections, deficits of at least $1.5 billion, or 8 percent of the general fund, are expected in each of the next two fiscal years. Connecticut routinely ranks at or near the top in national surveys of states’ bonded and retirement benefit debt burdens. Connecticut is among the most productive, best-educated, and highest-income states. But its recent low growth trends raise questions about whether Connecticut will be able to rely on economic activity alone to resolve its current debt and deficit challenges.

The fiscal condition of Connecticut’s major cities is more fragile than that of state government. Bridgeport, Hartford, New Haven and Waterbury all have poverty rates above the statewide level and lower bond ratings than state government’s Aa3. As explained in recent reports by Moody’s and Standard & Poor’s, these cities’ high reliance on state aid makes them unusually exposed to state government’s budget challenges. The average Connecticut locality relies on the state for 22 percent of its revenues, but for Bridgeport, Hartford and New Haven, this figure is 47 percent, on average. All four have been included in the state Department of Economic and Community Development’s list of “distressed municipalities” for over fifteen years. In recent budget cycles, they have had to rely on various “one-time” maneuvers, such as tapping into their reserves, to bring revenues in line with expenditures.

To an even greater degree than the state, Connecticut’s major cities are desperate for growth. But after decades of economic development attempts by local officials, more outside investment and middle-class jobs remain elusive. Accordingly, more radical proposals, such as regionalization, state oversight, and bankruptcy are now under discussion in both the state capital and city halls. Both Bridgeport and Waterbury were placed under state oversight within the past thirty years and the former narrowly avoided bankruptcy.

These four cities are home to roughly 500,000 residents, or 14 percent of the state’s population. They educate over 15 percent of its public school children. The fiscal challenges of these localities deserve the attention of state lawmakers. However, what the state should do, or can do, given its own fiscal situation, are complicated questions.

Budget I (Pensions, OPEB, Taxes, Government Employment)

Pension costs are widely understood to be a leading cause of Connecticut state government’s struggles. They are also a problem for its major urban centers.

Figure 1 sketches out the basic features of the pension systems of Hartford, New Haven, Bridgeport and Waterbury. All have promised far more in benefits than they have on hand (New Haven’s funded ratios are extremely low); all have systems with fewer active members than retirees; and all are paying out more in benefits than they are taking in contributions. Including the pension obligation bonds that Bridgeport and Waterbury issued to backfill their liabilities, these four cities are currently saddled with more than $2 billion in pension debt.

Pension costs have been rising much more rapidly than revenues. Figure 2 illustrates that, if Hartford and New Haven had seen pension costs rise at the same rate as property tax revenues, they would have had an additional $26.3 million and $10.5 million in revenues, respectively, to spend on municipal operations in FY15.

Pension costs were an important factor in state government’s decision to take over Waterbury’s finances in the early 2000s. The Waterbury Retirement System at that time had a funded ratio in the single digits. Retirement benefit debt burdens have been at issue in most of the recent municipal bankruptcies across the nation: Stockton, Vallejo and San Bernardino in California; Detroit, Michigan; and Central Falls, Rhode Island. Like these five cities, Waterbury, Hartford, New Haven and Bridgeport are poor cities that still provide their workers with a defined benefit pension, a form of compensation that has been gradually phased out of the private sector. However weak the local budget and tax base may become, and however much a given pension fund may see its investments under- perform, a defined benefit plan’s employer sponsor, which in the public context ultimately means the taxpayer, must guarantee that pension promises are honored throughout employees’ retirement years.

Over the near term, Connecticut cities’ pension costs are likely to continue to increase for two reasons: their systems are underfunded and they allocate 60- 80 percent of their pension funds to “risky” assets: equities, real estate, and alternative investments (Figure 1). In order to keep pace with existing amortization schedules, and avoid minimizing how much they must ask from taxpayers to keep benefits generous, government pension funds project an annual rate of investment return of 7.5-8 percent a year for the portfolio as a whole, and about 10 percent for equities. Though the past two years have been times of growth for the economy, investment markets have underperformed. The average public pension returned 1.07 percent in FY16 and 3.43 percent in FY15. Thus, costs are rising. In future years, many investment experts project annual equity returns within the 3-7 percent range.

Figure 3 shows liability and cost figures related to retiree medical insurance, a benefit offered by all four governments. Collective spending on “OPEB”—“other post-employment benefits”— reached $120 million in FY15 and these cities’ unfunded liabilities were, in sum, estimated at $2.7 billion. In the current fiscal year, Waterbury is paying more for health benefits for retired workers ($41.6 million) than for current workers ($38.4 million). Like defined benefit pensions, retiree health insurance has been gradually phased out of the private sector while remaining common among state and local governments. According to federal data, fewer than 10 percent of private firms in Connecticut that provide health insurance offer it to their retired workers.

All four cities have struggled with deficits in recent years. Even if Hartford Mayor Luke Bronin is able to win the $15.5 million in concessions he is seeking from city unions during the current fiscal year, Hartford still faces a structural deficit of $30 million in FY18, projected to rise to about $80 million by FY22. New Haven ended two recent years in deficit. Bridgeport faced a $20 million deficit for the current fiscal year. Waterbury’s FY17 deficit was $25.7 million, or over 6 percent of projected revenues. Waterbury’s retirement benefit-related costs amounted to $83.7 million in FY17, or more than three times the city’s deficit. That is, instead of a $25.7 million deficit, Waterbury would have had an almost $60 million surplus were it not burdened by retirement benefit debt costs.

Using official estimates, when the liability and debt numbers from Figures 1 and 3 are combined, and figures for Waterbury and Bridgeport’s pension obligation bond issuances are included, Connecticut’s four major poor cities owe about $4.8 billion in retirement benefit-related debt ($1.5 billion in pension underfunding, $540 million in outstanding pension obligation bonds, and $2.7 billion in OPEB underfunding).

To keep pace with rising fixed costs, cities have the choice of reducing services or raising taxes. Connecticut’s poor cities have been doing both. Because, unlike Massachusetts and California, there is no property tax cap in Connecticut, nor is there a local income or sales tax, setting the mill rate is the most important revenue power city officials can exercise. Property taxes provide close to 60 percent of local government general revenues in Connecticut. Figure 4 shows that three out of the four cities have higher mill rates than they did in FY06 and that New Haven, the fourth, has raised its mill rate over the course of FY13-15. State Office of Policy and Management data show that, in FY17, Hartford, Waterbury and Bridgeport ranked 1, 2, and 3, respectively, in mill rates among Connecticut municipalities. Waterbury’s mill rate would be 40 percent lower—36.3 as opposed to the current 60.21—if not for its retirement benefit liability costs.

Figure 5 shows recent trends in government employment. Connecticut relies on its local governments to provide police, fire, public works, library and elementary and secondary education to residents, all of which are funded at least in part by local revenues. Though these four cities account for only 14 percent of the population, they account for over half the state’s murders and robberies. These four cities’ educational performance measures trail state averages.

Robust staffing levels alone do not ensure a competent municipal government. But it takes an extremely talented manager to reduce crime and improve test scores while also slashing the budget. Moreover, many of the ways in which the public defines service quality, such as low class sizes and rapid response times, require a sufficient government workforce. The public simply will not tolerate staffing levels below a certain point, so the more a workforce is reduced, the closer a city approaches an effective condition of “service delivery insolvency.” Although increased spending on benefits has been a leading cause of these headcount reductions—as New Haven’s headcount has declined by 40 percent (Figure 5), its spending on retirement and medical benefits has increased by 45 percent on an inflation- adjusted basis —reducing staff is much easier than cutting compensation.

Budget II (Debt Reserves and Bond Rating)

Most of Connecticut’s major cities have all drawn down their reserves from where they were ten years ago, and most have also increased their bonded debt burdens (Figure 6). In a May 2016 report, Moody’s raised specific concerns about the low levels of reserves among Hartford, Bridgeport and New Haven, and their being “highly leveraged with debt per capita in excess of $4,000, well above the state average of $2,324.” Some cities have recently faced dramatic run-ups in debt service costs. Between FY16 and FY18, Hartford’s debt service expenses are projected to increase from $23 million to $45 million, and then reach $60 million in FY21. New Haven’s debt service costs more than doubled between FY02 and FY09.

Citing “limited operating flexibility, exacerbated by weak and declining reserves and rising costs (including debt service and pension payments) over the next several years,” Moody’s recently “super-downgraded” Hartford to Ba2, a junk, speculative or below-investment grade rating (the Moody’s ratings scale is shown in the Appendix). Less than one percent of the local governments rated by Moody’s are below-investment grade. Hartford also has a negative outlook, connoting the likelihood of further downgrades “over the medium term.” At Baa1, New Haven is itself only three downgrades away from junk as well.

Waterbury is the highest-ranked among all four cities. It is the only one whose reserves have increased over the past decade. Its bonded debt is up due to the issuance of $313 million in pension obligation bonds in 2009. A recent report by Kroll Ratings judged “the financial condition of Waterbury as strong based on a history of balanced financial operations and maintenance of a stable reserve position in the General Fund.” Waterbury has an extremely checkered financial history and uncertain future, as is the case with all poor old industrial cities. But its ability to maintain at least a modicum of fiscal stability should serve as a model for Hartford and other localities now faced with unsustainable deficits.

Relying on reserves to balance a city budget is, in the words of the state Municipal Financial Advisory Commission, a “stop-gap” maneuver. In a recent letter to Hartford Mayor Luke Bronin, the agency warned that the city will only achieve fiscal stability when it ceases its practice of “Budgets Adopted Based Upon Stop-Gap Solutions.” In Mayor Bronin’s own estimation, “70% to 100%” of Hartford’s recent deficit-mitigation efforts have depended on “one-time fixes.” Notable examples, aside from tapping into reserves, include funding retirement benefit obligations by transferring a city park to its pension fund, and selling the Church Street Garage and devoting the proceeds to the city’s General Fund.

Poverty

Over recent decades, Hartford, Bridgeport, New Haven and Waterbury officials’ attempts at economic development have been unrelenting. Their efforts are documented in the introductory section of every comprehensive annual financial report, and numerous revitalization plan documents stored in local libraries. However, they have only met with modest success.

In America, poor, former industrial urban areas overwhelmingly tend to stay poor. Three out of four of Connecticut’s major cities, over recent decades, have seen their populations decline (Waterbury’s increased slightly) and all four have seen their poor populations rise, producing greater concentrations of poverty (Figure 8). At present, 36.3 percent of the state’s poor residents live in one of these four cities. Virtually all public schoolchildren in Bridgeport and Hartford qualify for free or reduced price lunch. Most of Connecticut’s homeless population is concentrated in these four cities.

At 34.4 percent, Hartford’s poverty rate is 8th highest in the nation among cities with populations above 100,000. According to the recent town- level estimates by the state’s departments of Labor and Economic and Community Development, Hartford’s unemployment rate is not only the sole locality hovering close to the double-digits, but ranks last among all 169 localities in Connecticut. In addition to increasing demands for services, poverty restricts a locality’s ability to raise revenues. Further mill rate increases in Hartford, where only 23.5 percent of occupied housing units are owner-occupied, would tempt many landlords to abandon their properties if they believed they could not raise rents to offset the increased tax burden. City government is if anything, even warier of what the effect of mill rate increases would be on business owners, who are already bearing a disproportionate burden on account of Hartford’s “split” tax system. Whereas residential property owners are assessed at 32 percent of market value, commercial property owners’ “assessment ratio” is 70 percent.

But poor cities are by no means doomed to insolvency. Industrial decline following World War II was the experience of hundreds of urban areas across the northeast and Midwest, yet the vast majority of these cities have not gone bankrupt. Most cities with a poverty rate above the national average (15.6 percent – Connecticut’s is 10.5 percent) manage each year to balance their budgets and provide basic services. Worcester (pop. 182,511, poverty rate 22 percent, Aa3 (stable outlook)) and Lowell (108,491 pop., poverty rate 19.1 percent, A1 (stable outlook)) are relatively poor, mid-sized New England cities that share with Connecticut’s major poor cities a history of industrial decline and a significant reliance on the property tax. And yet they face no imminent prospect of state intervention. Syracuse, New York’s poverty rate is slightly higher than Hartford’s (35.1 percent v. 34.4 percent) but Moody’s rates it at A1 (stable), much higher than Hartford’s current Ba2 (negative).

Bankruptcy 

As mentioned above, all four of Connecticut’s major poor cities are officially considered “distressed” by state government. Municipal insolvency has been a recurring concern in Connecticut over the last three decades. In early 1988, Bridgeport’s mayor disclosed that the city faced a budget deficit in excess of $51 million, a significant sum even by modern standards, and appealed to the state legislature for assistance. State government authorized the city to sell $60 million in deficit financing bonds and also guaranteed a portion of the debt. As a condition for this assistance, the Bridgeport Financial Review Board, whose 11 members were mostly appointed by the state, was imposed.

By June of 1991, the city’s fiscal crisis was still unresolved and local and state officials were unable to agree on a solution. Gov. Lowell Weicker wanted Bridgeport to raise taxes whereas Mayor Mary Moran wanted access to the remaining bond proceeds. Moran led for bankruptcy in June 1991. State government vigorously protested the city’s petition—then-attorney general Richard Blumenthal argued the case in court. Judge Alan Shi of the Superior Court sided with the state and rejected Bridgeport’s bankruptcy petition on the grounds that it was not technically insolvent, which is a requirement to become a municipal debtor under federal law.

Moran initially appealed, but she lost her bid for reelection and her successor Joseph Ganim dropped the case. Bridgeport eventually gained access to the bond proceeds. In the words of Eric Henzy, an attorney at Reid and Riege, PC and then- law clerk for the Superior Court, “[Bridgeport] lost the chapter 9 case, but in some sense the city won the war.” Bridgeport emerged from insolvency with a more efficient city administration in place. With the assistance of the local business community, the city enacted an extensive audit and restructuring of municipal operations. Among other changes, the number of departments reporting directly to the mayor were reduced from 34 to seven. The Bridgeport Financial Review Board was dissolved in 1995.

Waterbury also faced significant fiscal challenges in the early 1990s, for which it had to seek special state legislation to authorize deficit nancing bonds. An oversight board with mild supervisory powers was put in place. Waterbury’s fiscal crisis was still unresolved in December 2001, when the city was forced to issue short-term debt to meet payroll and was downgraded to junk. The state imposed another, much stronger oversight panel and provided a $40 million cash bailout and guarantees on $100 million in debt- financing bonds “to save [the city] from financial collapse.” The “Waterbury Financial Planning and Assistance Board” was given “broad authority over the City’s financial affairs.” It could approve or reject new budgets and union contracts and was given some leeway from arbitration law though it could not unilaterally abrogate or supersede existing contracts.

Unsustainable personnel costs, due to both an outsized workforce and overly generous salary and benefit packages, were seen as a major cause of Waterbury’s fiscal struggles at this time. In 2001, the City of Waterbury Retirement System reported a funded ratio of about 4 percent and pension benefits were being funded out of the city’s annual budget. Over the years, Waterbury officials had failed to contribute in accord with the actuarially- recommended amounts, and they used pension fund assets to pay for retiree healthcare benefits. Shortly after taking power, the oversight board successfully pushed for a 30 percent tax increase, causing Waterbury’s mill rate to rise from 74.6 to 97.7. The oversight board was lifted in 2006.

Bridgeport, Waterbury and New Haven at present are far more fiscally stable than Hartford. Mayor Bronin’s administration projects deficits of over $20 million in FY18 and $50 million in FY19. These deficits come after a $48.5 million deficit for the current FY17 budget.

Since assuming office in early 2016, Mayor Bronin has proposed a range of proposals to reduce spending and/or raise new revenue. Last legislative session, he recommended that state government impose an oversight board. The “Hartford Financial Sustainability Commission” would have had final say over collective bargaining contracts on a going forward basis, but was not enacted to due to a lack of support from the city’s legislative delegation and the statehouse more generally. Hartford in 2017 might be in worse fiscal condition than Bridgeport was 25 years ago and Waterbury 15 years ago. At present, Bridgeport, Waterbury and New Haven would not meet municipal bankruptcy’s eligibility requirements, but Hartford might.

Municipal bankruptcy can have advantages, most notably debt reduction. Hartford would be much better positioned if it had more room in its budget to invest in its future. In the current fiscal year, FY17, Hartford is devoting over $70 million in general fund spending to pensions and debt service. This sum is projected to increase by over $20 million FY18, but it could be reduced substantially via bankruptcy. It would also gain leverage to restructure the collective bargaining contracts, which determine how and how much the city spends on salaries and benefits for current workers, the largest expense of the budget.

The main disadvantages of bankruptcy are the process’ uncertainty and costs. Though the city takes the lead in designing the bankruptcy plan, the federal judge and creditors have significant influence over how deeply the debt can be cut and the length of the process. After filing for Chapter 9 in summer 2012, San Bernardino, California only recently had its exit plan approved. Bankruptcy places a range of enormous demands on a city government, from fielding press requests from national media outlets to the extensive financial and legal work the process requires. Both “Main Street” and “Wall Street” creditors can be expected to avail themselves of first-rate professional services firms. A municipal debtor must follow suit, if it expects to get the better of its creditors. Detroit’s bankruptcy, which most considered well-managed, cost $170 million in professional services fees.

Much depends on state government. In its approach to municipal bankruptcy, Connecticut is considered a “conditional authorization” state: no Chapter 9 petition may proceed without “the express prior written consent of the Governor.” Not only must the state authorize any bankruptcy petition before it can proceed, it would have to decide whether to impose some sort of state oversight or takeover regime before or after the petition was led, or perhaps even in lieu of allowing the petition. New Jersey Gov. Chris Christie recently installed an emergency manager in Atlantic City to forestall bankruptcy. An overhaul of municipal operations, which was an important legacy of both Bridgeport and Waterbury’s experiences with insolvency, is more easily directed by state appointees than federal judges during bankruptcy proceedings.

Because bankruptcy could raise borrowing costs for other Connecticut municipalities through a so- called “contagion” effect, state government could face pressure to prevent bankruptcy or ensure its prompt resolution. Under any scenario, Hartford may need a bail out to restore solvency. Approval of Detroit’s bankruptcy plan would not have been possible if not for the $200 million that Michigan’s Republican- controlled state government contributed to backfill the city’s depleted pension system.

Regionalization

In public policy circles, “regionalization” of one variety or another has been discussed since the development of the suburbs and the emergence of the crisis of America’s central cities. Pushes for regionalization are often prompted by an immediate need to bolster city budgets, but at a deeper level they are founded in criticisms of the fragmented nature of American local government for being inefficient and unfair. Examples of notable politicians who have recently voiced the need for more regional cooperation include Illinois Gov. Bruce Rauner and New York Gov. Andrew Cuomo.

The regionalization question has taken on special intensity in Connecticut of late. This is the result its having been promoted by Mayor Bronin and the Connecticut Conference of Municipalities, and the Connecticut Superior Court’s recent decision in Connecticut Coalition for Justice in Education Funding v. Rell. Though that decision was not specifically a call for regionalization, many, including Moody’s, believe that it may lead to diverting more revenues away from suburban areas to central cities. Some urban politicians have claimed that Rell gives them “leverage” over suburban areas.

Regionalization can come in various forms. Bronin has suggested a regional sales tax or shared service agreements. For regionalization to play any significant role in stabilizing city budgets in Connecticut, it would have to entail a redistribution of wealth from suburban areas and/or their residents to cities, beyond that which is already in place through existing state aid programs. In FY17, Connecticut state government distributed $4.5 billion in municipal aid, an increase of $300 million from FY15. Much of this sum was raised, via income and sales taxes, from suburban areas.

Regionalization can come in various forms. Bronin has suggested a regional sales tax or shared service agreements. For regionalization to play any significant role in stabilizing city budgets in Connecticut, it would have to entail a redistribution of wealth from suburban areas and/or their residents to cities, beyond that which is already in place through existing state aid programs. In FY17, Connecticut state government distributed $4.5 billion in municipal aid, an increase of $300 million from FY15. Much of this sum was raised, via income and sales taxes, from suburban areas.

Four objections may be raised about regionalization as a solution to Connecticut cities’ fiscal struggles. First, it would not be prudent to move forward with any dramatic redistribution push while the state budget situation remains uncertain. Though Gov. Dannel Malloy has downplayed talk of any new major tax increases during the next budget cycle, more revenue may be called for in light of the state’s extraordinary debt and deficit struggles. If suburban taxpayers may be called on to balance the state’s budget, now may not be the right time to increase their tax burden for the benefit of Hartford city government as well. Connecticut’s total tax burden already ranks second among states; liberal organizations rate Connecticut’s tax progressivity in the middle.

Second, a fragmented local government landscape is not inherently inefficient. Several studies by the demographer Wendell Cox have found “a strong relationship between smaller local government units and lower taxes and spending…larger local governments tend to be less efficient, not more.” New York’s city administration provides municipal services for 8.5 million residents, or more than twice the population of Connecticut, and yet concerns over waste and inefficiency are persistent. Municipal mergers are not known for producing major savings, as salaries and benefits, the largest expenses of urban and suburban localities, tend to rise to the highest level.

Third, it is a generally-respected principle in public finance that redistribution is better to transact at the state and federal levels (because it’s easier for high earners to escape city taxes than state or federal) than on an individual-to-individual basis. Regionalization implies redistribution on a community-to-community basis. The number of Connecticut residents living below the official federal poverty line grew from 217,300, or 6.8% of the state’s population, to more than 314,000 or 9.2%, between 1990 and 2010. Though Connecticut’s poverty rate remains one of the lowest of all states, its recent increase has outpaced that of the nation as a whole. Funding social programs for this population, in an era of tight budgets, will not be easy. Redistributionary efforts oriented towards poor individuals will always be better-targeted than those oriented towards poor communities, since not all residents of poor communities are poor. Indeed, most aren’t. Regionalization could indirectly weaken the state’s ability to continue to support safety net spending. A number of state safety-net programs are already threatened with cuts in FY17.

Fourth, a poor city can be a solvent city. Massachusetts’ local government landscape is similar to Connecticut’s: there are 351 municipalities; county government, aside from the justice system, is non-existent; and the property tax is the main source of locally raised revenue. And yet, despite these and many other similarities, the charged debate over insolvency and regionalization is not now taking place in Massachusetts.

Critics who claim that the New England township structure is “antiquated” fail to account for why it is, at this point in American history, that the threat of municipal insolvency looms so large. The number of towns has been decreasing in recent decades, from 17,142 in 1962 to 16,360 in 2012, not increasing. What is at historically-unprecedented levels at present is retirement benefit debt. As the Obama administration documented more than once in its annual “Economic Report of the President,” state and local unfunded public pension liabilities relative to GDP are currently near their post WWI era- peak. The efficiency-based case for regionalization was much stronger before the recent rise of retirement benefit debt levels. One way or another, a redistribution of resources from the suburbs to the central cities at present time would go towards paying off pension liabilities.

Conclusions and Recommendations

As of December 2016, the American economy is the midst of an economic expansion that has lasted 90 consecutive months, a postwar record. If these are, by relative standards, the good times, it stands to reason that state and city governments will face much more challenging situations when the economy starts to slow down or contract. Connecticut’s major cities are poorly prepared for the next downturn. Both state and local leaders should take action.

On the local level, city officials should focus more on laying the conditions for growth, meaning healthy city budgets, than growth itself. Though their constituents expect them to be active on the economic development front, the truth is that city politicians have far more power to stabilize their budgets than expand the economy. Stabilizing the budget will require reining in current trends in spending on benefits for government employees. This is, to be sure, easier said than done in a state where two-thirds of the public sector workforce is represented by unions. But it is necessary.

These cities’ fiscal struggles cannot be considered simply a revenue problem. Possibly state government could help cities in reforming retirement and medical benefit programs by giving local managers more leverage in contract negotiations, such as through reforming binding arbitration laws or removing certain elements of compensation from collective bargaining entirely. State government should not implement any policies aimed at generating more revenues for localities, such as authorizing a regional sales tax, or a state sales tax increase with the revenues dedicated to increasing the reimbursement rate for tax-exempt property, without also acting to facilitate reductions in city spending.

As should be clear from the preceding analysis, the threat of insolvency is far more pressing in Hartford than in the other three cities. In public policy circles, many fiscal experts advocate that states take a broad-based approach to municipal fiscal distress. But, in the near-term, there is a strong case to be made that Connecticut state government should focus its fiscal distress efforts on developing a solution that is custom-tailored to Hartford’s current struggles. Trying to develop a more general policy aimed at helping poor cities risks becoming a solution in search of a problem, because, for the time being, Waterbury and Bridgeport, and most likely also New Haven, can continue to muddle through without the need for extraordinary support from the state. The same cannot be said for Hartford.

About the Author

Stephen D. Eide is a senior fellow at the Manhattan Institute. His work focuses on public administration, public nance, political theory, and urban policy. His writings have been published in Politico, Bloomberg View, New York Post, New York Daily News, Academic Questions, e Weekly Standard, Wall Street Journal, and City Journal.

Eide was previously a senior research associate at the Worcester Regional Research Bureau. He holds a B.A. from St. John’s College in Santa Fe, New Mexico, and a Ph.D. in political philosophy from Boston College.

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