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TAXES AT HOME: A Comparison of Municipal Spending
by Zachary Janowski with Benjamin Levy and Thurston Powers
AUGUST 2015

EXECUTIVE SUMMARY
High property taxes are a fact of life in Connecticut. Assessed at the local level, they account for nearly half of all the taxes collected in-state.

Recently, legislators have looked at providing some cities and towns with more tax revenue by designating a portion of the state sales tax to some municipalities. But providing cities and towns with a new revenue stream isn’t the key component in controlling property taxes – controlling spending is.

The following paper provides a comparison of per person spending for every city and town in the state. It also analyzes the budgets of four of the top five spenders. The results are both revealing and unsurprising – as with the state, years of generous promises to government employees have pushed spending higher. Municipal budgets have been deeply affected by localities’ failure to pay for their promises up-front, and local taxpayers have been burdened with the obligation to make large catch-up payments to draw down those liabilities.

This study also examines spending on education in the four case study towns, and finds that more spending doesn’t necessarily guarantee better educational outcomes. Perhaps that’s because the single biggest difference between these particular districts appears to be the number – not of teachers – but of “non-certified” staff working in the schools.

This study is intended as a starting point for comparing spending in Connecticut’s 169 municipalities. Although the measures used here to compare the towns are not perfect, they are good approximations based on available data.

Above all, meaningful accountability at the local level requires transparency. The difficulty in comparing spending across towns highlights the importance of clear financial reporting standards for Connecticut’s municipalities. Standard spending categories would greatly enhance town leaders’ efforts to compare their municipality’s spending with that of similar counterparts.

Many hard-working local officials across Connecticut are committed to controlling spending. Having usable data that would allow town governments across the state to share best practices and the creative ways that out-of-control spending is being addressed would be a boon to every Connecticut taxpayer.

INTRODUCTION
Connecticut’s citizens bear one of the highest property tax burdens in the country. Local property taxes make up nearly half of the total state and local taxes paid by residents. The average bill ranks among the top ten in the country, and the amount of property taxes on a per capita basis are the second highest in the country.

Municipal government leaders find it difficult to compare their city or town’s spending with their peers. Although local governments, unlike the state, must comply with generally accepted accounting principles (GAAP), each city and town can structure its accounts in its own way, so line items in one town often can’t be directly compared to those of a neighboring town. These slightly different accounting habits make comparisons time consuming – when they aren’t altogether impossible.

As a result, many of Connecticut’s 169 cities and towns operate in a vacuum without any reference to neighboring towns or peers across the state.

In many cases, towns reinvent proverbial wheels that have been in use elsewhere for years. There is a need for best practices to be shared across the state – and borrowed from efficient and effective local governments across the country.

The goal of this project is two-fold. First, it provides a general overview of local spending in all 169 towns. This collection of recent historical data is a first step toward more in-depth comparisons between towns. In addition to the general overview of local spending in Connecticut, the study includes an in-depth case study on four of Connecticut’s highest-spending towns: Darien, New Canaan, Westport and Wilton. After minimizing significant differences in accounting practices, three factors stood out in the budget comparison: the cost of retirement benefits, especially paying for unfunded past promises; education spending; and debt repayment. In these highest-spending towns, there are millions of tax dollars being spent with dubious returns.

From 1996 to 2012, the average annual increase in property taxes was 4 percent. However, it was particularly high between 2003 and 2010, when property taxes grew by an average of 5 percent. Some states have enacted laws that protect residents from extreme tax hikes; for example, Massachusetts’ Prop 2.5 caps annual property tax revenue increases at 2.5 percent. This study applies an approximation of this law retroactively to see what the impact would have been in order to understand what it could do for Connecticut taxpayers going forward.

CONNECTICUT PROPERTY TAX HISTORY
Get your flannel shirt and fade jeans. We are going to the ‘90s.

In 1996, Connecticut towns raised $1,426 per person from property tax. By 2012, that number was up 80 percent to $2,569. Over the same period, local spending increased 70 percent, from $2,070 to $3,528. This increase in local taxation and spending has been disproportionate to our economic growth, meaning that property taxes take up an extra .5 percent of our income (3.8 percent vs. 3.3 percent).

Some towns that experienced significant growth in property tax rates started with a low rate because they received significant state funding, but then that funding dwindled over time. For example, property taxes in Lisbon paid for only one-third of spending in 1996, but rose to cover more than half the local budget by 2012. While per-person spending increased by 70 percent – exactly the state average – property taxes per person rose by 163 percent. Bethel, Killingly, Preston, Prospect and Voluntown experienced similar changes.

Two towns in the top 10 for increases in property taxes stand out for other reasons. New Canaan increased property taxes 147 percent to fund a 157 percent increase in local spending. Darien saw a similar increase in property taxes, 138 percent, and local spending, 143 percent. To put their spending in context, that is about five times the growth of the economy, as measured by the Bureau of Economic Analysis. Put simply, since 1996, the property tax burden has greatly increased relative to taxpayers’ ability to pay it.

WHAT TO DO?
This study is the first step toward creating meaningful comparisons that communities can use to manage their own affairs more effectively. City and town leaders who are pleased with their standing compared to their peers should stay the course, but some communities may realize their leaders are spending more than similar towns without getting more value. In these communities, further review may be necessary to identify a specific plan of action. The accompanying case study is just one example of this kind of close
comparison.

WHO SPENDS THE MOST
(You May Be Surprised)

Many assume urban communities spend the most. Although they tend to have large overall budgets, this isn’t the case when adjusted for population. For example, Hartford is ranked 13th for spending at $4,265 per person in 2012, while Westport spent $7,333 — or 72 percent more than Hartford – in the same year.

Although Mansfield’s spending is the lowest per capita, this figure is distorted by the presence of UConn, which adds to its population without proportionately increasing costs. Putnam is second lowest at $2,363 per person. While Hartford spends nearly twice as much as Putnam, Westport spends three times as much per person. (See the appendix for spending figures for all 169 cities and towns.)

Connecticut residents pay nearly half of all of their state and local taxes through their property taxes. The state’s big cities spend a lot – partially fueled by state aid – but the biggest spenders are wealthy suburban towns in Fairfield County. The top five spenders are: Darien, New Canaan, Weston, Westport and Wilton. Four of these towns – excluding Weston, which is smaller in population – are ideal candidates for comparison.

Comparing a small group of towns, it is possible to collect more recent data. Westport still spent the most on a per person basis: $6,999, according to the adopted budget for 2014. As the largest of the four towns by population it also has the largest overall budget by about $70 million. In 2012, according to data analyzed for all 169 Connecticut towns, Westport was the only town in Connecticut to spend more than $7,000 per person, and only three spent more than $6,000 per resident (New Canaan, Weston and Wilton).

In fiscal year 2014, Westport would have saved $32.9 million (or 17 percent of its total budget) if it spent as much as Darien does per person. That amounts to $1,204 in extra taxes per resident. So even as Westport spends the most overall and per capita by a significant margin, is that town any better off than others because of it? Westport is smaller in land area than Wilton and New Canaan. Darien is more densely populated. And though Westport has a larger commercial presence than the other towns, this factor alone can’t account for the higher spending.

PENSIONS & RETIREE HEALTHCARE
Westport: An Outlier among Outliers

In all four towns, overall spending is around twice the Connecticut average. Yet there are still stark differences among these towns. All the towns spend a significant amount of money on retirement benefits, in the form of pensions and healthcare, to retired town employees. (Retiree healthcare benefits are often called “other post-employment benefits” or OPEB.) But subtle policy differences – like age of retirement and type of benefits offered – can mean big differences for the amount of money a town must spend.

Nearly 12 percent of Westport’s budget goes toward these costs. Wilton’s expense is less than half Westport’s, although it is second highest, at just over 5 percent of its budget. Darien spends 2.6 percent of its budget on retiree pensions and benefits, while New Canaan spends 1.37 percent.

Accordingly, Westport spends eight times more per capita than New Canaan on pensions and benefits for retired town employees, four times as much as Darien and 2.5 times as much as Wilton.

RATIO DIFFERENCES

In Westport, 63 taxpayers support each retired town worker receiving benefits. Nearly twice as many taxpayers support each retired town worker with benefits in Wilton and Darien. New Canaan falls in the middle. Because New Canaan has the lowest per taxpayer cost of retiree benefits, this factor alone cannot explain the variation.

The high ratio in Westport may have something to do with the town’s eligibility requirements. Westport appears to at least sometimes set a lower bar for retirement. For example, in New Canaan, municipal employees can retire at 65 with 5 years of service or retire early at 55 with 15 years of service. Westport allows its municipal employees to retire at age 55 with 10 years of continuous service, age 55 with 15 years of non-continuous service, or any age after 25 years of service. Generous eligibility requirements allow more employees onto the plan at an earlier age, resulting in more beneficiaries (and, therefore, higher costs).

However, even when one accounts for the demographic difference between towns, Westport still spends far more per capita on pensions and benefits for retired employees. In order to explain the entire difference, one needs to look more closely at Westport’s OPEB system.

DIGGING DEEPER INTO WESTPORT’S RETIREE HEALTHCARE

Westport offers its town healthcare plan to retirees under the age of 65 and a Medicare supplement plan to its retirees over the age of 65.

Yet Westport spends more to provide care for retirees over age 65, despite Medicare coverage. Contrast Westport’s situation with the state’s cost of covering its retired employees. On average, a retired male Connecticut state employee’s healthcare costs $12,766 at age 64 and drops to $2,071 when he reaches age 65 and enrolls in Medicare, a decrease of 84 percent. Put another way, the cost to the state of insuring a 64-year-old male is six times higher than a 65-year-old male.

One would expect Westport’s liability to decrease when town retirees switch from a town funded healthcare plan to Medicare with a town-funded supplement. If Westport experienced a similar drop in spending at 65 as the state does, its retirees, on average, would have to live for a century.

The exact mechanism through which this liability has grown is not obvious. Given that the amortization cost exceeds the normal cost and the projected liability for future retirees is far lower than current retirees, said mechanism may no longer be in play. However, one provision might explain part of the cost. The annual increase in healthcare costs is capped at 10 percent for retirees. It’s possible that this has a cumulative effect, resulting in retirees paying a little less of a percent of the plan each time the cost of healthcare increases by more than 10 percent.

EDUCATION SPENDING
Do you get what you pay for?

Education is the single largest expense in Connecticut towns. It ranges from 59 to 66 percent of the total spending across the four towns. Darien spends the least per student — approximately a thousand less per student than Westport and New Canaan – while New Canaan spends the most per student. If Wilton spent at the same rate as Darien, it would save about $1.7 million; New Canaan and Westport would both save $5.3 million.

The higher spending does not translate into superior academic outcomes. Notwithstanding minute variations in student performance from category to category, on the whole, all these towns are exceptional in terms of their students’ academic achievement.

This raises a question: how does Darien spend less and still compete with Westport and New Canaan in terms of academic results? The answer is most likely the confluence of a number of variables, but one stands out in the data – the way that the schools are staffed.

Darien has far fewer “non-certified” staff relative to their student body. These tend to be town employees who act as support staff to educators and administrators, such as paraprofessionals. Some believe that more support staff, and assistant administrators, will result in better academic achievement. However, the data in this case don’t seem to support this theory. Darien has nearly half the non-certified staff of Westport and New Canaan, but still continues to provide an excellent education for its students.

Setting aside the question of support staff efficacy as a whole, paraprofessional payroll highlights another possible explanation.

Perhaps it’s not a question of how many paraprofessionals are required to secure improvements in educational attainment, but the quality of said paraprofessionals. Darien spends, on average, far more per paraprofessional, suggesting that their support staff has higher qualifications, educational or experiential.

Differences in accounting can lead to incorrect comparisons. For example, Darien’s Board of Education suggested that its spending per pupil was “tracking behind” Westport by $2,200 per student in the 2014- 2015 recommended budget. The Board of Education reached this number by comparing its operational budget to Westport’s operational budget, plus $12.7 million in debt service. The gap would be far smaller if Darien included its own $8.5 million in debt service in its comparison.

DEBT
The Rabbit Hole

All four towns have to repay past debts with annual debt service covering principal and interest. The towns must also pay for unfunded past promises to retirees. The variation in these payments explains the remaining difference in local spending per person.

The towns also vary in how they report their debts. For example, Darien includes debt service incurred by its Board of Education in its total debt service, while Westport reports it separately with other education expenditures. As a result, Westport presents what appears to be the lowest debt service costs. A more accurate estimate including debt service for education puts Westport second highest for debt service per person, behind New Canaan. The cost of paying off unfunded pension and retiree healthcare promises are not recorded as debt payments but instead as payments against “unfunded accrued actuarial liabilities” in various locations within the budget.

UNFUNDED LIABILITIES: PENSIONS AND OPEB PLANS

Between 2006 and 2009, all four towns started irrevocable trusts to fund their OPEB plans as accounting rules required more transparency. Westport started its trust in 2008 with unfunded past promises totaling $122 million, while New Canaan started its trust in the same year with only $26 million unfunded. Darien started the year before with only $5.3 million unfunded. Wilton started in 2006 with $5 million unfunded.

It typically requires some work to separate the cost of current benefit promises from catch-up payments on past promises. Unfortunately, Darien and Wilton report their current OPEB costs (called normal cost) and catch-up payments (amortized costs) as a combined figure. Additionally, all four towns combine both portions of their pension costs. This makes it difficult to discern how much of the yearly contribution is due to past debts and how much is due to current year costs. As a proxy for the cost of paying for past promises in the future, it is possible to compare a measure of the unfunded past promises (unfunded accrued actuarial liability or UAAL). Westport will continue to bear the burden of large annual catch-up costs for at least the next 23 years due to its high UAAL.

In fairness to Westport, the town is using a more realistic discount rate to calculate its pension obligations. Discount rates seek to approximate the cost of future promises in terms of dollars today. For governments, selecting a discount rate is highly subjective. At times, political leaders will choose a high discount rate (effectively a reduced price – discount – on future payments) to reduce their current funding costs. Westport, in contrast, is being more responsible than peer towns when it calculates its obligations and funding costs. Although Westport’s assumptions are more reasonable, economists generally consider even Westport’s discount rate too high. If the towns achieve their ambitious targets for investment returns, they will pay exactly what they say they owe. If they fall short, taxpayers will make up the difference. In this way, there are sometimes tradeoffs between the cost of local government and its financial stability.

CAVEATS & CONCLUSIONS

Our data is gathered primarily from each town’s Comprehensive Annual Financial Reports (CAFR) for the fiscal year 2014. While these reports provide a more or less complete account of each town’s financial activities, there is some degree of variability in presentation. Each town has developed its own accounting method.

These financial reports are the basis for comparison between towns. It would be valuable to know what services cost more in which towns. However, that kind of analysis requires so many assumptions at this point as to have little value.

The differences in financial reporting practices may seem esoteric but the consequences are far reaching and impact resident’s day-to-day lives. The barriers we have encountered in comparing the four towns also exist for town leaders. The lack of a standardized format and clearly defined categories prevents towns from accurately comparing themselves to one another. Spending is justified within towns rather than being able to provide greater context.

The inability to compare and isolate both good and bad spending habits is costing the Connecticut taxpayer. The state Office of Policy and Management (OPM) recently developed a standardized financial report, called a “uniform chart of accounts,” for municipalities and boards of education. OPM is working with local governments to facilitate implementation that over time will make this kind of comparison easier.

For now, it is possible to summarize Westport’s excess spending over Darien’s as follows: Westport spends $1,204 more capita.

ALTERNATIVE POLICY: MASSACHUSETTS PROP 2.5

Proposition 2.5 in Massachusetts limits how much a city or town can increase the property tax rate from
year to year and prevents the property tax from exceeding 2.5 percent of a property’s value.

  • The “Ceiling”: This limits the annual increases in the property tax rates to 2.5 percent growth a year. Essentially, if a town collected $100 in property tax revenue last year, the ceiling would limit how much they could collect this year to $102.50 in property tax revenue.
  • The “Limit”: However, regardless of the previous year’s rate, towns cannot tax a property more than 2.5 percent its total value, or 25 mills.
  • Exceptions: There are some exceptions, such as raising funds to pay off debts or revenue from new properties. The town may also override the law via majority vote.

What would have happened if Connecticut had adopted a similar policy in 1996? As previously mentioned, from 1996 to 2012 the Connecticut state average property tax burden per capita jumped from $1,426 to $2,569, an 80 percent increase. If Connecticut had enacted Prop 2.5 in 1996, the maximum growth, 2.5 percent annual increase, would have resulted in a mere 48 percent increase. This would have reduced the tax burden by $452 per capita.

The policy would have been even more effective in Fairfield County. For example, Darien’s property tax increased by 138 percent between 1996 and 2012. In 2012, Darien collected $98 million via the property tax. Had prop 2.5 been enacted in 1996, they would have been limited to $71 million, reducing the tax burden by more than $1,000 per person. The same could be said for New Canaan, only more so; that town’s residents would have reduced their burden by $2,200 per capita.

MOVING FORWARD

Although we can’t change the past, we can learn from it.

The trend of rapid governmental growth in Connecticut began in 2003 and it is taking its toll on the taxpayer. Prop 2.5 presents a way of capping local government’s revenue and thus curbing local spending, allowing the economy to grow instead. The aim of this study is to allow local leaders to begin comparing their town’s spending habits with spending in other towns. (Please see the appendix for spending data for all 169 towns, including a historical snapshot from 1996.)
The case study of Darien, New Canaan, Westport and Wilton can serve as a template for more in-depth analysis elsewhere. Taxpayers contribute billions each year in property taxes. They have a right to expect that their money will be spent wisely.

ABOUT THE AUTHORS
Zachary Janowski is the Yankee Institute’s director of external affairs. He is founding editor of Raising Hale, the Yankee Institute’s investigative reporting blog, where he reported on government waste, fraud and abuse for more than four years. Janowski studied economic history at Boston University before becoming a journalist. He was a 2012 Robert Novak Journalism Fellow and a visiting member of the Hartford Courant’s editorial board in 2014. He lives in Plantsville with his wife and two children.
Benjamin Levy was a spring 2015 intern at the Yankee Institute. He graduated from Trinity College in May and is pursuing a career in politics.
Thurston Powers is a summer 2015 intern at the Yankee Institute. He is a graduate of the University of Vermont and will enter the MPA program at NYU Wagner in the fall.

THE YANKEE INSTITUTE FOR PUBLIC POLICY
The Yankee Institute develops and advances free-market, limited-government solutions in Connecticut. As one of America’s oldest state-based think tanks, Yankee is a leading advocate for smart, limited government; fairness for taxpayers; and an open road to opportunity.
The Yankee Institute for Public Policy is a 501(c)(3) research and citizen education organization that does not accept government funding. All donations are tax-deductible.

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