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Connecticut, home to great wealth, may be sinking into a fiscal mire

Home to Yale University with its $25-billion endowment, numerous high-flying hedge funds and top-drawer celebrities ensconced in opulent estates worth tens of millions of dollars, Connecticut possesses great wealth and boasts the highest per capita income of any American state.

But look a little closer and it’s a fiscal train wreck. The Constitution State is among the worst states when it comes to business costs, economic climate, growth prospects and regulatory burdens. Ground zero for this train wreck is the capital, Hartford. 

The administration of Gov. Dannel Malloy, a Democrat who has been in office since 2011, projects a budget deficit of more than $5 billion over the next two years, thanks to generous pension benefits and the burden of servicing its big debt, plus falling tax revenue due to the exodus of large employers and residents reaching retirement age. 

Its budget woes, as well as concerns that they will be repeated year after year, helped lead General Electric in 2015 to consider moving its headquarters out of the state. Last year, it did exactly that. 

The state’s population is falling: Its net domestic out-migration was nearly 30,000 from 2015 to 2016. In 2016, it lost slightly more than 8,000 people, leaving its population at 3.6 million. Indeed, recent national moving company surveys underscore the trend, showing more people leaving Connecticut than moving in. In 2016, the state also saw a population decline for the third consecutive year, according to Census Bureau estimates.

One of the companies, United Van Lines, reported that of all their Connecticut customers, 60 percent were leaving compared to 40 percent who were moving there. Only three other states had higher rates of people moving out – New York, New Jersey and Illinois. One out of five of those leaving said they were retiring.

Truth in Accounting, a nonprofit whose mission is to provide information about government finances, gave Connecticut a grade of "F" on its fiscal condition. 

"Connecticut has $11.3 billion available assets to pay $74.9 billion worth of bills," its report on the state said. "Connecticut would need more than $20,000 from each of its taxpayers to pay all of its bills."

Some of the state’s most prominent economic experts blame present and past political leaders for the crisis, saying that they were lulled by Connecticut’s wealth and felt no urgency to revamp the financial system and try to bring expenses and revenue into alignment. They say political leaders have been short-sighted, lurching from crisis to crisis in recent years and have been reluctant to consider new ways of handling Connecticut’s finances and to diversify its economy.

“We’ve been rich and lucky, we’ve been the Alfred E. Neuman ‘What me, worry?’ state,” said Fred Carstensen, a finance professor at the University of Connecticut who has advised the state’s political leaders. “There were missed opportunities and bad policies. The state has never paid attention to collecting good quality administrative data. We have extremely poor information. When you have no GPS, your car has no headlights, and then you’re surprised you’ve run into a tree?”

As a partial solution, Malloy and state employee union leaders agreed earlier this week on a tentative proposal calling for concessions by the worker groups of about $700 million for the next fiscal year, and slightly more than $800 million for 2018-2019.

The plan, which faces a vote by member unions, would freeze wages for the next two years, but then give raises of a base of 3.5 percent the following two years.

The concessions, which Malloy had pushed for, were controversial among union groups. 

The Services Employees International Union’s Local 1199, which represents 7,000 state workers, has taken a very vocal stance against the governor’s proposed cuts and employee layoffs. The union has denounced the governor’s proposal for cuts as heartless, and says it will hurt those who already struggle and are the state’s most vulnerable, including children and the disabled.

The SEIU recently aired a television ad taking aim at the governor and legislature, and pushing them to look to the state’s high-income earners as a source for closing the budget gap.

“They’re asking a lot of middle class workers,” said Jennifer Schneider, an SEIU spokeswoman. 

“You have a lot of wealthy people in the state. Democrats and Republicans have proposed concessions from state workers. It comes out to about $30,000 per person. That’s salary combined with health insurance and other benefits. It’s an astounding amount for just middle-class workers to be handling. Everyone should be part of the solution, not just the middle class.”

There are calls from various segments of the state that say Connecticut cannot afford to continue granting such generous benefits – including health care and retirement packages – to government workers.

We’ve had a significant growth in fixed costs – things like Medicaid, pensions for state employees and teachers. These expenditures continue to grow quite rapidly.

- Chris McClure, public information officer for the state’s Office of Policy and Management

State Senate Republican leader Len Fasano says his GOP colleagues are ready to work with Democratic lawmakers to address the crisis, but that before there can a remedy, there needs to be an admission by Democrats about the role that their flawed policies played in Connecticut’s financial mess.

He said Connecticut needs to revamp its financial system. Fasano, who notes that he personally gains from benefits given to state-level public workers, said it’s time to look at such things as public employee contributions to pensions and health care plans.

“We have to tackle our [retirement] liability,” Fasano said, adding that their benefits and contributions “should be in line with the private sector or local unions.”

Health insurance for many state-level public employees, Fasano said, have no deductible. Further, pensions, which are based on earnings, generally take into account overtime income earned during an employee’s final years. Finally, unused sick and vacation days, which can accumulate for years, are often paid out when a government worker retires. 

“State workers who are going to retire rack up a lot of overtime to rack up their pension,” Fasano said. “I don’t blame the state workers for using these benefits, but we have to change it.”

Malloy has threatened to lay off thousands of public workers if he can’t secure concessions from the unions. 

It’s not just the expense side of the state ledger that needs surgery; tax revenue presents just as big a problem.

Malloy administration officials say the volatility of the financial markets making budetary planning difficult, and the decision of some Connecticut-based companies to move out has cut revenue.

Chris McClure, public information officer for the state’s Office of Policy and Management, said the causes of Connecticut’s budget crisis are “multifaceted, not a single event caused it.”

“We’ve had a significant growth in fixed costs – things like Medicaid, pensions for state employees and teachers. These expenditures continue to grow quite rapidly,” McClure said. 

Already the state’s richest residents pay a huge portion of state revenue: The top 1 percent of the wealthiest residents, McClure said, already account for about 30 percent of state tax revenue.

We have to tackle our [retirement] liability...[benefits and contributions] should be in line with the private sector or local unions.

- State Senate Republican leader Len Fasano

“But it doesn’t translate into a fixed revenue for the state because their income is generated from investments. It’s volatile, based on the investments,” he said. 

For instance, McClure added, revenue from the top 100 taxpayers dropped significantly, possibly because they made moves in their investments that were not taxable.

“That’s an idea that has been floated,” he said of the drop in tax revenues. “There’s not opportunity for capital gains to be generated” if people don’t sell.

“There is a possibility of a revenue spike down the road,” McClure added, “when they sell out their positions.”

There have been some tax proposals that don’t target the rich, but it’s hard to imagine those making a dent in the problem. Some state legislators suggest legalizing marijuana as a new tax source, as well as new tolls and a new casino. Other legislators and economic analysts say one remedy is to start taxing services, such as dog grooming.

“An overly heavy reliance on wealthy people to provide for a large portion of individual income tax revenues is dangerous,” Morgan Scarboro, a policy analyst for the Tax Foundation, a nonprofit in Washington, D.C., said. “If the state was to levy a lower rate tax on a broader base, the revenue volatility partly stemming from high-income taxpayers wouldn’t be as severe.”

State administrators are convinced that cutbacks are inevitable.

“We’re trying to figure out what has worked, and what hasn’t,” McClure said. “We want to put the state on the best track, having a predictable year-after-year outcome. We’re trying to keep the budget at about $20 billion, even if that means cutting… Some programs, [such as the] jobs training program, are fantastic, but to pay for that over Medicaid” is not feasible.

Malloy has said it behooves the legislature to work with him to address the economic crisis. The state Senate is evenly split between Democrats and Republicans, each with 18 members. In the House, Democrats hold a 79-71 majority.

Fasano, the Senate GOP leader, said the state “needs to spark the economy” by “getting older people to stay here, and get rich people to stay in the state.”

Elizabeth Llorente is Senior Reporter for FoxNews.com, and can be reached at Elizabeth.Llorente@Foxnews.com. Follow her on https://twitter.com/Liz_Llorente