In a report to the Finance Revenue and Bonding Committee, State Treasurer Denise Nappier noted, "The common cash pool balance has fallen substantially during the year… though available cash remains ‘adequate’ right now, pressure on the state’s cash flow continues to mount". In April, the level of operating cash had fallen to a dangerously low $25.9 million.
This is not a good sign. The balance should be near $1 billion. Furthermore, the state raided its capital programs four times in less than six months to pay its bills.
All of this has happened in the wake of the largest "retroactive" tax increase in state history. Where did all the money go? A spending increase of 7.2% in the last two years in a $40 billion two-year budget clearly indicates a spending problem, not a revenue problem.
Bloomberg Business News reported that Connecticut "deferred debt payments, trimmed programs and diverted funds as tax revenue came up short and opened a $200 million budget hole. The gap emerged about a year after the governor signed a $2.6 billion tax increase, the biggest in state history."
The report goes on to say, "Connecticut counts on the levy [state income tax] for almost half its revenue, with the biggest chunk coming from the hedge fund capital of Greenwich [and] Connecticut debt has posted the weakest returns this year among U.S. states."
Moody’s credit rating agency downgraded Connecticut’s bond rating from Aa2 to Aa3 in January. Their reasons include:
- Fixed costs for debt, pension and post employment benefits are the highest in the nation
- Low funding ratios for pension systems
- Complete depletion of the Rainy Day Fund
- Vulnerability to financial market fluctuations due to overreliance on capital gains revenues and employment concentrated in the financial services sector (A nearly $9 billion dollar hedge fund company, ESL, just announced it would leave Greenwich)
According to Moody’s, Connecticut is currently fourth worst among the 39 states who issue General Obligation Bonds. The Pew Survey of States ranks Connecticut worst in pension contribution (53%), as we face a $12 billion funding gap and the highest state income tax per capita. And things could get worse.
Lack of available reserve levels; one time budget solutions; revenue weakness driven by delayed economic recovery; cash flow strain; and an increase in fixed costs could lead Moody’s to downgrade Connecticut again.
The answer to the problem lies in a structural change to the state’s benefits, pension and post-retirement liabilities. A responsible and balanced budget must address the imbalance created by these unsustainable costs. The state is running out of cash, as some of us warned months ago. Not only may we face another downgrade but the state may need to borrow to cover its payroll - something the administration pledged not to do.
How do we stay solvent? A few principles my father, and most likely yours, taught me that government can learn from include: spend no more than you make and borrow only what you can pay back. In addition to these common sense principles, the state must reduce spending; hold the line on taxes; abide by our legal spending cap; cap bonding levels and restrict them for public works projects.
The state of Rhode Island took serious steps last fall to address their unfunded liabilities. Using good judgment and employing political nerve, they enacted a plan to cut $3 billion out of their $7 billion unfunded liability by raising their retirement age, suspending cost-of living increases until the pension system is 80% funded and moving workers to hybrid plans.
This move was not popular, but it helped secure the retirement of workers and avoid a bankruptcy.
The bottom line is this: when do not have any cash coming in, you have to spend less.
Our friends across the Atlantic are learning this lesson the hard way. Let’s hope Connecticut reverses course to avoid a similar fate.