Connecticut governor Dannel Malloy won reelection last year with 51 percent of the vote, but a new poll puts his approval rating at a meager 32 percent. Nearly three-quarters of those surveyed gave the governor a negative grade for his handling of the state budget, taxes, and the economy. Only 4 percent said that they were very satisfied with the direction of the Nutmeg State. No wonder. Just weeks after officials vigorously defended plans to pay off the state pension system’s enormous debt, Malloy proposed a new plan—pushing billions of dollars of payments well into the future. The new proposal is an admission that Malloy has yet to grab control of Connecticut’s precarious finances even after imposing massive new taxes that have businesses threatening to exit the state.
When Malloy took office in early 2011, the pension system had just 53 percent of the money it needed to pay for future obligations. Since then, the system has gone even further in the hole, despite years of double-digit stock market gains that have helped some other pension funds rebound. Malloy isn’t responsible for the debt in the system, but he engineered changes after taking office that he promised would put pensions on a path toward adequate funding. Those included modest reforms that raised worker retirement ages and restrained cost-of-living increases. He also committed the state to big increases in annual pension contributions, which have risen from $926 million in 2012 to $1.5 billion in the current budget and are scheduled to keep going up—reaching perhaps $3 billion annually within the decade. As recently as early October, state officials assured skeptics that Connecticut could meet this rising tide of payments. “We have plenty of resources to address whatever shortfalls, or whatever fiscal crisis might develop,” the state’s key budget official told the Wall Street Journal. Several days later, Connecticut treasurer Denise L. Nappier sent a letter to the newspaper criticizing its coverage of the state’s fiscal squeeze. “Today, there is real progress toward a better funding ratio for our pensions,” she said.
A mid-October poll showed that many state residents aren’t buying what the administration is selling. Malloy’s slumping popularity can be traced to the $1.5 billion tax hike he signed earlier this year. It was the second big increase in his five-year tenure. State leaders said the new revenues were necessary to keep expanding services for needy state residents, but when Connecticut businesses complained (the state’s largest company, General Electric, threatened to leave the state) Malloy trimmed $178 million from the package. Savvy business leaders now understand the reason for the tax hikes: Connecticut’s crushing debt burden, one of the highest in the nation relative to the state’s size, and Malloy’s meek response to the pension problems, which did far less to rein in costs than some other state reform plans. As Rhode Island treasurer, Gina Raimondo—now the Ocean State’s governor—took on public-sector unions when she engineered a comprehensive change in her state’s severely overburdened pension system in 2012. A New York Times headline recently touted her efforts: RHODE ISLAND AVERTS PENSION DISASTER WITHOUT RAISING TAXES.
Once a haven for financial firms and Fortune 500 businesses fleeing expensive New York, Connecticut has now become toxic to business leaders, and GE’s search for a new home has shaken up the state. In recent years, Connecticut has been consistently ranked as one of the least desirable places to open or expand a business; in a 2015 CEO Magazine survey of executives, it ranked 45th out of the 50 states. One executive commenting in this year’s survey summed up the state’s business climate: “Connecticut is a horrible state for business. The governor is anti-business and the economic environment he creates is confrontational. The roads and highways are in poor condition, and the state is fundamentally broke.” CEOs understand how debt corrodes a state’s business climate. As one Connecticut executive put it in a previous survey, “Unfunded future pension and healthcare liabilities are future taxes.”
Last week, Malloy debuted a new initiative designed to stem some of the criticism. It includes modest tax reforms for businesses and a complex plan to save money by splitting the state’s pension system into two separate funds. One fund would include employees who began working for the state before 1984—to whom the state owes much of its unfunded pension debt. The second plan would be reserved for current employees and would contain much less debt. The state would continue prefunding retirement credits being earned by newer employees because those payments would be modest. But it would commit to financing the pensions of older employees on a pay-as-you-go basis, saving tremendous amounts of money in the near term—up to $8 billion starting in the next fiscal year and for 15 years after that—but it would leave future generations on the hook for huge costs later.
Significantly, Malloy proposed no new pension savings as part of this plan, meaning that Connecticut workers would see no reductions in benefits, and taxpayers would still be required to come to the rescue if the pension system failed to hit future investing targets. Malloy’s proposal is basically an admission that he didn’t solve the state’s pension problems four years ago and can’t afford to pay for his own plan. Now he’s proposing to kick the Nutmeg State’s problems down the road.
In soccer, a “nutmeg” is a deceptive maneuver in which a player dribbles the ball through the legs of an unsuspecting defender. Being “nutmegged,” according to one book, has come to suggest “stupidity on the part of the duped victim and cleverness on the part of the trickster.” Connecticut residents and businesses are right to wonder whether they are being nutmegged in their own state.