State authority on fiscal stability: Lamont’s budget gets ‘high marks’

Gov. Ned Lamont gets high marks for both the policy recommendations and the collaborative style reflected in his biennial budget proposal released this week.

For those of us from the private sector who labored for 16 months in producing two reports for the Commission on Fiscal Stability and Economic Growth, we can finally say that somebody is listening. While the commission has formally disbanded and these views are my own, I can say with confidence that they reflect the policies we endorsed and the thinking of most of our members.

The governor did not endorse all of our recommendations, nor do I entirely approve of all of his. But the strategies he has chosen closely align with ours and are a good starting point for the legislature.

First, we agree on balancing the budget by holding the line on new expenses and finding savings in nonfixed costs through increased efficiency (like digitizing services and cutting health care reimbursements to providers for state employees) while avoiding new taxes or a raid on the rainy day fund to get there. There is, of course, more work to be done on finding specific expense reductions (for example, through privatization of services and examining why we are maintaining the highest Medicaid income eligibility levels in the country).

A positive innovation is the governor’s proposed “debt diet.” A big part of our fixed cost burden is interest on debt — we have the highest debt-service-to-revenue ratio in the country. The governor’s plan to cut back our level of general obligation debt issuance by almost 40 percent is sensible, provided room is found in the reduced bonding budget for our high priority proposals to fund new STEM scholarships and to expand the Capitol Region Development Authority to additional cities.

Second, we are pleased with the direction of the governor’s proposals for “long overdue structural reforms” of the state’s pension and retiree health care obligations, although in some respects they don’t go far enough.

In the case of the Teachers’ Retirement System, his plan to spread out the amortization of the pension debt mirrors the commission’s strategy. The creation of a special capital reserve fund within the rainy day fund, backstopped by lottery proceeds, is a creative alternative to our plan to transfer the lottery proceeds to the pension. It merits close study.

But the proposal to lower state costs by having local governments assume 25 percent of the pension costs of current teachers (and all of the extra pension cost associated with higher-than-median salaries) needs to be considered in conjunction with the commission’s strategy of asking teachers to increase their level of contribution from 7 percent to the national median of 9.8 percent. Perhaps some combination is feasible.

It is in the area of “streamlining the State Employees Retirement System” that his proposals, while helpful, don’t get the job done.

Even so, we note that the State Employee Bargaining Agent Coalition has already rejected them and any idea of re-opening the 2017 labor agreement. This is an area the commission felt strongly about, concluding that a reopener of SEBAC was essential. Our conclusion was driven not merely by the daunting budget economics of these fixed employee costs and the accompanying $70 billion in unfunded liabilities but by issues of fairness. Our state employees and teachers have compensation and benefit plans that rank among the top half-dozen states in the country, yet their contributions to their plans rank in the bottom half dozen.

Should taxpayers in the private sector, whose own employee benefits are significantly less rich, be fairly expected to subsidize that disparity? It is time for a centrist coalition in the legislature, together with the governor, to shine light on this problem and call for a re-opener.

Third, while we jointly endorse tax reform, the governor’s plan is not as supportive to economic development as the commission would like. He would still repeal the nuisance $250 biennial business entity tax, but he appears to have dropped his campaign commitments to eliminate the capital stock tax and reduce business personal property taxes.

We both proposed to increase tax equity by increasing the income tax credit for local property and car taxes and extending it to those below 65, and to expand the earned income tax credit for lower-income people. But while he proposes to end the gift tax (Connecticut is the only state that has one), he leaves in place what is perhaps the biggest tax disincentive to living in Connecticut for upper income people — our archaic insistence on taxing estates (we are one of only 12 states to still do so).

Like the commission’s plan, he would fund these tax reductions principally through expanding the sales tax base (not the rate). Taxing goods and services equally is the right thing to do (although taxing services to businesses risks double taxation given that business would be paying on both inputs and outputs). The proposed budget would raise $300 million to $500 million from eliminating tax exemptions, which we believe would be enough to offset a broader set of business and estate tax cuts.

Fourth, we agree on raising the minimum wage in steps to $15 per hour, with special provisions for younger workers.

And fifth, we agree on prioritizing transportation investment around the “30-30-30” goals for the New Haven Line, projects to de-congest key sections of major highways, safety improvements on bridges, and using publicprivate partnerships as a new financing and implementation vehicle.

Particularly welcome is the Governor’s willingness to consider supporting a properly designed statewide tolling system. In our view, the legislature needs to embrace tolls in principle as the only realistic long-term way to finance needed transportation infrastructure (especially given the “debt diet” that would constrain general obligation bonding). Then the debate can begin on where and how much.

From an economic development point of view, investing in transportation infrastructure is a necessity that should override the natural legislative reluctance to impose new financial burdens.

All together, the governor’s budget is a balanced and creative starting point for the difficult debate that is about to commence.

Robert Patricelli is the former co-chair of the state Commission on Fiscal Stability and Economic Growth.