CONNECTICUT FACES LONG CRAWL OUT OF WEALTH EXTREMES, CRUSHING DEBT
By Keith M. Phaneuf and Clarice Silber
This is the final article in an occasional series exploring wealth and income inequality in Connecticut and its impact on a state struggling to cope with massive debt. Find the other articles here.
There is no shortage of ideas to address the extremes of income and wealth inequality that threaten Connecticut’s economic future.
Whether it involves the investments in education and social programs that liberals favor, or the austerity and tax cuts espoused by conservatives, there’s general agreement on the need to reduce Connecticut’s deep pockets of poverty.
But there’s a third component to this debate, a challenge more daunting in Connecticut than in most other states: Connecticut has amassed more than $80 billion in debt — much tied to a pension system neglected for decades.
So how can it address wealth and income inequality when the math already suggests all income groups will be asked to sacrifice over the next 15 years just to cover this bill?
“Inequality is one of the reasons the world’s falling apart,” said University of Connecticut economist Fred Carstensen, who heads the Connecticut Center for Economic Analysis.
While economists and politicians differ over how to address the problem, those on all sides of the inequality debate generally agree there is an economic tipping point: when disparities become too extreme and too many are struggling.
When adequate investment in human capital — higher education, adequate health care and decent housing — are impossible because of debt or under-employment, inequality becomes a significant drag on economic growth.
While income is limited to the earnings one household receives over a set period of time — usually a year — wealth incorporates stocks, property and other assets a household possesses, as well as the mortgages and debts that burden it.
“If you don’t have wealth, if you don’t have assets against which you can draw so you can balance things out over a longer time period, … you are living literally paycheck to paycheck,” Carstensen said.
Those living paycheck-to-paycheck are one crisis, one accident, away from the governmental safety net. That could mean food stamps, rental and child care subsidies, government-sponsored health coverage, or hospital emergency room services that the patient cannot cover.
The key, Carstensen said, is not perfect equality of wealth and income, but rather a focus on drawing people out of poverty, and keeping the middle class from falling backward.
A 2014 study of the U.S. and 22 other countries in North America and Europe also suggested targeting the lower portion of the inequality spectrum.
According to the Organisation for Economic Cooperation and Development, a progressive policy think-tank based in Paris, the key lies in “reducing income disparities at the bottom of the income distribution.”
Inequality is one of the reasons the world’s falling apart.
Countries that had dramatically reduced poverty enjoyed more robust economic growth than those that had produced extreme degrees of income inequality. Some degree of tax hikes, by raising top marginal rates and closing deductions, “which tend to benefit high earners disproportionally” may well be necessary, the study reported.
But the other key is to use those funds to increase access to public services, including high-quality education, job training, transportation and health care.
“It is not just poverty — the incomes of the lowest 10 percent of the population — that inhibits growth,” the study states. “ … Policymakers need to be concerned about the bottom 40 percent more generally, including the vulnerable lower-middle classes at risk of failing to benefit from the recovery and future growth. Anti-poverty programs will not be enough.”
Economic danger signs
There are signs that income and wealth inequality are undermining Connecticut’s economy, despite a healthy 4.2 percent unemployment rate.
The top 1 percent of earners in Connecticut captured all of the post-recession income growth between 2009 and 2013, according to a 2016 analysis by the Economic Policy Institute of Washington, D.C., a nonpartisan think tank, while the remaining 99 percent watched their earnings fall nearly 2 percent. By comparison, the top 1 percent nationally captured 85 percent of all income growth.
There are other warning signs as well: Connecticut is the only state not to have recovered all jobs lost in the last recession, having regained just over 90 percent; and child poverty levels have increased by 50 percent since 2000, according to the Connecticut Association for Human Services.
Meanwhile, the health care safety net has sprung several holes due to state budget cuts. Starting in 2016, an estimated 23,700 working poor adults lost Medicaid coverage through the HUSKY A program when income eligibility guidelines were reduced. That meant families of three earning between $40,380 and $31,139 lost coverage.
Connecticut had 140,531 households in 2016 with incomes defined as “extremely low
Further complicating matters, health care advocates estimate 80 percent of those cut from HUSKY A could not afford to purchase insurance on the state’s health care exchange, despite government subsidies, and now are uninsured.
Lawmakers ordered a second tightening in 2017, from 155 percent to 138 percent of the federal poverty level — a limit of $28,676 for a family of three. This would have removed coverage for another 13,500 families starting this summer, but the General Assembly reversed that decision in May.
After fierce public outcries lawmakers also repealed new limits on a health care program for seniors last May — but have no plan for covering the added costs next fiscal year when state finances are projected to be 10 percent in deficit, a gap of about $1.7 billion.
Both access to higher education and housing also have become more restricted.
Between 2010 and 2017, tuition and mandatory fees for an in-state resident attending the University of Connecticut rose by 35 percent. Over the same period, the increases for the Connecticut State University and community college systems were 25 percent and 23 percent, respectively.
Connecticut had 140,531 households in 2016 with incomes defined as “extremely low,” according to the National Low Income Housing Coalition. The NLIHC also found the state had 36 affordable and available homes per 100 renter households in that category.
Government must invest for the economy to grow
Faced with these challenges, some argue Connecticut must find the resources to spend more.
Even though government must spend more to cover pension and retirement health care debt left by past generations, it still must invest more, some say, in education, health care and infrastructure.
“Every child in Connecticut should have the pathway to success through quality education, through opportunities to go to college, to own their own home and to have a successful life and raise their children there,” said Jamie Mills, director of fiscal policy for Connecticut Voices for Children, a New Haven-based research and public policy group. “I think we are at a tipping point where that is no longer the reality for a significant number of people who live in Connecticut right now.”
Mills said lawmakers have no choice but to ease budgetary capping systems. Otherwise surging pension and other debt costs — which already have drained resources from education, health care and transportation — will take an even higher toll on these areas.
Yale Law School Professor Anika Singh Lemar said education and quality housing are the two main public resources people must have to climb the socio-economic ladder.
“I think the most troubling aspect of our current state of inequality is about unequal access to opportunity and we do a particularly bad job in that in Connecticut, where the sort of preliminary public goods that create opportunity are highly segregated by class and race,” Lemar said.
Lemar, who runs the Community and Economic Development clinic at Yale, said Connecticut needs to focus on de-concentrating classrooms in urban cities and addressing its high housing costs.
“So we have classrooms in our urban cities where you have 26 kids in the classroom—over half of whom are struggling with food insecurity, various forms of trauma exposure, no previous educational experience in a pre-K classroom,” Lemar said. “And we expect classrooms to deal with that. … You have to de-concentrate poverty in our schools.”
While Connecticut has one of the most highly educated populations in the country, it’s not educated enough to meet the demands of our future workforce, according to Jennifer Widness, president of the Connecticut Conference of Independent Colleges, a coalition of private colleges and universities.
Within six years Connecticut will require a workforce in which 70 percent have some post-secondary training, according to an analysis from Georgetown University’s Center for Workforce. The current level is 54 percent.
And the education gaps between whites and minority students are greater in Connecticut than in almost all other states, Widness said, noting that the best way to increase educational attainment is through greater state investment in financial aid.
Carstensen, who frequently refers to Connecticut as an “I-T island,” said the state has little chance of generating long-term economic growth without greater investment in both its information technology and transportation infrastructure.
Connecticut also needs to provide more housing options for the poor besides in its struggling cities.
David Fink, a consultant for Partnership for Strong Communities, said this would give low income families the mobility to choose which communities work best for them.
But this traditionally has sparked fierce political resistance and would require a coordinated education effort by the state and by nonprofit housing advocates to make change.
“Unless you think you can have the votes to mandate towns to do it, you have to convince town after town … and that requires work,” Fink said.
Affordable housing is a key tool to reduce recidivism and help inmates find a stable life upon release from prison, said Rep. Brandon McGee, D-Hartford.
But quality housing is just the first step in a larger effort to revitalize Connecticut’s cities, he said.
“In order for Connecticut to close the income and wealth inequality gap, we have to begin investing in the urban centers,” McGee said. “Many of our urban centers have high mill rates, we’re spending a lot of money on social services, and many of our people are not even making enough for meaningful wages that will allow for them to lift themselves up out of poverty.”
Investing in health care could — in some cases — cost more up front, but also has the potential to deliver major savings, said Patricia Baker, president and CEO of the nonprofit Connecticut Health Foundation.
“The fact of the matter is we have to address health and well-being because the cost of it is eating up our resources,” she said.
Direct out-of-pocket spending is the most regressive form of health-care financing, the journal Health Affairs concluded in 2011 when it published a study conducted by the Rand Corporation.
The study found a typical American family — a median-income married couple with two children and employer-sponsored health insurance — saw its income grow by $23,000 between 1999 and 2009. But rising health care costs left them with just $1,140 extra income after adjusting for inflation.
The foundation supports holding the line against any further cuts to the HUSKY program, or to school-based clinics that expand health care access dramatically in low-income communities.
But the foundation’s recommendations go far beyond simply maintaining state spending to preserve health care access.
“We have to tackle the delivery system and we have to move to paying for outcomes as opposed to episodes of care,” Baker said. “This is, I think, fundamental to building a healthier Connecticut.”
Connecticut should also continue to support the State Innovation Model initiative, also known as SIM, which is exploring ways to design primary care to promote wellness, Baker said, adding that the state should invest in growing its stable of community health workers.
These frontline public health workers bridge the gap between the doctor’s office and the patient and can improve access to care. For example, Baker said, a community health worker could help the parents of a child with asthma learn new cleaning techniques to minimize asthma triggers.
Who pays the very big bill?
But if Connecticut already is at risk of significant tax hikes over the coming decade-and-a-half to cover its debt costs, how would it pay for new investments in services and infrastructure ?
The first step, according to Salvatore Luciano, the new head of the Connecticut AFL-CIO, would be to raise taxes on wealthy households and major corporations.
“I don’t think people realize how huge the wealth disparity is in Connecticut,” Luciano said. “I think that’s a big part of the problem.”
According to the Economic Policy Institute, the top 1 percent of households nationally emerged from the last recession earning 25.3 times what the bottom 99 percent average.
In Connecticut the ratio is 42.6-to-1, and in Fairfield County it’s 73.7-to-1.
But Peter Gioia, economist for the Connecticut Business and Industry Association, warned state officials must try to hold the line on taxes wherever possible.
“If you raise taxes at this point in time, you will have a flood of people leaving the state,” he said. “You’ve got to stabilize your (tax) base.”
“There’s a whole cottage industry of financial advisors that are talking to people about this (tax trend,) and showing them where else they can go,” Gioia said. “That’s what is hurting Connecticut now more than anything, and I think it will continue to accelerate.”
Gioia echoed Carstensen’s concerns about the need to invest in transportation, but said Connecticut has to try to identify resources within its existing budget. If the choice comes down to raising taxes or expanding transportation spending, the latter will have to wait, he said.
Gioia and other business leaders also have pointed repeatedly to a series of studies released in 2011 and 2012 by the Connecticut Institute for the 21st Century, a business coalition focused on achieving greater cost efficiency in state government.
In one report focused on Connecticut’s dual, public-private system of delivering social services, the institute called that model “a confusing, non-integrated, inconsistent and out-of-balance system that is neither efficient nor effective.”
If you raise taxes at this point in time, you will have a flood of people leaving the state. You’ve got to stabilize your (tax) base.
Gioia and others also have argued there may be too many community-based nonprofits competing for scarce state dollars. State government might be able to cut costs, shift significant amounts of savings to cover rising pension costs, and still have some left over to bolster nonprofit providers — if the overall number of agencies were reduced, he said.
Former hedge fund manager David Stemerman, a Greenwich Republican who sought the GOP gubernatorial nomination last year, said Connecticut should try to buy senior public-sector employees — as well as retirees — out of their pensions with lump-sum offers.
Connecticut’s reckless savings habits between 1939 and 2010 — which created the current retirement benefit crisis — have offended taxpayers, and every effort must be made to reduce the cost of that multi-generational mistake, he said.
“People are deeply concerned that one day the money might run out,” Stemerman said. “And we need to have an honest conversation across the board.”
But has the money run out yet? Connecticut’s tax system is projected to raise more than $16.4 billion this fiscal year.
That’s more than the $12 billion it raised in the 2010-11 fiscal year — the last fiscal year before a major, $1.8 billion tax hike signed by Gov. Dannel P. Malloy took effect.
It’s also more than the $12.4 billion that taxes raised in 2007-08, the last fiscal year before The Great Recession.
And while state tax hikes frequently fail to raise as much additional funding as lawmakers were counting on when they approved them — an economic danger sign — Connecticut is not seeing less revenue either.
Welcome the wealthy, don’t villify them
Still, it’s not just Gioia and Stemerman who argue that Connecticut needs to recognize that taxpayers — wealthy ones in particular — have been pushed too far.
The state Commission on Fiscal Stability and Economic Competitiveness, a 14-member panel dominated by business leaders, last year recommended a comprehensive blueprint for stabilizing the state’s finances and jump-starting the economy.
It drew criticism, in part, for centering much of the blueprint on a state tax reorganization plan that would benefit the wealthy the most — and potentially shift burdens onto the middle class.
The group recommended lowering state income tax rates across the board. Connecticut’s richest residents, who pay the most, would scoop up most of that savings. This would be offset by higher sales and business taxes, as well as by a $1 billion cut in state operating expenses.
Given that surging pension and other debt costs largely are fixed by contract, critics said much of this cut would come from municipal aid, weakening the cities and driving up property taxes.
The commission’s co-chairmen, health care entrepreneur Robert Patricelli and Webster Bank chairman and former CEO Jim Smith, say this tax restructuring would generate economic growth and begin to remove Connecticut’s stigma as a tax-and-spend state.
The president of the Connecticut Hedge Fund Association, Bruce McGuire, said the state should create new enterprise zones that offer tax discounts to hedge funds willing to relocate here.
According to the state’s nonpartisan Office of Legislative Research, Connecticut has the second-largest hedge fund industry in the U.S. There are 211 hedge fund managers and about 700 hedge funds listed on Preqin’s, a leading online industry information source.
Two of the world’s largest, Bridgewater Associates of Westport and AQR Capital Management of Greenwich, managed $151.7 billion and $74 billion, respectively, in assets based on 2015 data.
And while they represent a small percentage of the population, they rank among Connecticut’s biggest taxpayers.
By offering the right incentives, particularly in shoreline cities like Stamford or New Haven, McGuire said, the state could build its hedge fund industry as part of a larger plan to revitalize urban centers.
“We should focus our attention and energy on making Stamford a thriving center,” McGuire, 54, said. “That’s what millennials and more than a few people my age want.”
Don’t forget the middle-class
But others argue it is Connecticut’s middle class that needs the most attention, with many at risk of slipping out of that demographic and needing more government assistance.
Luciano said boosting the minimum wage from $10.10 per hour to $15 should be a priority. Patricelli and Smith’s panel also endorsed that target, though they said it might need to be phased in over a few years.
Sen. Cathy Osten, D-Sprague, co-chairwoman of the legislature’s Appropriations Committee, said Connecticut needs to embrace more efforts like its manufacturing pipeline program.
Last year the state provided high-skill job training — such as welding, drafting, sheet metal fabrication — for more than 2,000 individuals, primarily through its community college system. It then placed them in jobs with major manufacturers, such as General Dynamics’ Electric Boat Shipyard in Groton.
“It sets people on the pathway not only to cover their expenses, but to have that quintessential American Dream, to own a house,” Osten said.
Gov-elect Ned Lamont, whose first budget proposal is due to the legislature in mid-February, has said he wants to hold the line on state income and sales tax rates.
And while he praised the fiscal stability commission for its work, Lamont said his first priority will be to offer relief to the middle class.
“Given the fiscal realities of the state, the Commission’s recommendation of cutting the top rate on the income tax is not an immediate priority,” he said. “Connecticut’s middle class deserves a break, and that’s where we’re going to concentrate the energies of this administration and the budget.”
Lamont unveiled a plan during the campaign to bolster the property tax credit within the state income tax, which is only available to middle- and low-income households.
The new governor also said he hopes to shield municipal aid, particularly for Connecticut’s poor urban centers.
“By creating a responsibly balanced budget that stabilizes the state’s finances, we can eventually restore municipal aid to its proper levels instead of leaving municipalities to choose between making draconian cuts or increasing property taxes on hard-pressed homeowners,” he said.
Make sure the state’s tax credits pay off big
Carstensen insists the ultimate answer, both to meeting the challenge of extreme wealth inequality as well as the state’s huge debt, rests neither with spending nor taxes.
Simply put, state government first must get a lot smarter.
Connecticut offers dozens of credits, exemptions and other tax breaks across its entire revenue system — income, sales, corporation and other levies — worth more than $6.5 billion per year, according to the legislature’s nonpartisan Office of Fiscal Analysis.
How effective are those grants, loans and tax breaks? Do they create jobs? What if they created enough jobs, which in turn generated enough income, sales and other tax receipts that state government came out ahead?
“Other states have much more sophisticated ways of tracking their own economic activity,” Carstensen said, noting that the state’s chief fiscal offices don’t have in-house economists. “We don’t collect any granular information,” he added. “That cripples the whole process.”
With a more strategic approach to leveraging tax credits and other forms of economic development assistance, tying them to job creation in cutting-edge industries, Connecticut’s economy could reach new heights, Carstensen said.
“We’re flying blind,” he added. “We are the Land of Steady Habits and until that changes, that means, among other things, we are the land of not paying attention to what is going on.”