HARTFORD, CT — The 14-member Commission on Fiscal Stability and Economic Growth made 10 recommendations Thursday, including a reduction in income taxes, an increase in sales and corporation taxes, a $1 billion reduction in annual operating expenses, and an end to collective bargaining for benefits.
The commission unanimously adopted the recommendations.
The biggest part of the proposal involved restructuring Connecticut’s revenues with a $2.1 billion reduction in personal income taxes. The commission maintained that the change would be revenue neutral because they also proposed increasing taxes in other categories to account for the changes.
The commission also pitched an increase in the sales tax from 6.35 percent to 7.25 percent and increasing corporate income taxes approximately $475 million starting in 2020 by implementing a new tiered payroll tax. It would reduce tax exemptions by 14 percent and eliminate the estate and gift tax. It also proposed a seven cent increase in the gas tax over four years and accepted the concept of tolls.
“They all net out to a net positive at every level of income,” Robert Patricelli, co-chairman of the Commission, said of the reduction in income taxes.
The savings for someone who makes around $60,000 a year is around $400, according to the commission.
The commission also proposed increasing the minimum wage to $15 an hour by 2022.
On the spending side of the ledger, the commission recommended reducing operating expenses by $1 billion, but it didn’t say where it would cut.
The commission also proposed creating a joint budget committee that would set the revenue and spending. Currently, legislative leadership negotiates between the Appropriations Committee, which is in charge of spending, and the Finance, Revenue, and Bonding Committee, which is in charge of raising revenues.
On the whole, the commission said its recommendations would increase Connecticut’s economic activity and reduce projected budget deficits.
“We would seek enactment of all the tax proposals in 2018, for implementation in July 2019 at the start of FY 2020,” according to the report. “Implementation would be conditioned, however, on the General Assembly’s enactment in 2018 of our recommendations regarding collective bargaining and binding arbitration.”
Further, the report says results depend upon the governor’s implementation of additional cost-management recommendations based on another study to be conducted by a consultant, and the resulting development by the governor of a proposal to extract $1 billion in annual cost from state expenses.
But it’s an all or nothing package.
“It really can’t be cherry picked,” former state Rep. Patricia Widlitz said. “It really needs to be looked at as a package. It won’t balance if it isn’t.”
Greg Butler, a commission member, said the “day of reckoning is here” and the legislature needs to look at voting on the package as a whole.
House Speaker Joe Aresimowicz, D-Berlin, thanked the commission for its work.
“With their report now in hand, an expedited yet full vetting by the relevant committees are next steps,” he said. “We all appreciate the time and work that went into this, so it’s important that the report as a whole or isolated recommendations aren’t pre-judged.”
Republican legislative leaders issued a similar joint statement.
“The Commission took this task to heart and completed a significant amount of work within the allotted time frame. We now need to spend time reviewing the package as a whole in great detail,” Senate Republican President Len Fasano, and House Minority Leader Themis Klarides, said.
Gov. Dannel P. Malloy, who appointed members to the commission, said the report “presents Connecticut with an opportune moment to engage in a meaningful conversation about bold ideas for growing our economy and building stronger communities where people want to live and work — now and into the future.”
The committee proposed giving the state legislature the power to define the health and pension benefits for state employees and teachers.
“This is not anti-labor. This is pro-legislature,” Patricelli said.
The large contingent of labor leaders in the room chuckled at the remark.
Labor had predicted this would be a recommendation of the commission.
The commission said in its report that the legislature has never had proper control over one of the biggest cost drivers — state employee wages and benefits, and teacher pensions.
“These have been left to collective bargaining between the SEBAC coalition bargaining group, in the case of state employees, and the governor’s office,” the report says. “The legislature only has the right to vote up or down on a negotiated contract. It has been effectively disenfranchised from managing one of the primary elements of the General Fund and the largest component of unfunded liabilities. The Commission was surprised to learn that only four states do it this way.”
Labor leaders said collective bargaining has actually saved the state money.
“There are many key savings we’ve been able to realize because of collective bargaining that will not be allowed once pensions and healthcare are set through state statute,” SEIU 1199 spokesperson Jennifer Schneider, said. “It’s important to keep in mind it is only because of collective bargaining in Connecticut that the State began properly paying into the retirement fund. Before collective bargaining workers properly paid into the pension fund but the state did not.”
The unions contend that the unfunded pension liability is not their fault and they’re already helping contribute to the funding efforts by contributing more than they have in the past.
Lori Pelletier, president of the AFL-CIO, said she hates to say that the fix was in, but she says she was right about that.
Sal Luciano, executive director of AFSCME Council 4, said he doesn’t think anyone in the labor community is surprised by the outcome.
Donald Williams, a former lawmaker who is executive director of the Connecticut Education Association, said he thinks its a mistake to give the legislature the ability to negotiate health and pension benefits with state employees.
“If you politicize the process, it could have negative consequences,” Williams said.
But the commission maintains that it tried to position Connecticut to be more competitive and was not trying to take a stand against labor.
In fact, during Thursday’s press conference Patricelli said they don’t believe the new tier of state employees created through the recent State Employees Bargaining Agent Coalition agreement was “competitive,” and he said the deal “needs to be voluntarily reopened.”
At the same time,“We need to restructure fixed costs,” James Smith, the other co-chairman of the commission, said.
They said the report’s calculations assume that the SEBAC deal isn’t reopened voluntarily, and as such they were suggesting that everyone has to accept their recommendations in order to get there.
The state was estimated to have total liabilities of $87 billion as of June 31, 2017. That would increase to over $100 billion if the state employee and teachers’ pension systems reduced their weighted average investment return assumption from 7.5 percent to 6 percent, more in line with recent historical returns and returns of other US public pensions. Through 2015, the average 10-year return for the 41 largest state funds was 6.59 percent.
The state’s total required contributions to the teachers retirement system and the state employees retirement system are projected to increase from $2.7 billion last year to $4.9 billion in fiscal year 2032, representing a compounded annual growth rate of 5 percent.
With the legacy liabilities rising at such a high rate, the commission is also looking at using the Connecticut Lottery revenue stream as a way to pay the teachers retirement pension fund down.
“It’s not a securitization,” Smith said. “The stream would go to the teachers retirement system plan.”
The report says the lottery revenue would go to the pension plan for a period of 30 years in order to reduce unfunded liabilities by an approximate and hypothetical value of $7 billion.
The state could also consider in-kind contributions of land, buildings, airports, roads, and healthcare facilities, which may have valuable development potential to reduce the pension liabilities.
Eric Hammerling, executive director of the Connecticut Forest & Park Association, called it “a terrible idea” that would have “disastrous consequences for some of the state’s most precious publicly owned lands.”
The report was a mixed bag for the business community.
Joe Brennan, president and CEO of the Connecticut Business and Industry Association, said his members have concerns about the payroll tax proposed as part of the corporate income tax increase.
“What impact will this have on the state of Connecticut being competitive and attracting businesses?” Brennan said, adding that this is what his board will be looking at as it examines the proposals.
He said he thinks the reduction in the personal income tax will stop the “flow of wealth from leaving the state.”
Andrew Markowski, with the National Federation of Independent Business, said it’s not immediately clear that the reductions in personal income tax will make up for the cost of the new payroll tax.
Also, higher sales taxes will raise the cost of goods and services for small businesses, and the possibility of additional local option sales taxes could result in a patchwork of varying rates and administrative burdens, Markowski said.
“The good news is that getting rid of the estate tax will help family businesses continue to survive from one generation to the next,” he added. “Right now the heirs are often forced to sell business assets just to pay estate taxes.”
A coalition of nonprofits is concerned about where the state would even begin looking for $1 billion in spending cuts.
“With half of the state budget tied up in ‘fixed costs’, it is hard to imagine an implementation of this plan that would not devastate the state’s human service safety net,” Gian-Carl Casa, president and CEO of the Connecticut Community Nonprofit Alliance, said. “On behalf of people with disabilities, those struggling with substance abuse or mental illness, domestic violence, homelessness or re-entry to the community from prison, who our providers serve every day, we urge the General Assembly to reject across-the-board budget cuts that will hurt the most vulnerable people in our state.”