August 28, 2016

Connecticut's Fiscal Condition among Worst

Eileen Norcross

Vice President of Policy Research
Summary

Good “economic DNA” doesn’t make years of profligate spending, evasive accounting, increasing tax burdens and regulatory pressure go away, as businesses and residents can flee for better climates. But it gives states an opportunity to right the ship.

Connecticut Gov. Dannel P. Malloy’s office recently rolled out plans to eliminate more than a quarter of full-time Department of Developmental Services jobs. Unfortunately, painful cuts like these will plague Connecticut and New England until states eliminate the root causes of their fiscal struggles. Despite being a political, economic and cultural powerhouse, the region lags in state fiscal health, with Connecticut in the country’s weakest position.

It’s nearly impossible to manage a state’s finances without reliable fiscal information. While there’s no shortage of data, it can be surprisingly difficult, even for state leaders, to find the right data.

That information should come from states’ Comprehensive Annual Financial Reports (CAFRs). Unfortunately, CAFRs are hard to interpret for all but the most budget-savvy readers. To shine a light on them, we’ve compared each state’s most recent CAFR (from 2014) to create a system of state fiscal health rankings and analysis.

New England states cluster into distinct groups: relatively healthy (New Hampshire), adequate with room for improvement (Vermont, Rhode Island and Maine), and weak (Massachusetts and Connecticut).

Think of a state’s financials like a patient’s vital signs, and its economy like its genes. Too little cash or too much debt – much like a patient being overweight or having high blood pressure – may point to a serious condition. But whether the person is in imminent danger depends on other factors, such as heredity and lifestyle. Some states are endowed with robust economic “genes” and can withstand greater fiscal shocks than others.

So the key in understanding a state’s financials is to distinguish between occasional budgetary stress and continuing structural weaknesses.

New Hampshire ranks 20th in the nation. It has relatively low levels of debt and pension obligations, its long-term liabilities are manageable, and it ran a small surplus. It didn’t have much ready cash, which could be a problem if a recession strikes. However, taxes, revenues and spending are low compared to the wealth of its residents, so New Hampshire should be able to make adjustments in a downturn.

Vermont (36th), Rhode Island (37th) and Maine (43rd) have similar short-term outlooks. None has much cash, so they would do well to bolster their rainy day funds. Vermont and Rhode Island ran budget surpluses, while Maine ran a small deficit of $20 per capita. Vermont and Maine have very low levels of debt and manageable pension liabilities, while Rhode Island’s are larger, but average when compared with the rest of the nation.

Vermont can brag about its relatively low debt and pension obligations, but its taxes, revenues and expenses are high compared to the income of its residents.

The two fiscally weakest states in New England are Massachusetts (49th) and Connecticut (50th). Both had little cash and insufficient revenues, and the long run is not looking much better.

Total state liabilities exceeded assets by 34 percent in Connecticut and 53 percent in Massachusetts. Connecticut had $20.8 billion in bonded debt, or $5,087 per capita, the highest in the nation. Add in unfunded pension liabilities and health benefits, and both states are exposed to long-term fiscal risks.

However, numbers don’t tell the whole story. If Massachusetts and Connecticut manage their economies, debts and revenue systems properly, they could be facing a short-term challenge rather than a fiscal disaster. Both states use debt finance for a range of projects, which, if sustainable, is not necessarily a problem.

Much of Massachusetts’ debt is related to projects like school construction and transportation. Connecticut has issued debt to balance budgets and plug pension holes – deeper structural issues that point to unsustainable debt.

Good “economic DNA” doesn’t make years of profligate spending, evasive accounting, increasing tax burdens and regulatory pressure go away, as businesses and residents can flee for better climates. But it gives states an opportunity to right the ship.

These rankings, while basic, help identify problems before they reach a tipping point. How Massachusetts and Connecticut manage their cash reserves, budget shortfalls and long-term liabilities will determine whether they are a passing challenge or a lasting fiscal failure.