Pension Crisis

After Several Major Tax Increases, Connecticut Still Can't Make Ends Meet

The bloated public sector is sinking the Nutmeg State.


Ingram Publishing/Newscom

Connecticut has long been one of the richest states in the union, but its bloated public sector has now engulfed it in a fiscal crisis.

The rising cost of public employees' retirement benefits has prompted the state to raise taxes three times in the last eight years. The public employee unions are adamant that the problem can be solved only by more taxation, and they have threatened to sue if any changes are made to the present payouts. Gov. Dannel Malloy and the General Assembly haven't been able to agree on what to do, leaving the state without a budget for more than 100 days.

The state is $74 billion short of what it needs to fund those retirement benefits and the state's bonded debt obligations. As of 2014, according to The Wall Street Journal, Connecticut ranked 48th in pension funding, meeting only 50 percent of its obligations. The state is looking at a budget deficit of $3.5 billion, out of a budget of about $19 billion.

The last time Connecticut faced financial difficulties of this size was in 1991. From 1984 and 1990, the cost of state pensions increased by 119 percent, according to The Connecticut Mirror. That led the state to impose its first-ever income tax. But the income tax revenue—$126 billion over the following 25 years—did little to restrain spending, and funding for pension programs is still inadequate. Retirement costs and debt services were 12 percent of the state budget 20 years ago. In this fiscal year, they will be 31 percent.

State workers in Connecticut make about 42 percent more than equivalent jobs in the private sector—the widest such gap in the country, according to a 2014 American Enterprise Institute study. Their retirement health benefits were the equivalent of an individual employee getting an additional 18 percent in wages for each working year.

A JP Morgan report published last year said that to fully meet its unfunded liabilities, Connecticut has four options: It can pay 35 percent of state revenues toward its debt for 30 years, it can cut the state budget by 14 percent, it can increase taxes 14 percent, or it can increase worker contributions to their pensions by 699 percent. None of those choices are palatable to most lawmakers.

In September enough Democrats joined their GOP colleagues to pass the state's first Republican budget in years. The Democratic governor vetoed it, citing its cuts to state pensions as one of his concerns. Until Connecticut gets a budget, Malloy is managing the state finances by executive order.