Judging by muni spreads, Illinois is widely considered the most financially troubled state in the country. However, preppy Connecticut, which has the highest per-capita income in the country and whose capital Hartford has been on the verge of bankruptcy for months, isn’t far behind. As lame-duck Democratic Gov. Daniel Malloy battles with the legislature – including members of his own party - over passing the state’s budget with a $2.5 billion deficit, the state’s largest newspaper, the Hartford Courant, is highlighting an issue that is emblematic of a nettlesome fiscal problem facing the nutmeg state: its overly generous treatment of state employees through overtime pay, particularly the Department of Developmental Services which operates a string of hospitals serving the intellectually disabled and group homes, that is putting a heavy strain on the state’s already teetering budget. State payroll data analyzed by the Courant revealed that, through the first half of the year, 37 DDS employees have already earned more than $50,000 in overtime alone, putting a handful of these workers on track to collect $250,000 in pay this year. By comparison, workers with similar jobs in the private sector with state contracts - a group that serves 90% of the state’s intellectually disabled patients - haven’t had a pay raise in 12 years. This excessive reliance on overtime is the result of a quirk in the regulatory framework that governs how the aging state institutions are run. Some nurses are on track to earn more this year than DDS Commissioner Jordan Scheff. “With half the year to go, one direct-care worker in a facility in DDS's west region, with an annual base salary of $44,000, had already earned $119,000, including $91,170 in overtime alone, payroll records show. She's on pace to earn $238,000 this year.” “…in the north region, with a base salary of $57,000, had earned $122,500 by mid-year, including $94,000 in overtime since Jan. 1, the records show. At this pace, he'll earn over $245,000, well more than the $138,000 annual salary of the commissioner of DDS, Jordan Scheff. More than 250 DDS employees, most of them direct-care workers, had earned at least $25,000 in overtime through June, records show.” According to the Courant, the state’s excessive regulations governing how state-run health-care enterprises should be staffed, have transformed the Department of Development Services into a massive drain on the state already devastated budget. As a result, the state is hesitant to hire much needed new workers because it’s slowly working to close the state-institutions. “For many advocates…overtime illustrates the inequities between the public and private sectors. There have been calls for several years for more funding for the private agencies serving most of the state's 16,000 intellectually disabled clients. Advocates say the disability community has never been in greater jeopardy, and they have ratcheted up their public protests. Several hundred parents, advocates, and clients attended twin rallies at the Capitol on July 18.” DDS Head Scheff explains how the state’s powerful public employee are working to preserve the system despite its obvious inefficiencies, adding that the costs of running these hospitals are “not sustainable.” "No, it's not sustainable, and it's not cost effective, and it's not in the best interest of the people we support to have out folks working this way," Scheff, in an interview last week, said of the overtime situation. He said the budget impasse, funding cuts to the agency, and certain state concessions to the union, such as stopping the privatization of state-run group homes, have hampered the department's ability to reduce costs and shift money to serve clients who have been waiting years for housing support, in-home aides, or other assistance from DDS.” Furthermore, wasteful regulations that require a ratio of 2.7 on-duty staff for each psychiatric patient at a state-run hospital has also been blamed for ballooning the DDS budget to $1 billion. “Advocates who have studied the public and private systems extensively say that a higher staff-to-client ratio in the public sector, about 2.7:1, compared with about 2:1 in the private sector, is a major reason why the public costs are significantly higher. A study by the legislature's program review and investigations staff concluded that the quality of care provided by state and private workers was the same.” To be sure, solving the overtime problem at CT’s psychiatric institutions wouldn’t go anywhere near to resolving the state's budget woes which extend far beyond this one sector. But the problem is emblematic of the most intractable financial and political problems facing the state: powerfully entrenched state employee unions, wasteful regulation and programs that commit vast resources to serving a handful of needy individuals. But the need to close – or at least minimizing – the massive budget deficit is growing inexorably more pressing with each passing day. Back in May, yields on CT’s general obligation bonds surged as plummeting income-tax revenues and a series of downgrades by the major credit-rating houses raised serious questions about the state’s fiscal health. And with the state capital, Hartford, downgraded to junk on June 11, underscoring the threat of an imminent bankruptcy, worries that the state might need to orchestrate a bailout of its once-proud capital have intensified. And just when the situation was showing signs of stabilizing, a series of corporate defections, including health insurance giant Aetna’s June decision to move its headquarters to NYC – are shrinking the state’s already narrow tax base. Now that Gov. Malloy’s strategy of enticing companies to stay with a mix of tax cuts and the promise of state aid has failed, the state is in desperate need of a new leader to find a way to lure businesses back into the state. The question is who would even want that job?
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With Illinois facing a Friday night deadline by which it has to come up with its first fiscal budget in three years or face a downgrade to junk resulting in what a policymaker called a "death spiral", another mini drama is taking place in Connecticut, which is also facing big budget problems as wealthy residents, hedge funds and major corporations flee the state's high taxes and its fiscal future gets murkier by the day. Just today, we reported that Aetna, the insurance giant founded in Hartford where it has been for the past 164 years, announced it would move its headquarters to New York City despite intensive lobbying efforts by Connecticut officials. The move, which followed a departure by GE of its Fairfield HQ of 40 years, is a blow to the company’s hometown, which is facing severe financial problems. Hartford's problems are a representation of the troubles facing the entire state: while Illinois' story is familiar, Connecticut has the distinction of the third-worst ratings in the country, only behind Illinois and New Jersey after S&P, Moody's and Fitch all downgraded the state last month in what officials described as a "call to action" for state leaders. “We’ve been downgraded by everybody in the last six months, and in the last year two or three times,” Senate Republican President Len Fasano said cited by Fox news. “If we don’t pass a budget, I think we will see a further downward spiral.” And, just like Illinois (and 14 other states), Connecticut faces a Friday day of reckoning: the state has yet to pass a fiscal 2018 budget by the June 30 deadline. “We must immediately take the necessary steps to mitigate the current year deficit and then balance the ... budget with recurring measures to reduce spending and structural solutions to our long-term problems,” a spokesperson for the Connecticut Office of Policy and Management said in response to Moody’s downgrade. It's not just the rating, however. Connecticut’s deficit has reached $5 billion, and according to an analysis by Pew, the state only has $240 million in its 'rainy day fund'; just five states have a smaller cushion. Much of the financial troubles are tied to the state’s pension system, which two-term Democratic Gov. Daniel Malloy’s office is seeking to address with a new plan to save the state $24 billion in “coming years.” One solution offered by Malloy is to require new state employees to be covered under a new hybrid pension system. The agreement, which Malloy’s office made with the state union, is tentative and awaiting legislative approval. “Connecticut can and will adopt a responsible, balanced budget for the coming biennium—the question is how best to handle our finances until that happens,” Malloy said. He offered a short-term “mini-budget” to allow “more time to negotiate a full budget, without making our current problems any worse and without further jeopardizing the state’s bond rating.” But, like in Illinois, Republican Fasano told Fox News the governor’s budget is not seeing support on “either side of the aisle.” “His proposal decimates municipalities, social services and has no support, so we did our own budget,” Fasano said. “He has really shown the propensity of turning this state in a very negative direction.” What makes things even more complicated is the even split in the State Senate: Fasano serves as the State Senate’s Republican president in conjunction with the Democratic president. This is a special situation, as for the first time in decades, the State Senate is split evenly in the historically blue state. “We are tied, 18-18, and that’s making it more difficult because the Democrats can no longer plow across the finish line a progressive agenda, fiscally speaking—so they can’t figure out what to do,” Fasano said. “Senate Republicans are the only ones with a line-by-line, detailed and balanced budget.” Fasano claimed the budget put forth by Senate Republicans changes taxes and includes structural provisions that would help keep businesses in the state, although if Aetna is any indication, it's not nearly enough. “We are doing things to try to attract people to stay here as best we can, given the fact that we have a $5 billion deficit,” Fasano said. “If we do not pass a budget by June 30, we have sent a message, I think to everyone, that we have no idea what we’re doing, and that is not going to give [comfort] to people to buy or stay here.” Those who have already left the state, mostly affluent hedge fund managers who have migrated to Florida, already got the message. And while Aetna's depature was a hit to the state, the state capital Hartford has been struggling with a financial quagmire of its own, even as we reported in early May, meeting last month to discuss the option of filing bankruptcy. “We know that now more than ever, we are in competition across all industries –not just with Massachusetts or New York state, but more specifically with Boston and New York City,” Malloy said last month. Another problem is the fundamental deterioration in the state's economy. Connecticut’s unemployment rate rose to 4.9 percent in April, up from 4.5 percent in January. “Keeping those employees in Connecticut is far more important than where Aetna plants its corporate flag,” Malloy said. Malloy is looking to boost jobs with the approval this week to begin construction on the state’s third casino. The Democratic governor remains optimistic, however, and his office told Fox News that companies like Xerox, Sikorsky, and Vineyard Vines, among others, have committed to the state over the last two years. But Fasano said he spoke with GE executives before they left and they cited state financial issues. “They said Connecticut continues to tax at rates that make it unaffordable for businesses, people to stay here and didn’t see what Connecticut looked like seven or eight years from now,” he said. “... That’s the same analysis I’ve heard from a number of businesses as to why they’re leaving. The progressive agenda this governor put forth is now coming home to roost.” * * * So will CT pass a state budget? There was some 11th hour hope on Thursday, when AP reported that Connecticut House Democrats said they've come up with a two-year budget proposal that could be ready for a vote on July 18. The last minute $40 billion two-year plan would increase the state's 6.35% sales tax to 6.99% to help maintain funding to cities and towns. It would also provide municipalities with additional ways to generate local revenue and restore the local property tax credit against the personal income tax. The proposal was being offered up Thursday as lawmakers grappled over whether to pass Democratic Gov. Dannel P. Malloy's three-month, stop-gap budget before the fiscal year ends on Friday. Malloy says it will be less draconian than having him run state government using his limited executive authority. And, of course, there's disagreement, about whether to vote on the mini budget. If the disagreement is not overcome by Friday, Connecticut could soon be in the same financial straits as Illinois. Incidentally, the muni bond market - with its usual glacial delay - finally noticed that not all is well, and today yields on AAA-rated 10-year muni bonds rose 7 basis points to close at 1.95% , the biggest one day absolute increase since Dec. 15. There was a similar move for 5-year muni bonds which rose 5bps on the day to end at 1.34% now up 10 bps week-to-date, also the largest day-over-day move since December 15.