For years — decades — activists have urged the state to lessen its heavy dependence on local property taxes to fund local governments. For example, a 2015 study by the advocacy group 1,000 Friends of Connecticut said the state is in “urgent need of a property tax overhaul to correct a system that undermines economic growth (and) is regressive, unfair and economically inefficient.”
With one small exception — a cap on car taxes passed in 2015 — nothing has changed. But pressure to overhaul the age-old system could reach a crescendo in the upcoming session of the General Assembly because many cities and towns are having trouble making ends meet.
Another 2015 study, this one by the New England Public Policy Center of the Boston Fed, found that 78 of the state’s 169 cities and towns do not have the capacity to raise enough revenue to cover their non-education expenses.
The study found that wealthier towns have more than eight times the capacity to raise revenue than poorer towns. The municipality with the worst “needs-capacity gap” is Hartford, which is teetering on the edge of the fiscal roof.
Hitting the wall
The capital city has been limping along for several years, balancing budgets by such steps as selling parking garages and restructuring debt. Now there are very few rabbits left to pull out of the hat. Though first-term Mayor Luke Bronin and the city council cut 100 jobs (45 by layoff), transferred a park to the pension fund to save on a pension contribution and cut subsidies for festivals and parades, among other measures, the 2016-17 budget that went into effect July 1 is still out of balance, awaiting $15.5 million in (unlikely) union concessions. The picture gets worse next year.
Hartford likely will face an estimated shortfall of between $40 and $50 million going into fiscal 2017-18 with — at this point — no new sources of revenue. Barring some kind of major intervention, the city could face bankruptcy.
The fiscal news coming out of Connecticut in recent years hasn’t been rosy to begin with. Would the prospect of the the state capital, the Insurance City, the place once known as the “richest little city in the country,” standing with hat in hand in bankruptcy court be enough to make the state change the system that put Hartford in the hole?
There are those who think Hartford is the cause of its own troubles. “Unfortunately, Hartford has had mismanagement over the years and Mayor Bronin is trying to fix a decades-old problem,” Bloomfield Mayor Joan Gamble told The Hartford Courant in early August.
Well, yes and no, mostly no. Hartford cannot be blamed for decades of government-aided suburbanization that took tens of thousands of middle-class residents out of the city, nor for the loss of a once-substantial manufacturing base. (It would have taken a magician to save two typewriter factories.)
Though Hartford over the years has endured some inept leadership and made bad decisions such as the generous police union contract that allows officers who pile up overtime to retire at more than they made on the job, the city has not been beset with endemic corruption or the kind of mismanagement that required a state takeover of Waterbury’s finances in 2001.
The real problem, as has been obvious for years, is the almost exclusive use of property taxes to fund local governments.
Because property is not evenly distributed among the state’s 169 towns, the property tax system creates winners and losers. Wealthy towns with a lot of property and relatively low needs are the winners, they have low tax rates. Conversely, the deck is stacked against towns with high needs and little property.
Hartford is forced to play a game it cannot win. It is small to begin with, only about 17 square miles, and more than half of its property — schools, churches, government buildings, arts institutions — is tax exempt, a hole only partly filled by state payment-in-lieu-of-taxes (PILOT) reimbursement. On the need side, it bears the costs attendant to poverty; for example, it has the state’s largest local police department.
So, Hartford has far and away the highest tax rate, 74.29 mills, of any city in the state. Waterbury and Bridgeport are next in line, with mill rates of 58.22 and 54.37 respectively. The people in the poorest cities pay the highest taxes.
Kevin Maloney of the Connecticut Council of Municipalities said Hartford and other distressed cities have inordinately high property taxes, lower housing values, and high demand for critical municipal services, and cannot tax at a high enough level to pay for those services.
“Over-reliance on the property tax coupled with inadequate state aid, particularly education aid, place Connecticut towns and cities in a severe fiscal bind,” he said. Bridgeport is in such a bind.
The Park City faced a $20 million deficit going into this year’s budget process (Bronin’s deficit was $48.5 million) and cut jobs, sold property, restructured debt, limited overtime and sought union concessions, among other cost-cutting measures. Mayor Joseph Gamin still had to carry $10 million forward, according to his budget message, though he says he has whittled that down somewhat.
Critics such as David Walker, a Bridgeport resident and former Comptroller General of the United States, think that if the city doesn’t fundamentally restructure its finances and get more help from the state, it will eventually face bankruptcy.
“Why would a business of any size want to locate in Bridgeport when the surrounding towns have tax rates that are a third to a half less than Bridgeport’s? The surrounding towns also have better schools and support services. The answer is simple, they won’t, unless we change course,” Walker said in testimony at a crowded July 5 city council meeting.
He said in an interview that state education funding needs to be more equitably distributed. A decision in the long-running CCJEF v. Rell school funding lawsuit, which claims current state support for education is inadequate, could force that issue.
He also called for the creation of a financial oversight board with authority to restructure the finances of Bridgeport and possibly Hartford and Waterbury. Gamin has thus far rejected that idea. He has been here before.
Ganim served as Bridgeport mayor from 1991 to 2003, when he resigned after being convicted on federal corruption charges. He served time in federal prison, then made an astounding comeback to be selected in 2015. When he was first elected in 1991, the city was in bankruptcy court. It’s petition for Chapter 9 protection had been rejected on the grounds the city wasn’t quite broke, but the city appealed.
Gov. Lowell Weicker offered millions in state aid if the city would withdraw the appeal, and was as good as his word, buying a city park and a zoo, among other things. With the breathing room, Ganim balanced the next 10 budgets (while he was fleecing city contractors). But it’s not 1991, and with the state anticipating major deficits in upcoming years, it’s not clear if Gov. Dannel Malloy could repeat the gesture.
Gamin, who apologized to city residents and claims to have learned his lesson, thinks he can again get the budget into balance. For starters, he said in a telephone interview that he “got two zeroes,” got two municipal unions to agree to no raises.
Longtime Bridgeport watcher Lennie Grimaldi, publisher of the popular “Only in Bridgeport” blog, said it will likely take another budget cycle to see if Ganim can keep the wolf from the door.
Bronin doesn’t appear to have the luxury of another budget cycle. Without some kind of help, his city could run out of money next year.
While he has largely protected public safety, most other non-education departments are down to the bone. Much of the city’s school funding comes from the state and can’t be used for other purposes. Thus the projected deficit would have to come from the general operating budget of about $280 million, not the overall budget of $552 million. The current budget took the last of the rainy day fund. Bronin does not want to borrow to pay operating costs because it would put the city deeper in the hole.
Bronin said he would “do everything I can to keep the city out of bankruptcy,” but added: “There comes a point where you can’t tax any more and you can’t cut any more, and we are at that point.”
So what happens?
Hartford might be helped by the removal of its tax differential. Unlike every other municipality in the state, Hartford has a split tax system in which residential real estate is taxed at a lower rate than other types of property.
One- to three-family residences are assessed at about 32 percent of market value, thanks to a bill passed decades ago, while larger residential and commercial buildings are subject to the state’s standard 70 percent assessment ratio, the number used for all real property in all other municipalities.
If the differential were ended overnight (it is in a long-term phaseout), the city’s tax rate would drop by 10 mills of more, by one estimate.
Or, the state could shift the burden away from the property tax. For example, said Rep. Matt Ritter, the state could assume the entire cost of special education, a particular burden on the cities, and sometimes on small towns. Noting the success of locally funded transportation projects around the country in recent years, Ritter said taxpayers are more open to tax increases if they know what the money will be used for.
The General Assembly could go for more radical steps, such as a state-wide property tax for education or a regional tax sharing plan, but these would almost assuredly be a political bridge too far. Fully funding the PILOT programs would of course be a godsend for cities such as Hartford.
There has been some progress. Outgoing House Speaker Brendan Sharkey championed a legislative effort called the M.O.R.E. Commission to find ways to lessen both the cost of government through regional cooperation and reduce the disparities among towns. It produced, among other things, the cap on car taxes – at 32 mills next year and 29 the following year – a help to residents of high-tax cities (the state makes up revenues lost by cities whose mill rates are higher than 32 with a portion of the state sales tax).
And, in the past decade or so, regional cost saving has improved; in Greater Hartford the 38-town Capitol Regional Council of Governments can boast regional police communication, online building permits, purchasing, animal shelters, electronic document management and some other measures.
But as Hartford’s budget crisis suggests, there’s more work to be done.
As Bronin learned earlier this year, change comes slowly in the Land of Steady Habits. Discovering when he got under the hood that the budget situation “was much worse than we could have imagined,” he attempted to get legislation passed that, among other things, would have created a “financial sustainability commission” that would have served as an arbitration panel if the city is unable to reach agreements with its unions.
The bill never got out of committee; one legislator calling it “premature.”
So Bronin will have a selling job to do to gather support for Hartford, whatever form it may take. (He’s not picky.)
One approach, which he is quietly pursuing, is involving the business community. The 1,000 Friends of Connecticut study found that property taxes are the largest share of state and local taxes on businesses. And, if cities have to cut services to the point where they become untenable for businesses — if for example Aetna felt it had to leave Hartford if its proposed merger with Humana moves ahead — it would be a disaster for the region, not just the city. Tens of thousands of suburban workers commute into the city each day.
Bronin has sought regional solutions, and has joined a task force assembled by CCM that will explore regional and revenue options for towns. The suburbs have never been enthusiastic about helping Hartford, but the prospective loss of a major employer might change their minds.
The heavy emphasis on property taxes hurts the economy in another way. Because education is their largest expense, many towns use zoning to limit the influx of school-age children and artificially raise housing prices. This has the effect of encouraging recent college graduates and young families, the workforce of the near-future, to move to other states. This argument is presented in a comment by four of the 14 members of the State Tax Panel, which created by the legislature to study the state’s tax situation.
The Tax Panel in its 2015 report, while critical of the property tax system, did not recommend ending the state’s heavy reliance on it. The four dissenting commentators — Groton Mayor Marian Galbraith, Coventry town manager John Elsesser, Yale law professor Anika Singh Lemar and CT Voices for Children board member David Kee — believe the system needs “major overhaul.”
Policy at odds with itself
Finally, high taxes in cities puts public policy at odds with itself. Cities were traditionally the hub of innovation, where inventors and entrepreneurs met and dreamed up new products and businesses. They are regaining that role, as millennials and empty-nesters flock to cities across the country. New housing in Hartford and other Connecticut cities are part of this trend.
So on the one hand, the state is subsidizing housing in Hartford and other cities, and on the other it is allowing a tax system that discourages residents and businesses from being in cities.
Earlier this year Bloomberg News columnist Justin Fox opined that in an “age of cities,” Connecticut and New Jersey have “lost some of their attractive force” because neither state has a major city. One answer to that would be regions that worked like cities.
Making that happen, getting tax policy in line with urban policy, will not be easy. “It will challenge all of us,” said state Comptroller Kevin Lembo. Whether Hartford’s challenges light the match remains to be seen.