CT’s legacy of debt was Malloy’s ultimate challenge
An occasional series examining the legacy of the administration of Gov. Dannel P. Malloy and the challenges awaiting his successor, Ned Lamont.
It was Gov. Dannel P. Malloy’s personal white whale.
Two line items, buried amongst hundreds of others, rose from the pages of the state budget to confound his plans year after year: required contributions to state employees’ and teachers’ pensions.
Cash-starved after seven decades of inadequate funding, they exploded during Malloy’s tenure, stealing billions of dollars the governor would have preferred to spend on roads, schools — and even tax rebates.
This behemoth of debt, a monster seven decades in the making, forced Malloy to temper his aspirations for transportation, tax relief and other initiatives and to impose two major tax hikes during his eight years.
But if Malloy couldn’t slay the monster, he made progress in taming it.
Despite being saddled from Day One with a huge deficit, an empty reserve, and a weak recovery from the last recession, he became the first Connecticut governor in modern history to make all required pension contributions — breaking a longstanding practice of leaving a bill for Connecticut’s children someday to cover.
And while the governor’s efforts to reduce Connecticut’s reliance on property taxes bogged down, he largely was able to shield municipal aid from the budget axe — at a time when many other states did not.
Malloy also secured two major concessions packages from state employee unions, deals that reduced pension liabilities and increased health care cost-sharing dramatically — but not without a cost. To get those changes, the governor locked Connecticut into an additional decade of having to provide retirement benefits that some legislators argue simply are unaffordable.
And while he may not be remembered fondly for the tax increases, Malloy says the truth of his success lies in other numbers.
“I measure myself by what we accomplished, not how well it’s known or understood or appreciated,” Malloy, who has two weeks left on the job, told the CT Mirror during an interview last week. “And I can assure you I’m not going to spend any time after the 9th of January wondering when I’m going to be loved. It’s not going to happen.”
Cash-starved pensions: Malloy’s greatest nemesis
The Democratic governor’s greatest nemesis arguably wasn’t the Republican Party, or even the sluggish economy. It was the state’s obligation to its retired workers.
In the last budget approved by Gov. M. Jodi Rell, covering the 2010-11 fiscal year, required contributions to state employees’ and teachers’ pensions amounted to $1.1 billion, or just over 6 percent of the General Fund.
By Malloy’s last year they had more than doubled, approaching $2.5 billion and devouring 13 percent of the budget. Put another way, every single year the governor had to find — on average — another $164 million to feed this two-headed fiscal beast.
Despite those costs, Malloy made the full required contribution every year, unlike any other governor is modern times.
And while he and state employee unions struck a deal in 2017 that delayed some of the pension obligations until after 2032, Malloy still was the first governor in decades not to bill Connecticut’s children for the retirement benefits promised to today’s public-sector workers — a fact he plays down.
“I told you what I was going to do,” he said, referring to a pledge in his 2010 campaign not to skirt pension obligations. “The things I told you I was going to do, I did — most of them — and I fought very hard to do the rest.”
His critics disagree.
Was he honest about tax increases?
Embroiled in a tight gubernatorial race in 2010 against Greenwich Republican Tom Foley, who’d made the dubious pledge to solve an unprecedented $3.7 billion budget deficit without raising taxes, Malloy was being pressed to make the same promise.
“I want to be very clear: We’re not going to raise taxes,” Malloy said during a televised debate on Oct. 30, 2010. “That is the last thing we will do.”
Malloy briefly paused and then awkwardly added a qualifier: “If we have to, and only then to protect the safety net.”
Did most voters take “the last thing,” to mean tax hikes were the furthest thing from Malloy’s mind, or simply the last step in a budget preparation process that would begin with spending cuts?
“That’s what I meant,” Malloy said, referring to the latter interpretation, while conceding some likely misunderstood. “I understand that happened, but that certainly was not my intention. And every time we raised taxes … it was the last thing I considered.”
“I never intentionally misled anyone while I was in office, never,” Malloy added. “And I always answered everyone’s questions whether I liked them or not.”
Connecticut didn’t buy that answer then, and still doesn’t now, said Republican political strategist Liz Kurantowicz.
“It’s too bad we don’t have lemon law for politicians,” she said. “He just wouldn’t level with the people of this state. … I think that’s built into his low approval ratings.”
After the election, Malloy signed into law one of the largest tax hikes in state history, worth more than $1.8 billion per year.
Four years later when Malloy ran for re-election, again matched up against Foley, he dismissed nonpartisan projections of a $1.3 billion hole in the first post-election budget and pledged not to raise taxes.
“We really don’t have a deficit,” he told the CT Mirror in June 2014. “I know that’s hard to believe.”
It was hard to believe because it wasn’t true.
Malloy won, the deficit remained the same, and the governor signed a budget that raised about $670 million in taxes — and canceled about $220 million in tax cuts scheduled to take effect after the election.
After his no-deficit prediction, Malloy would close the next three fiscal years, 2015 through 2017, with modest shortfalls.
“You like to win everything,” Malloy said of his budget struggles. “You don’t want to get 90 percent of anything. You want to get 100 percent. At least that’s how I’m constituted. Having said that, I don’t dwell on it.”
“I think it’s more of the same bait-and-switch,” Kurantowicz countered. “That’s his legacy in many respects.”
“I think he had this sense, in his view, that he had to be right, that everything he did had to be right,” said Senate Republican leader Len Fasano of North Haven. “If the revenue wasn’t there to balance the budget, he had to say ‘Sure it is, you just can’t see it.’ ”
Malloy inherited fiscal mess of historic proportions
But the Democratic governor said what his critics couldn’t see, or wouldn’t be honest about, were the magnitude of problems stacked against him.
The ticking fiscal time bombs that were the pension funds were the biggest problem, but far from the only one.
His predecessor, Republican Gov. M. Jodi Rell, and the Democrat-controlled 2010 legislature, left Malloy a built-in deficit in his first budget,a $3.7 billion gap that approached 20 percent of all General Fund spending.
They also had racked up more than $900 million in operating debt. Not only did they leave that entire bill for Malloy, but they also borrowed another $90 million to cover the initial payments on that operating debt until they were out of office. Malloy cleaned that up too.
Rell and the 2010 legislature emptied a nearly $1.4 billion emergency budget reserve, raided state employee pension contributions during their last two years in office, and propped up one-fifth of the entire Education Cost Sharing grant program for cities and towns with temporary federal aid that expired after Rell left office.
Malloy, who had been Stamford’s mayor for 14 years through 2009, kept a campaign pledge not to reduce education grants, despite the loss of federal funds.
“Governor Malloy did a whole lot to shield municipal governments,” said Joe DeLong, executive director of the Connecticut Conference of Municipalities. “He looked those fiscal challenges right in the eye. Even if we didn’t agree with him on all issues, there has to be a certain level of praise that goes along with that.”
Republican legislators, businesses and taxpayer groups balked at Malloy’s 2011 tax increase and hammered the governor when his first budget sprang a leak. One of the chief reasons was that the administration was counting on roughly $800 million of the $3.7 billion deficit problem to be solved by economic growth.
Few in the GOP recalled or mentioned that Foley’s plan to avoid tax hikes assumed between two and three times the rosy economic growth that Malloy had built into his budget.
Joseph Brennan, president and CEO of the Connecticut Business and Industry Association, said many business leaders understood, despite the political rhetoric, that some level of tax increase was necessary during the past eight years.
“People just felt there was too much of a reliance on raising revenue at a time when our economy was still in a fragile condition,” he said, adding that Malloy didn’t help himself by setting expectations on the campaign trail that weren’t met when he was in office.
The business backlash peaked in May 2015 when GE — formerly General Electric — and several other major corporations issued statements warning that Malloy’s second round of major tax hikes might push them out the door.
“Raising taxes again on Connecticut’s residents, businesses and services makes businesses, including our own, and citizens seriously consider whether it makes any sense to continue to be located in this state,” the corporation wrote. Eight months later it would make good on its threat, rejecting a last-minute incentive pitch from Malloy and moving its headquarters from Fairfield to Boston.
“Every company, every individual has their tipping point,” Brennan said. “In 2015 we got very, very close for too many individuals, too many companies.”
But Brennan added that Malloy deserves credit for incentive packages that helped United Technologies Corp. both retain and expand Pratt and Whitney in East Hartford and Sikorsky Aircraft in Stratford. These moves, coupled with aid that helped General Dynamics’ Electric Boat Shipyard in Groton to also expand, preserved Connecticut’s vital engineering and advanced manufacturing base.
“The importance of advanced manufacturing to the Connecticut economy, keeping robust the critically important subcontractor supply chains that serve those companies, cannot be understated,” Brennan said. “Hundreds of companies and tens of thousands of jobs rely on those firms. The trends are positive now after decades of decline.”
“I’m the only governor that’s sustained a 100,000-job increase” in the private sector, Malloy said.
Transportation — a missed opportunity?
That job increase might have been higher had state government invested in transportation to the magnitude Malloy discussed while campaigning for his first term in 2010.
Big fuel tax increases between 2005 and 2007 coupled with surging petroleum wholesale prices swelled Connecticut’s coffers going into the last recession. But between 2005 and 2013 nearly $1.4 billion in fuel tax receipts were spent on non-transportation programs.
Malloy, who campaigned on a pledge to reverse this trend, did so. But he wasn’t able to wean the General Fund off fuel tax receipts entirely until the start of his second term.
And while he began that term in January 2015 by proposing a 30-year, $100 billion rebuild of Connecticut’s aging, overcrowded transportation system, he didn’t recommend any long-term funding source, appointing a study panel instead.
Malloy waited until legislators approved a new legal “lockbox” amendment to the state Constitution to protect transportation fund revenues — which didn’t make it onto the ballot until this past November. It was adopted overwhelmingly.
But lawmakers refused to adopt tolls or gasoline tax hikes and the governor spent much of the past year warning that without a big infusion of cash, Connecticut’s ability to tackle necessary major projects — such as repairing the elevated section of Interstate 84 in Hartford, and completing its rebuild of the “Mixmaster” junction of I-84 and Route 8 in Waterbury — will vanish by 2021.
Donald Shubert, president of the Connecticut Construction Industries Association, said Malloy took some important steps forward in transportation, “but we had the opportunity to make a tremendous amount more of progress than we did over the past eight years.”
In December 2010, just before Rell left office, Connecticut had $1.7 billion in approved-yet-unissued transportation bonds. In other words, project financing that exists only on paper, often because the state can’t afford to make debt payments if it borrows the funds.
And even though Malloy borrowed at a faster pace than Rell during his second term, the transportation financing backlog has more than doubled and now approaches $3.8 billion.
The economic stakes of that backlog are huge. Every $1 of state borrowing spent on transportation usually leverage $3 to $4 of federal grants that also go into the construction economy.
University of Connecticut economist Fred V. Carstensen, who heads the Connecticut Center for Economic Analysis, says that every $1 billion in backlogged transportation bonding represents about 10,000 potential construction or related jobs.
As pension costs rose, government had to shrink
But Malloy said he had to make tough choices as pension costs rose, and one of those was to shrink government.
During his tenure, Malloy cut Executive Branch staffing by more than 10 percent, shaving off more than 2,500 jobs.
Though it doesn’t grab a lot of headlines, Malloy also slowed to a halt big spending growth in another major segment of the budget. Annual increases that typically reached 7 percent now have flattened out thanks to a variety of managed care initiatives.
“The growth in Medicaid is not a problem for us like it is in so many other states,” said Ben Barnes, Malloy’s budget chief for his entire tenure.
Malloy’s labor concessions packages froze wages, increased worker’s share of health care costs, and reduced pension benefits — often putting him at odds with a vital part of his political base.
“I fought with the unions, I fought with the teachers,” he said, adding he was “greatly resented” for the first round of concessions he demanded. “I fought with everybody.”
Saying he never expected to win a second term, the governor added, that “I had a short time to do as many big things as I could. … I didn’t have a lot of time for pleasantries.”
Hartford attorney Daniel Livingston, chief negotiator for the State Employees Bargaining Agent Coalition, said the governor “respected collective bargaining and tried to protect the public services upon which we all depend.”
But while workers were being asked to sacrifice, Malloy refused to elevate state income tax rates on the wealthy anywhere close to what labor leaders had proposed.
Labor leaders and other progressives flinched during Malloy’s first budget address in February 2011 when the new governor said that “while I do believe in a progressive income tax, I do not believe that we should punish success, or wealth.”
“Our core fiscal problem comes from income inequality, educational and economic opportunity that depends more on zip code than ability or character,” Livingston said, “and an outdated tax structure that makes those things worse instead of better. Too often working families, private sector and especially public sector, have paid the price for our failure to address these core truths.”
Lawmakers craft a final budget without Malloy
Still, Malloy said there was no way to face the problems he faced and not run into disappointment or even resentment.
And when legislators from both parties compromised to end 10 months of budget gridlock in November 2017, they excluded the Malloy administration from those talks — and did so again when the next budget was passed in May 2018.
“We certainly brawled on a regular basis but he certainly was a very hard-working governor,” said House Minority Leader Themis Klarides, R-Derby. “He believed what he believed in and he would not let anybody sway him.”
But Klarides added that in 2017, “things got to a point where it just wasn’t working.”
After the budget was passed, complete with an $80 million, two-year emergency bailout for the city of Hartford, legislators were shocked when Malloy executed a deal that guaranteed more than $500 million in debt assistance for Hartford over two decades.
The governor and state Treasurer Denise L. Nappier said the budget authorized such a deal, and that lawmakers didn’t understand what they had passed.
Top lawmakers from both parties said Malloy had violated legislative intent.
“He knew darn well this was not what the leaders intended,” Klarides said.
“He wanted to say ‘because I wasn’t in the room, they didn’t know what they were doing,’” Fasano said. “That’s the prickly attitude he’s always had.”
But Roy Occhiogrosso, the political strategist who advised Malloy’s 2010 and 2014 campaigns and served in his administration, said Malloy fearlessly waded into issues that many politicians — in some cases for generations — ignored.
“When the Republicans say ‘Dan Malloy wrecked the economy,’ it is such a ridiculous thing to say. In so many ways he put the state in a position where future growth is possible.”
Occhiogrosso predicts Malloy’s legacy will be viewed increasingly favorably over time, particularly when future generations don’t receive a bill for the billions of dollars of present-day pension costs.
“Whether it’s Governor Lamont or some future governor, people will see it when they have the ability to spend money that Dan Malloy couldn’t spend,” he said.
Malloy is not so sure how his image might change over time, but insists he’s at peace nonetheless.
“People don’t like me, necessarily, but they know I work hard,” he said. “That’s enough. That’s enough.”
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