Connecticut Budget Gets Mostly Positive Reviews From Investors
Hartford Courant, June 6, 2019
By Martin Braun
Connecticut’s $43 billion two-year budget, which spares residents an income tax increase, is getting mostly positive reviews from investors.
The budget, approved by the Democratic-controlled House on Monday and by the Senate late Tuesday, closes a $3.7 billion gap. It maintains a hospital tax that generates $1 billion over two years, raises or expands the sales tax on everything from digital downloads to prepared foods and cuts employee health care cost by $185 million.
However, lawmakers largely avoided tackling the rising costs of debt service, pensions and health care that eat up more than 30 percent of state spending.
"'It's positive that they closed the gap and didn't raise income taxes and increasingly push wealthier residents out of the state," said Richard Schwam, a municipal credit analyst at AllianceBernstein. "But the elephant in the room is still there."
Connecticut’s finances are on the mend as a surge in income tax revenue boosts the rainy day fund to a projected $2.6 billion at the end of the fiscal year, providing a cushion for the next recession. Higher tax collections led S&P Global Ratings Inc. to raise its outlook on Connecticut’s debt and ease pressure on the state to demand big concessions from public employees unions or cut spending.
Connecticut's borrowing costs relative to top-rated municipal debt has plunged by 0.4 percentage point since the beginning of the year as residents clamor for tax-exempt debt in the wake of the federal cap on state and local tax deductions.
Still, the fiscal stress that has pushed Connecticut’s rating to the third-lowest among U.S. states is likely to continue. Lawmakers rejected Democratic Gov. Ned Lamont’s proposal to shift a quarter of teachers’ pension costs to municipalities and haven’t yet agreed to a ‘debt diet’ proposed by Lamont that would shrink state borrowing by 39 percent annually.
The state and public employee unions are still negotiating Lamont's proposal to tie cost-of-living increases for retirees to pension performance. A proposal by Lamont to toll state's major highways to pay for new roads, bridges and mass transit will be taken up in a special session of the Legislature.
Kicking the can back to top
It kicks the can down the road," said Daniel Barton, co-manager of Mellon Investments Corp.'s Connecticut municipal bond fund. "While it helps the budget in the near term its now a long-term problem."
Lamont promised not to raise income taxes during his gubernatorial campaign last year and he kept that promise in his first budget. To the relief of Connecticut’s wealthiest residents, a proposal by some Democrats to levy a 2 percent capital gains surtax wasn’t in the budget.
And while the spending plan didn’t increase the sales tax rate, it extended the 6.35 percent tax to services like dry cleaning, interior design and parking. It also imposes a 1 percent tax on prepared foods and beverages, including restaurant meals, and increases taxes on partnerships and limited liability corporations.
At this time last year, Clinton's firm didn't hold any debt issued by the state. Now, it's one of its biggest holdings across client portfolios, evidence of his confidence Connecticut's finances are turning around.