Federation of Connecticut Taxpayer Organizations

When Moody's Investors Service announced the downgrading of Connecticut's credit rating Jan. 20, it concurrently and ill-advisedly revised the state's financial outlook upward from negative to stable.

Focusing on the credit downgrade, the response from Gov.Dannel P. Malloy's office was laced with anger and charges of incompetence. After all, no one likes to be told publicly they have done poorly, even if it is true. The governor's office did not, however, questionMoody'sincompetence regarding the financial outlook upgrade; that the governor accepted. I cannot.

Moody's is being too optimistic about the state's financial and economic prospects. I think there are two distinctly different reasons for this.

In explaining its credit downgrade, Moody's notes ongoing very high debt, pension and other costs, significantly underfunded pension systems and a depleted rainy day fund. It also notes the state is vulnerable to revenue reductions due to an economy slow to recover. All plausible reasoning for a credit downgrade.

Moody's continues in support of its downgrade with findings that policy and practices are in place that diminish the financial strength and performance of the state, both currently and going forward. It cites optimistic revenue projections, which may not support the high operating costs of the state while also providing funds to replenish the rainy day account, as the main reasoning behind the credit downgrade.

Given the above, it is a hard to understand why Moody's revised the state's financial and economic outlook upward to stable from negative. For that action Moody's provides little explanation. Although we all hope things get better, there is little sustained evidence that is indeed to be the case.

Consider two different reasons why Moody's improved outlook may be too optimistic.

Connecticut taxes at some of the highest rates in the country; on just about everything. It is charging those taxes against, in the aggregate, the wealthiest citizens in the country. If you believe tax rates have an impact on economic activity, and you should, the implication of this situation becomes clear: Economic activity will be adversely affected by Connecticut's higher tax rates.

People will leave the state to avoid paying higher taxes. Economic activity will move to other lower tax locales. Revenues are what they are now given the high rates and highest income levels. What happens when the wealthy leave? Moody's fails to address this distinct possibility.

As a simple example, I live in North Stonington. Traveling to a gas station close by in Rhode Island, you'll find many of the cars in line are from Connecticut. Gas prices are lower in Rhode Island in large part due to lower gas taxes. Note, "in line" because often there are cars waiting to fill up. Meanwhile gas station pumps close by in Connecticut sit idle.

If this is happening to save several dollars in fuel costs, it stands to reason the same kind of behavior is taking place and will continue to take place among the wealthiest citizens as they move to shelter income from Connecticut income taxes. High taxes are a self-inflicted problem for the state. That can and should be fixed by lowering tax rates.

The second revenue problem is something the state can do little about: diminishing casino tax revenues.

Connecticut has financially benefited from being in partnership with two Indian casinos. The casinos have paid billions of dollars to the state over the past decade. For much of that time these casinos had a virtual monopoly on the entire Northeast, where tens of millions of people had no other close-by place to go should they want to gamble. That is no longer the case. Competition is here and will only get more intense. Massachusetts, Rhode Island and New York have and are moving to expand casino activity. Connecticut's casinos will be surrounded. Casino tax revenues will likely decline. This critical issue is not mentioned in Moody's report.

Moody's explanation of its credit downgrade of Connecticut is clear and well supported with facts and sound reasoning. Most of us got the intended message brought by that move.

Moody's failed however, to support its reasoning to revise upward the outlook for the state from negative to stable. The state faces far too many problems, most by the its own doing, to expect sustainable significant economic improvement any time soon. That too is the message Moody's should have delivered.

Louis Gingerella teaches accounting and finance in the MBA program at Rensselaer Polytechnic Institute's Hartford campus. Before that he spent 25 years in banking, primarily in commercial lending.

http://articles.courant.com/2012-01-29/news/hc-op-gingerella-moodys-rating-of-connecticut-shou-20120129_1_credit-downgrade-credit-rating-tax-rates

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State Must Learn Difference Between Spending, Investing

OTHER OPINION

February 04, 2012|By TOM FOLEY and BENJAMIN ZIMMER, The Hartford Courant

Connecticut has the worst 25-year job growth of any state, at least partly because it has no logical, coherent jobs policy. It is time to get one.

Good jobs policy is not a tall order. Follow some simple guidelines and good things will happen. The Connecticut Policy Institute recently published a paper including these guidelines:

1. Invest, don't just spend.

2. Be careful what you pay to keep or bring jobs here.

3. Start being nicer to employers.

4. Get a grip on the state's addiction to spending.

Families know the difference between spending for a vacation and investing in a stock or a child's education. Money spent is money gone. Money invested is not only not gone, it creates future economic value. Connecticut policy-makers could learn from what families know intuitively. Economic capacity � equivalent at the state level to the number of jobs � grows when you invest and shrinks when you spend.

The state has no policy emphasizing investing over spending and has no screen for prioritizing investments based on investment returns. It should.

Gov. Dannel P. Malloy has initiated several infrastructure projects, but it isn't clear they are investments. The governor authorized $250 million in state funding for a busway between Hartford and New Britain. That is more than $25 million per mile for a project that does not connect to Connecticut's broader transportation infrastructure. Critics claim it will be a bridge to nowhere with low ridership and no investment return.

Incentives paid to employers for jobs should be looked at as investments, too. Job creation incentives do not make economic sense unless: The job will remain in Connecticut after the benefits from the incentives have expired; the cost of the incentive does not exceed 50 percent of the annual wages for the job created; and the job would not have stayed in or come to Connecticut without the incentive.

In 2011 alone, Connecticut committed more than $1 billion to new employer incentives. Most, perhaps all, of this spending does not meet these criteria. Tax credits that apply to all new jobs waste taxpayer money because most of the jobs would have been created anyway. Gov. Malloy's high-profile Jackson Laboratory deal cost $300 million to bring just 300 jobs here. That is $1 million per job � an absurd and wasteful amount for Connecticut taxpayers.

Part of the reason we have to pay employers to stay or come here is because our General Assembly and regulators go out of their way to make it unpleasant to employ people in Connecticut. It doesn't need to be that way. It is easy to be nice and helpful � and it doesn't cost anything. The legislative package for the Jackson Lab deal included a task force to look into reducing regulations and red tape. Time to forget the task forces and just do it.

Connecticut must get a grip on its addiction to spending and borrowing. If Connecticut's fiscal problem was that it wasn't taxing people enough, Gov. Malloy's $2.5 billion tax increase would have done the trick. But, last week, Moody's Investors Service downgraded Connecticut to Aa3 based on its projections of continuing deficits, no rainy day fund and piles of debt.

Despite all the hoopla about a balanced budget, the rating agencies know better. Connecticut is like a gambling addict, perennially overestimating winnings (revenues) and underestimating losses (spending). The latest 2012 fiscal year forecast projects a $95 million shortfall in income which is probably still optimistic by $100 million. Independent analysis of projected savings from the deal with state workers indicates those savings are over-optimistic by another $200 million. If true, we currently have a $400 million deficit.

Further, Gov. Malloy has borrowed another $1.5 billion off-budget this year. It is time to get serious about cutting spending and reducing debt or no employer with a brain will come here.

For years our politicians have recklessly thrown taxpayer money into politically motivated or poorly conceived job creation plans without a coherent policy framework. If they don't change course, expect continued sluggish job growth � and more bad news from Moody's.

Tom Foley is the founder and Benjamin Zimmer is the executive director of the Connecticut Policy Institute. Foley was the 2010 Republican nominee for governor. The CPI jobs paper is online at http://www.ctpolicyinstitute.org/policy-research/page/connecticut-job-creation.

http://articles.courant.com/2012-02-04/news/hc-op-foley-connecticut-needs-jobs-policy-0204-20120204_1_jobs-policy-job-growth-investments