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Pension Meltdown
Connecticut Fiscal Woes Highlight Blue Model Decay

In deep-blue Connecticut, a hard truth is setting in: another round of tax hikes on the wealthiest is not a sustainable fix for the state’s unaffordable public sector pension crisis. The Wall Street Journal reports:

The wealthiest state in the U.S. is having trouble collecting enough money to pay its bills, and the Democratic governor doesn’t think taxing the rich is the answer anymore. […]

Gov. Dannel Malloy has twice before bet that taxing the wealthy would help solve the state’s fiscal problems. But neither increase resulted in sustained revenue growth, according to his administration, which says it would be a mistake to do it a third time. […]

The state projects a $5.1 billion budget deficit over the next two fiscal years, fueled by increases in fixed costs over that period including pension obligations, health-care expenses and debt servicing.

Connecticut is among the U.S. states with the largest unfunded pension liabilities. It is also home to a wealthy cohort of hedge fund managers who pay high tax rates to fund a large portion of those obligations. But income tax revenue from the wealthy tends to be volatile and unreliable—in Connecticut’s case, as the WSJ notes, the hedge fund industry’s decline has led to lower-than-expected tax receipts (states like California have run into similar problems when taxing their own economic elite). Moreover, financiers are mobile, and can move to other states if rates get too high.

It’s tempting for blue model partisans to see the state and local pension crisis as a temporary problem that can be papered over with high-end tax hikes. And while the rich may well need to pay more to address the problem, it won’t be enough. The forces that have brought about the blue model crisis are structural: Overly-powerful public sector unions, dishonest accounting practices, chronic political can-kicking, and a defined-benefit pension model that doesn’t work in the 21st century. These are deep-rooted problems that will require major reforms in the way government runs and the way the civil service is organized. As Connecticut Democrats are realizing, the Bernie Sanders approach to government deficits—tax the millionaires and billionaires, then tax them some more—is simply not adequate to the scope of the crisis.

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  • Ofer Imanuel

    In NJ, a hedge fund manager (David Tepper) moved to Florida, and that made a significant tax shortfall. http://www.nj.com/news/index.ssf/2016/03/nj_has_lost_its_wealthiest_resident_to_florida_report_says.html

    It might be a good idea not to be overly greedy, or the goose laying the golden eggs might move elsewhere.

    • bflat879

      I’m reminded of the tax on cigarettes.

    • Rick Caird

      That is obvious to even a slightly rational person. It has been a staple of economic theory since Ada smith. But, somehow, the idea is a mystery to most Democrats, particularly the “progressive” wing of the party.

  • seattleoutcast

    With a nod to Giorgio A. Tsoukalos (I’m not saying it’s aliens, but it’s aliens…): I’m not saying the fault lies with republicans, but it’s republicans who are cutting the funding by giving tax breaks to the rich!

    I have a friend who is an airline pilot (not quite rich, but he makes a penny or two) who gave up and moved to Tennessee. He still has to fly out of JFK, but the “commute” is worth it.

    • Jeff77450

      Did you read the article? The governor of Connecticut raised taxes on the rich not once but twice and that didn’t solve the problem; long-term it may have made it worse.

      If all levels of government, federal, state and local, would confine themselves to the three necessary & legitimate functions of government identified by Adam Smith a plethora of problems would be solved. Those three functions are: National defense; a criminal & civil justice system to protect people & property (includes a legislative body); services & infrastructure that the public wants & needs but which aren’t profitable or practical for private industry to provide, i.e. services & infrastructure that are *unique* to government.

      Social engineering, forcibly redistributing wealth and creating cradle-to-grave-nanny-states are pointedly *not* among the legitimate functions of government and almost always run afoul of The Law of Unintended Consequences.

      • seattleoutcast

        Sorry, I was joking.

        • James

          I think some people thought you were saying that because Tennessee and other states were cutting their taxes, that was allowing the rich people in Connecticut a place to escape to and evade their duty to pay exorbitant taxes back home.
          I live in the San Fran Psycho Bayarrhea of Gruberfornia, so I am quite familiar with sick twisted idiotic liberal logic.

          • seattleoutcast

            I hear ya regarding SF Bayarrhea, and I sincerely feel your pain.

      • MarkM

        Did you read his story about the pilot by any chance?

        Thought I’m curious – determining a pilot’s tax home is a tricky business at best. It may well be for federal purposes, the Florida home is not the tax home for that pilot.
        http://www.irstaxtrouble.com/unique-tax-issues-faced-by-pilots-and-other-interstate-transportation-employees/
        For state taxes, I believe the rule is that any state where the pilot is spending over 50% of his time in flight has a claim against his income generated “in that state”.
        Reference: 49 USC 40116(f)
        See also, https://www.airlinepilotforums.com/money-talk/91913-state-income-tax-base-home-state.html

        • Jeff77450

          No, I hadn’t read that. I’ll have to look that up. Thank you.

  • Suzy Dixon

    Isn’t Bernie in hot water for not finalizing his disclosures for 2016. And isn’t his wife still under FBI or IRS investigation for some money issues?

    • subotaibahadur

      Bernie is not only a Democrat, but he is also an out of the closet Marxist. No laws can be applied against him or his family because they are above the law.

      Subotai Bahadur

  • FriendlyGoat

    As long as law enforcement and criminal justice people suffer whatever cuts to public service compensation are undertaken for the budgets, anything is on the table.

  • amoose1959

    “The forces that have brought about the blue model crisis are structural”. Wrong, what brought about this crisis is the collectivism culture now ingrained in our secular PM world . Rousseau -> Marx -> Frankfurt School->fill in the rest. Resentement (sic) is a strong human emotion.

  • JJS_FLA

    The Blue Model in the private sector died in the 1980s. Since then under relentless competition from globalization, the American private sector economy has been honed to a keen, efficient competitive edge. Not so in the Public Sector.

    New York has twice the number of public employees as Florida. A comeuppance is inevitable. Trump is just the agent. It’s no accident that Carl Icahn is POTUS’s good friend.

  • Dantes

    And while the rich may well need to pay more to address the problem, it won’t be enough.

    It would appear the rich are well nigh paying enough. Why this caveat? How about everyone pay for the government they get, if not the one they deserve. And cut spending.

  • John Tyler

    So what will the ruling class do in Connecticut?
    Very simple- kick the can down the road.
    Float more bonds, raises fees on everything, cut services that the citizenry most feels and sees and when the folks complain, raise taxes across the board to once again “continue” the most essential services that were cut.

    Most hedge fund managers are hard core liberal progressives and they will just bite the bullet and pay up.
    They could have moved long, long ago to tax and business friendly states, but 99% have not.

    Most likely it’s because they do hire the best tax accountants and tax attorneys so most of the income the hedge fund types make is tax sheltered or deferred; so actual tax rates are nowhere near what one thinks they pay.

    Connecticut could simply tax the GROSS UN-ADJUSTED income of the hedge fund millionaires/billionaires and , bingo, the money into the state coffers would really roll in. Of course, if the State did this, then the uber liberal progressive hedge fund types – in their hypocrisy – would most likely leave for Florida or other tax friendly states.

    • LizardLizard

      The State of Connecticut has run out of borrowing capacity. The State of Connecticut cannot continue to issue more debt as there is a formula that controls how much the Governor can borrow. The calculation for determining the Debt Limit is as follows:

      Debt Limit = Total General Fund Tax Receipts (personal income taxes, sales and use taxes, corporate taxes, etc.) x 1.6

      The borrowing capacity prescribed by Section 3-12 of the General Statutes of Connecticut then limits the total borrowing to 90% of the Debt Limit (as explained above). When the number reaches 90% of the DebtLimit, Governor Malloy must pay down existing debt, cancel future projects or cancel authorized (but not issued) new bonds.As reported by the Connecticut Office of Fiscal Analysis (OFA) , personal income tax receipts have declined dramatically in April. As a result, Connecticut cannot issue the remaining bonds that had previously been authorized in order to stay under the Debt Limit.
      The Financial Death Spiral in Connecticut continues.

  • cp3984

    And yet the people of the state keep voting for liberals…they get what they deserve…same as the aliens in Calif.

  • Fiftycal

    The answer is real simple. Ban cash. Only “digital cash” is allowed. Then, when the good nanny state runs a little short, they just TAKE say 2% of everybody’s “money”. You will hardly notice. And all the illegals will have to pay taxes and criminal enterprizes will have to pony up. No more handing dollar bills to the homeless on the street. They’ll need a phone and a card reader. There couldn’t be a downside to this, right?

    • Del_Varner

      With a name like “Fiftycal” i hope people get the sarc!

    • If it were 2% fifty times it still would not be enough. Demand is infinite.

  • LizardLizard

    The upper middle-class Boomers I know here in CT are almost all either moving to FL or seriously considering it. The Millenials we know who grew up here are almost all living and working in Brooklyn. What could go wrong?

  • Same same in Texas, at least among the biggest cities. Dallas and Houston are both having simultaneous meltdowns of their pension systems. If you are a cop or EMT there you had better know that those who have retired ahead of you are busy emptying out the vaults and finding that there is about half of what they expected in there.

  • bflat879

    Surprise, surprise!

  • subotaibahadur

    Connecticut is the model for Leftist Democrats. Let it go broke. Anyone stupid enough to stay there deserves it. I personally hope that jobs and industries keep moving out. They voted for a socialist state, let them have it good and hard. Maybe they can revisit the Hartford Convention during the War of 1812 and secede. Let them go.

    Subotai Bahadur

  • Dude1394

    Just stay out of Texas please.

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