Every state will eventually learn one lesson: when the rich are tapped out, then they will leave. It looks like Connecticut has taken too long to ascertain this, and now the affluent are exiting The Nutmeg State.
In recent years, Connecticut has taken on an immense sum of public debt. When everything is factored in – budget deficits, spending liabilities and postponed payments to pension and healthcare programs – Connecticut has a total debt load of $36 billion. This equates to more than $10,000 per person.
And Connecticut won’t have the rich to kick around anymore.
For years, Governor Dannel Malloy (D-CT) has treated businesses and millionaires like ATMs. The governor has relied on mandating entrepreneurs, investors, and other rich state residents to redistribute the wealth, primarily to public unions. But they have had enough, and an exodus has commenced.
Between July 2015 and July 2016, close to 38,000 people, predominantly wealthy, have moved elsewhere. General Electric made national headlines when it announced it was relocating operations to Boston. The Aetna insurance company, which has been headquartered in the state since 1853, recently packed up and left.
Higher taxes, budget deficits, and public debt have discouraged new business investments from forming and have encouraged entrepreneurs and companies to look for better tax environments.
Connecticut is already taking a hit with this trend, according to the Office of Fiscal Analysis. Last month, the agency reported that its two-year revenue forecast has tumbled by $1.46 billion. Income tax revenues for 2017 and 2018 are projected to crater by $1.1 billion, or 6%; sales tax revenues are slated to plummet by $385 million, or 7%, and corporate tax revenues are estimated to slip by $67 million, or 4%. It’s bad news for pension contributions because they are expected to spike by one-third over the next two years.
After crunching the numbers, Connecticut is left with a gaping budget hole of $5.1 billion.
Analysts are not pleased with what’s going on in The Land of Steady Habits. For the fifth time in the past year, Connecticut was slapped with a credit downgrade in May. Moody’s Investors Service reduced the General Obligation bond rating from Aa3 to A1:
The downgrades reflect continuing erosion of Connecticut’s finances, evidenced by the pending elimination of its rainy day fund, growing budget gaps and rising debt levels. The pressures created by growing fixed costs, coupled with weak economic performance, are unlikely to relent and will raise the risk of credit-negative actions such as deficit borrowing or backloaded financings.
Gov. Malloy has attempted to remedy the situation by offering tax breaks to businesses and hedge funds, but this has further eaten away at the state’s finances.
Conceding defeat, Connecticut is taking a page out of Puerto Rico’s playbook (because that is one government you want to emulate!) by launching credit bonds, The Wall Street Journal reports. These would be securitized by income tax revenues that would help slash the state’s borrowing costs. Puerto Rico had introduced the same measure in 2006 with its sales tax revenues. Suffice it to say that things didn’t work out in the island territory.
Puerto Rico’s Financial Oversight and Management Board declared failure in May, and now court proceedings have been started to restructure government debt. The government owes creditors approximately $70 billion, which is equal to roughly $20,000 per resident.
What exactly happened in Puerto Rico? It’s simple: the population of takers outnumbered the makers. Today, about 1.3 million Puerto Ricans receive food stamps.
According to the Bureau of Labor Statistics (BLS), 130 out of every 1,000 Puerto Ricans have a job. Of the remaining Puerto Ricans who are working, about one-quarter of them are employed by the state, and it is expensive to employ civil servants. Bureaucrats can receive a starting salary of $74,000, and most government workers are given three months vacation time, one-month paid sick leave and $120 million per year in bonuses.
It has become too costly for businesses to hire people. The minimum wage and the government’s many employee benefits have significantly impacted the private sector. In fact, labor costs have surpassed workers’ productivity levels
Like Connecticut, Puerto Rico has seen a mass exodus. Between 2004 and 2016, the island’s population has plunged 11%.
Here is what Foundation for Economic Freedom (FEE), using data from the National Bureau of Economic Research (NBER), opines:
The heavily indebted island demonstrates the tragic consequences of forcing up the minimum wage out of sync with the market price for labor. Between 1974 and 1983, Puerto Rico was forced to increase its minimum wage in line with the federal figure, where it has remained since 1983. The results of imposing this standardized federal minimum wage have been ‘substantially reduced employment on the island,’ as well as swathes of unemployable low-skilled workers who decided to immigrate to the US mainland to seek work…
When former Governor Luis Fortuno proposed to make some serious reforms after his election win in 2008, public sector unions and the media fought him tooth and nail. Upon his re-election defeat in 2012, unions and media outlets rejoiced by calling it a win for Puerto Rico.
Years later, the territory has not won anything. Instead, according to Governor Alejandro Garcia Padilla, Puerto Rico is in a “death spiral.”