This piece originally appeared in the September 2, 2013 issue of the Hartford Business Journal. Connecticut’s Debt Clock Ticking By Arthur J. Renner, CPA, CTCPA Executive Director I f you live, pay taxes, and (especially) own property in Connecticut, the 15 months between today and the November 2014 elections provide both a challenge and a critical opportunity. Will you allow our state to continue on its path of economic stagnation … or will you demand our political leaders change direction and pursue fiscal responsibility? The combination of pathologically underfunded benefit promises and looming demographic shifts will undo many of our city and state employee pension benefit plans. As Baby Boomers retire en masse and leave our state for warmer climate and lower-tax destinations, Connecticut’s revenue streams will dry up. Baby Boomer governmental employees are transitioning from work years to their retirement years, straining benefit systems. Events taking place in two Midwestern locations, Detroit and Illinois, provide an excellent albeit dismal preview of what Connecticut faces if we and our elected officials continue to ignore mathematical reality. Detroit’s history-making bankruptcy bids to unburden the city of its $18 billion debt. Much of the debt is hidden, not visible on Detroit’s financial statements. Some 60 years in the making, the city faces many deep-rooted problems, including economic stagnation and declining population. Detroit’s elected officials have been unwilling or unable to deal with the city’s mounting insolvency. Last March, Michigan’s Gov. Rick Snyder stepped in and assigned an emergency financial manager, Kevyn Orr, to correct Detroit’s course. Snyder approved the bankruptcy filing when city creditors, including its pensioners, could not agree on a plan to reduce Detroit’s obligations. What can happen in a state when pensions go unfunded? Illinois bond costs are spiraling up out of budgetary control due directly to the state’s inability to tackle pension reform. Bonds scheduled for sale in January were postponed until April, when the “pension premium” was pegged at an additional $10 million. Bonds sold in June cost the state 17 percent more than the April sales when the “pension premium” was an additional $130 million. In an effort to control borrowing costs, on July 10 Illinois Gov. Pat Quinn stopped paying his own salary and those of legislators until pension reform is enacted. On July 31, the legislative leadership sued to have their pay reinstated. Still no movement on pension reform. How strong is the connection between these Midwestern events and Connecticut? With its relatively small population, Connecticut easily avoids the media attention spotlighting the fiscal deficiencies of the larger states such as California, Pennsylvania, and Illinois. But in reality, our debt-per-taxpayer is by far the highest in the nation. A downgrade of Connecticut’s bond rating could steeply increase the state’s interest rates and other borrowing costs. A recent report by Moody’s said Connecticut’s reported $20.1 billion in pension liabilities trails only Illinois when it comes to underfunded pensions. Moody’s also said Connecticut is among the worst at accurately reporting its pension liabilities. The credit rating agency said Connecticut’s financial statements should reflect more than double the currently reported liability to realistically indicate what’s been promised to state pensioners. Connecticut arrived at this critical juncture because we, our elected officials, their appointees, and union representatives have focused on the political ramifications, ignoring the mathematical and logical realities. Under both Republican and Democratic governors, kicking the can into the future became a time-honored Connecticut budget- balancing method. Whenever Connecticut is cash strapped, employee contract negotiations emphasize future pension and healthcare benefits. Benefits Connecticut could not afford in the past only become more expensive in the future. Connecticut’s unfunded liability for employee pension benefits is 1.9 times the size of the state’s annual budget, according to Moody’s. What must we do? As the next election campaign unfolds, Connecticut voters must challenge themselves to hold candidates for public office accountable. We can’t accept vague answers to specific financial questions. We must insist upon substantial, mathematically accurate responses. A prime example of a factually suspect government term is Connecticut’s “rainy day fund.” No such fund exists. Connecticut’s own financial statements published annually by the Comptroller’s office prove the depth of state liabilities and the fallacy of placing any faith in a so-called rainy day fund. At June 30, 2012 the financials and footnotes show liquid assets of $3.9 billion, recorded liabilities of $29.9 billion, and off-balance sheet liabilities (reported in footnotes and actuarial reports) of another $45.5 billion. Let’s be clear, and let’s be real: Connecticut’s fiscal house has assets of $3.9 billion and liabilities of $75.4 billion, with no rainy day fund in sight. Detroit, with its vastly devalued real estate, and Illinois, issuing IOUs instead of payments to creditors, demonstrate the consequences for ineffective financial governance and spell catastrophe for the citizens most at risk and unable to fend for themselves. Time waits for no state, and Connecticut’s debt clock is ticking. Connecticut CPA September/October 2013 g 7