A new study shows Connecticut's five largest cities face a growing fiscal crisis—with potentially crippling consequences for taxpayers and local and state economies.

The Manhattan Institute's recently released Connecticut City Pensions: The Affordability Gap report calls for Bridgeport, Hartford, New Haven, Stamford, and Waterbury to "dramatically" reform their employee pension and retirement systems.

"Connecticut state government's pension struggles are well understood: deep levels of underfunding have led to credit-rating downgrades, tax increases, recurring budget deficits, and an inability to fund essential services," the report notes.

"What has been overlooked, though, is the challenge that the state's five largest cities by population face in paying for their own retirement benefit promises.

"All five of these cities have promised hundreds of millions of dollars in benefits, a promise that is backed, ultimately, by their tax base."

The report's author, Stephen Elde, a senior fellow at the institute, says "while the state's record of pension mismanagement is well documented, cities have been guilty of mismanagement as well.

"However, for the state's five biggest cities, the question of affordability is more important than mismanagement."

Elde says with the exception of Stamford, Connecticut's largest cities have weak economies and high rates of poverty, which hobbles their ability to properly address funding shortfalls.

Costs Outpace Tax Revenues

For example, property values in Hartford grew by $2.8 million in real terms from fiscal year 2009 to fiscal year 2017.

But during that same period, Hartford's pensions costs grew by $16.7 million.

Considering that property taxes are the major tool cities use to raise revenue, that puts cities, including Hartford, in a tough spot, Elde says.

"Despite rate increases, property tax revenues have not been keeping up with pension costs," the report said.

The report also questions the logic of municipalities providing healthcare benefits for retirees "considering that the private sector has largely phased out healthcare for retired workers."

Elde said cities must consider moving from current defined benefit pension plans to a more sustainable defined contribution plan—similar to the 401(k) plans widely used in the private sector.

"The case for dramatic retirement benefit reform—phasing out retirement healthcare and transitioning workers from a defined benefit to a defined contribution plan—may be more urgent for Connecticut's biggest cities than for the state," the report says.

Taxpayer Burden

Hartford, New Haven, Stamford, and Waterbury each operates their own retirement systems. Bridgeport participates in a statewide system but is responsible for meeting its pension obligations.

The report notes that an unhealthy retirement system can increase costs in many ways for municipal and state governments.

For example, Standard & Poor's downgraded Connecticut's credit rating in April from A-plus to A, citing the state's "high unfunded pension liabilities."

Connecticut has $69.8 billion in unfunded liabilities, including bond debt and state employee pension and retirement benefits, or an individual taxpayer burden of $53,400.

Concerns over the health of the state's economy have weakened political support for tax increases.
— Manhattan Institute
CBIA's Louise DiCocco said the report highlights the need for cities to gain control of their retirement plans.

"Connecticut cities must work with their employee unions and begin to tackle their pension problems head-on to stem the astronomical long-term costs to taxpayers," DiCocco said.

"A manner in which to do so includes switching from defined benefit retirement plans to 401(k) style plans and changing retiree healthcare packages.

"These changes will undoubtedly be a win-win situation for not only the municipality's financial stability and outlook, but for their taxpayers as well."

Economic Concerns

A Pew Center survey of state government pension systems ranked Connecticut fourth to last among states in funding its retirement system. Only Illinois, New Jersey, and Kentucky were worse.

Since the recession, the report notes, Connecticut has raised personal income taxes in 2009, 2011, and 2015, yet still faces growing budget deficits.

The report says the state government's ability to raise sufficient revenues to support growing costs faces a number of constraints, noting that "concerns over the health of the state's economy have weakened political support for tax increases."

"Connecticut's economy has contracted in three of the last four years and, in 2017, ranked 49th among all states, according to the Bureau of Economic Analysis," the report said.

"High-profile corporate relocations have created political crises for state officials; and IRS data show that each year, billions of dollars in income leave for other states, some of which have lower taxes and/or no income tax."

Recent changes in federal tax policy, including capping the deduction for state and local taxes at $10,000, will further heighten the fiscal challenges faced by state and local governments.

In 2016, 726,000 Connecticut taxpayers claimed an average $19,000 deduction for state and local taxes on their federal tax return.

"The new tax law may limit how much state government can redistribute from wealthy suburban taxpayers to the general treasuries of bigger and poorer Connecticut cities," the report said. "But poor cities' revenue-raising capacity has always been constrained and will remain so."

Pension Fund Health

The report found that several pension funds in the five largest cities are healthier than the state's retirement systems.

For example, the State Employees Retirement System is only 32% funded while the Teachers' Retirement System is 52% funded.

In contrast, Hartford's system is 72% funded, Waterbury's is at 63%, and four different pension plans in Stamford are funded anywhere from 68% to 82%.

The case for dramatic retirement benefit reform may be more urgent for Connecticut's biggest cities than for the state.
— Manhattan Institute
New Haven's city employee retirement fund is only 34% funded while its plan for retired police and firefighters is funded at 41%.

"Each of New Haven's citizens will, in effect, have to come up with $10,230 to ensure that the city's retired workers receive the pension and healthcare benefits they were promised throughout their retirement years," the report says.

Reforms Needed

The report also notes that, with the exception of Stamford, the cities have low fiscal capabilities, which could interfere with efforts to stabilize pension plans.

With a poverty rate of 25% and a median household income of $39,000, Waterbury will have trouble funding its system, the report says.

Stamford, with a poverty rate of 9% and a median household income of $81,000, will have less trouble.

Waterbury, for example, estimates its pension and retirement liabilities cost taxpayers almost 24 mills annually. That's roughly 37% of the city's annual tax rate.

Of the $44.4 million Hartford needs to contribute to its pension system in the current fiscal year, roughly two-thirds—about $30 million—was to fund benefits earned in years past, the report said.

It also notes that while all five cities express optimism in their annual financial statements, the recent histories of Hartford, New Haven, Bridgeport, and Waterbury "provide little evidence of an economic revival."

It's why, the report concludes, it would be best for taxpayers if cities reform their employee retirement plans, including eliminating retiree healthcare benefits.