Fiscal Surgery to Restore Stability & Accountability

March 20, 2018

Good Morning! In this morning’s eBlog, we consider options for addressing serious fiscal challenges in Connecticut, before journeying to the U.S. territory of Puerto Rico, where we try to assess whether there might be too many fiscal cooks in the kitchen.

The State of the Constitution State. In the wake of the unveiling of a series of diverse and likely fiscally painful recommendations, the Connecticut Commission on Fiscal Stability and Economic Growth has challenged the state’s legislature to adopt the proposal. Moreover, the Connecticut Conference of Municipalities, notwithstanding that full adoption could jeopardize state aid to local governments in the state, endorsed the full report, finding it would offer more long-term benefits for the state and its municipalities. The Commission report recommendations focused on new long-term benefits for the state and its communities, with its recommendations focused on new revenue-raising options for cities and towns and collective bargaining changes which could prove to be vital reforms which could more than offset the steep reduction in the state budget. The Conference’s Executive Director Joe DeLong noted: “Connecticut has long been the land of steady habits, but the precarious fiscal condition that still plagues the state budget demands that Connecticut change key core public policies—now,” adding the Commission report echoes many of the recommendations the Conference proposed to state legislators just one year ago: “We can wait no longer for substantive change that will set the state on a sustainable economic path that will benefit hard-pressed residents and businesses.”

The 14-member Commission, which was created last October as part of the new state budget, was charged with the task of helping to navigate Connecticut through one of its worst fiscal crises in modern history: the state not only lagged the majority of states in recovering from the great Recession, but also is confronted by surging public retirement benefit costs tied to more than 70 years of inadequate contributions—creating a fiscal challenge projected to place unprecedented pressure on state finances for at least the next 15 years.

Unsurprisingly, the growing costs of financing retirement pensions of post-retirement health care benefits has acted like a python in squeezing aid to the state’s cities and towns. Thus, the Conference found some solace from the commission recommendations, which might grant greater fiscal flexibility to the state’s communities to manage their own budgets and programs. Among the key recommendations: 

  • Authorizing municipal coalitions to add one-half of 1 percentage point to the sales tax rate to fund regional services and diversify local budgets that rely excessively on property taxes.
  • Allowing regional coalitions of municipalities to raise supplemental taxes for capital projects by special referendum.
  • Allowing communities, through regional councils of government, to charge fees on nonprofit colleges and hospitals, which currently are exempt from local property taxation.
  • Permitting towns to increase fees for use of the public rights of way, storm water fees, hotels, car rentals, restaurants, and other services.
  • Urging the state to increase the grants it already provides to restore some of the funds communities lose because state property is exempt from local taxation.

The fiscal stability panel also proposed several changes to collective bargaining, which could help the state’s local governments, including:

  • Allowing communities to use non-union labor on rehabilitation projects costing less than $1 million;
  • Providing communities with a single, neutral arbitrator for labor negotiations;
  • And exempting a city or town’s emergency budget reserve from being used to pay for labor contract settlements.

The Commission’s recommendation that the Legislature reduce the state annual operating budget approximately 5%, or about $1 billion per year left unclear what areas would be targeted, albeit the co-Chairs said that recommendation is not intended to target the nearly $3 billion Connecticut spends annually on major statutory grants to cities and towns; rather, their intent appears to be that the Legislature could achieve these savings via privatizing more services, seeking other efficiencies, and trimming labor costs wherever possible. The Connecticut Business and Industry Association and other business leaders have been urging lawmakers to revisit six reports prepared in 2010 and 2011 by a business coalition known as The CT Institute for the 21st Century. The coalition outlined strategies to cut state spending by hundreds of millions of dollars in total spread across several areas, including reductions in public-sector benefits. These strategies, many of which would take several years, also involved prisons, long-term health care, public-sector benefits, and use of technology to deliver public services. Nevertheless, a number of state legislators questioned the reality of a $1 billion reduction, given that nearly two-thirds of the state budget involves retirement obligations, payments on bonded debt, Medicaid, and other largely fixed costs, without constraining aid to cities and towns.

A Consulting Estado de Emergencia? (State of Emergency) Puerto Rico’s Executive and Legislative branches, during the Hurricane Maria state of emergency, agreed to 1,408 consulting and professional contracts totaling $ 70.1 million, according to an analysis of El Nuevo Día. That effectively translates into approximately 16 contractual agreements for each of the 88 days in which 3.5 million Puerto Ricans were almost in survival mode in the wake of last September’s hurricane—all contracts which were subject to the scrutiny of the Chamber and the Senate of Puerto Rico, as well as the PROMESA Oversight Board with regard to any contract which exceeded $10 million. It appears that nearly half of the consulting and professional services agreements agreed upon during the emergency period registered with the Office of the Comptroller were given mainly to individuals and several dozen firms which provide services to the government under an “administrative consulting” agreement and services: agreements totaling $24 million, with the largest contracts provided via three amendments to agreements of the Department of Health and the Special Program of Supplementary Nutrition for Pregnant, Lactating, Postpartum, Infants and Children from 1 to 5 years old (WIC) with the company to ManPower for temporary employment services. In addition, there is a $ 3.1 million contract from the Office of Management and Budget (OGP) with Deloitte & Touche for financial consulting—which has subsequently signed another contract with the office which will be in charge of administering the federal funds Puerto Rico receives for recovery from Hurricane Maria. Meanwhile, the firm KPMG received an amendment to a contract with the Public-Private Partnerships Authority (AAPP) of $ 947,189. Based on data from the Comptroller, during the emergency, when it was known that the agencies and schools were not operating properly and the courts recessed their work substantially, the agencies also granted 123 contracts for “legal consulting” and “legal services” for $ 4.6 million—with another 31 contracts valued at $2.6 million to accounting firms.  The list of administrative consultants also includes several contracts with amounts close to $1 million, with some of the largest granted by the Bureau for Emergency Management and Disaster Management to the firms Consul-Tech Caribe and DCMC LLC for $ 900,000 each.

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