Hartford Business Journal

18 Hartford Business Journal • November 16, 2015 www.HartfordBusiness.com OPINION & COMMENTARY EDITORIAL Budget woes reveal broken legislative process C onnecticut's legislative process is broken. If you hadn't figured that out yet based on the mounting red ink that is drown- ing the state budget legislators passed just a few months ago, State House Speaker Brendan Sharkey confirmed the notion when he recently admitted, according to published media reports, that the current budget process, in which policymakers rush passage of a spending plan during the waning hours of the legislative session, can lack transparency and lead to poor decision making. Sharkey was particularly critical of a proposal passed by lawmakers earlier this year to raise the data-processing tax, a decision that was eventually repealed in a special session following major outcry from businesses. Sharkey called the tax hike a "bad idea," and said legislators need to get more input from business leaders before they change tax policies. That's a strong statement from one of the most powerful lawmakers in Hartford. Sharkey's sentiments speak to a disconnect between the business community and leg- islature that has long haunted the State Capitol, often resulting in anti-growth policies. While we appreciate the candor, we must also point out that Sharkey is partially to blame for the broken legislative process. He is, after all, in charge of overseeing legislation passed out of the House chamber. We found it odd that Sharkey criticized the legislative body he oversees, while at the same time, according to the CT Mirror, trying to garner sup- port for a third term as House Speaker. We wonder if it's time for new leadership. Regardless, Sharkey's comments should bring to the forefront a larger conversation about Connecticut's legislative process, which completely failed the state this year. Setting the budget is lawmakers' most important task and to foul it up as badly as they did in 2015 raises many questions about legislators' ability to fix Connecticut's fiscal crisis. Just last week, new revenue estimates from the Office of Fiscal Analysis showed the state faces more than $600 million in deficits over the next two years, and a $1.4 billion gap thereafter. That, of course, is despite the fact that the legislature has passed two major tax hikes within the last five years. Admittedly, current policy leaders can't shoulder all the blame. Connecticut's fiscal morass comes from years, even decades of poor fiscal management and a Great Recession that devastated the local economy. However, we still lack a coherent strategy that will move Connecticut beyond its fiscal crisis. Economic growth is Connecticut's only hope to reverse course, so business leaders must be at the bargaining table. Sharkey made his comments at the first meeting of the Commis- sion on Economic Competitiveness, which was created this year to analyze the impact of tax policies on business and to promote pro-growth policies. The commission is a step in the right direction, but we've seen many blue-ribbon panels come and go without much influence. They key is not just discussing business-friendly policies, but actually enacting them into law. We also question if a part-time legislature is up to the task of tackling the com- plicated issues Connecticut faces. It has proven difficult for even the most engaged policymakers to solve the state's fiscal mess, so how can we expect legislators who convene only a few months a year to do any better? A smaller, professional and full-time legislative body may offer a better way. At the very least, legislative leaders and Gov. Dannel P. Malloy must establish new deadline benchmarks for the budget-setting process to prevent the last-minute, closed- door negotiations that often lead to poor policy decisions. Without changing the legisla- tive process, it's hard to see how we'll get different results in the future. n RULE OF LAW Fiscal train wreck could leave state pension fund 'out of luck' By John Horak O ver backyard beers and burgers with some friends this summer, a neighbor started a conversation about Connecti- cut's dismal finances. He grumbled about the billions of "debt" the state owed to its bond- holders and the billions of "debt" owed to its underfunded pension plans. He said he had abandoned hope and is planning to move before the fiscal train wreck occurs. Lawyers seldom miss opportunities to show off, so I tossed modesty aside and offered a technical correction to his comments. "You realize," I said, "that the amount owed to bondholders is debt in the legal sense, but that the state's obligation to alleviate the pension underfunding is not, even though it is commonly referred to as debt." He asked curiously: "Does this mean there is room for hope?" "Well," I said, "there may be a glimmer if the pension funds and retirees understand the dif- ference, which is that people to whom the state is indebted (bondholders) are owed a fixed non- negotiable amount and can sue the state if they are not paid; but the pension funds are owed a variable amount that's easier to negotiate and they cannot sue if the state stops making pay- ments to remedy the underfunding. So, if the train crashes the bondholders will be paid in full — but the pension funds will be SOL (sorrowfully out of luck), and retirees will be forced to live on what's already in the plan's coffers — or pennies on the dollar." My explanation drew stares of skepticism, so I offered the following clarification: First, the starting point is the doctrine of "sovereign immunity," under which state gov- ernment cannot be sued on any obligation (including its debt) unless it actually consents to being sued or has waived immunity in advance. Second, a bond represents an actual loan to the state. It recites the principal, interest rate and maturity date, similar to a bank loan to buy a car. When the state needs cash it goes to Wall Street where underwriters solicit investors to buy its bonds. Investors would not buy bonds (a bank would not make loans) if they could not sue in the event of nonpayment. Consequently, there is a statute waiving sovereign immunity for bondholders, which states that the courts "shall have jurisdiction to enter judgment against the state founded upon any express contract between the state and the purchasers … of bonds," and that if sued the state has all legal defenses "except governmental immunity … ." Third, the state's obligation to the pension funds is the result of an actuarial (mathematical) calculation (a highly professional guesstimate) of how much more must be set aside in the retire- ment plan coffers to be able to pay in full the ben- efits promised to current and retired employees. Unlike the bond debt, the unfunded amount is variable. Retiree longevity and lower invest- ment returns on monies already set aside will increase the amount that must be added, whereas early deaths and robust investment returns will do the opposite — as would a vol- untary agreement to negotiate a reduction in the size of the retirement benefits. Fourth, sovereign immunity would prevent the pension funds from suing to compel the state to make the additional contributions needed to reach full funding. This conclusion is explained in a Nov. 2014 paper prepared for the Connecti- cut Policy Institute by William and Mary Law School Professor Christopher Griffin: "Con- necticut's Public Pension Liabilities — How Big They Are and What Can be Done About Them." In his words, the state "cannot be compelled to make additional payments into its pension funds … [which] means that the state could decline to pay its annual actuarially required contributions and that the state cannot be com- pelled to pay out its pension benefits in the event that the underfunding leads to insolvency [of the plans]." Griffin speaks only to the obliga- tions to make additional contributions to fix the underfunding, not to monies already set aside in the pension funds to which retirees have legal rights. My neighbor asked quizzically, "Are you saying that the state should not pay its pensions?" "Not at all," I replied. "What I'm saying is that the state does not have unlimited resources, and if the fiscal train really crashes, bond- holders will be in the courthouse getting paid in full, but the pension funds will be standing outside on the sidewalk dealing with angry retirees." "So," my neighbor said, "I think I under- stand, but still don't see the reason for hope." I replied, "The hope is that the pension funds and retirees realize they are caught in a predica- ment both circular and ironic. The Connecticut train is in danger of going off the tracks because it is over laden with pension promises it can't afford, but if it goes off the tracks it's retirees who depend on the pensions who will be SOL. "We can hope," I said, " that the pension funds will realize that a reasonable negotiated reduction in promised retirement benefits will stabilize the train and provide greater retire- ment security (albeit with reduced benefits)." "Hmmm," my neighbor murmured. "I think I understand, but what if this does not happen?" "Well," I said as I poured another beer, "in that case there will be an exodus of folks buying one-way train tickets to destinations better able to keep their financial affairs in balance." n John M. Horak has practiced law at Reid and Riege P.C. in Hartford since 1980. The views expressed are his own. HARTFORDBUSINESS.COM POLL Should the state invest more in bike/ pedestrian pathways? ● Yes ● No To vote, go online to HartfordBusiness.com. Last week's poll results: What is Mayor Luke Bronin's biggest challenge? 42.6% Running the city more efficiently 29.5% Balancing budget 16.4% Improving schools 11.5% Reducing unemployment John Horak ▶ ▶ … If the fiscal train really crashes, bondholders will be in the courthouse getting paid in full, but the pension funds will be standing outside on the sidewalk dealing with angry retirees.

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