Business Leaders Say State Economy is in Crisis
By Matthew Ormseth, Hartford Courant
Connecticut’s private sector leaders convened Monday with two of the Malloy administration’s top economic advisers to tackle issues that have stymied lawmakers for years: sluggish economic growth, a dwindling population and an entrepreneurial climate that more and more businesses criticize as noncompetitive.
On Monday, members of the newly chartered Commission on Fiscal Stability and Economic Growth met at Yale with Kevin Sullivan, the state’s commissioner of revenue services, and Catherine Smith, commissioner of economic and community development. The 14-person commission, which includes the heads of some of Connecticut’s largest companies, represents a rare foray into the realm of public policy by private sector leaders. The commission will offer formal recommendations to Gov. Dannel Malloy and the Legislature on March 1.
Jim Loree, CEO of Stanley, Black & Decker, opened the meeting with a sprawling diagnosis of Connecticut’s fiscal ills. In 2001, Loree said, Connecticut was ranked the eighth-most competitive state in the country by the Beacon Hill Institute, “competitiveness” being a measure of fiscal policy, quality of life, labor supply and infrastructure. By 2016, he said, Connecticut had slipped to 43rd by the same index.
Outmigration is a well-documented phenomenon in Connecticut, but Loree singled out a telling statistic: On average, a family that moves into Connecticut has a household income of $93,000. The average income of a family moving out is $123,000. With such a fluctuating tax base, Connecticut’s income stream is “incredibly volatile,” Loree said, rendering the state “very vulnerable to market downturns.” A disproportionate amount of tax revenues flow from a handful of well-heeled enclaves, he added. Thirty-six percent of the state’s personal income tax revenue comes from 10 towns, including West Hartford, Glastonbury and Fairfield County towns. Twelve percent of all personal income tax comes from 357 families alone, Loree said.
“The suburbs of Connecticut are massively subsidizing the cities of Connecticut,” said Sullivan.
More than half of the state’s revenue comes from personal income taxes, which have held steady over the last five years, Sullivan said. “That’s not good news,” he explained, “because it doesn’t keep up with spending. It’s also not good news because this comes with three big tax increases. So we should be seeing a burst, and instead it’s just kind of clunking along.”
But Loree said the state’s unreliable income streams “look like a minor problem” compared to the state’s liabilities — debt, unfunded pensions and other unfunded post-employment obligations — which he called “a very, very serious problem.” Liabilities totaled $85.5 billion in 2016, with Moody’s Investor Service gauging Connecticut’s adjusted net pension liability at 20 percent of gross domestic product. Pension funding obligations are expected to triple in the next 15 years, Moody’s warned.
“When 25 cents of every revenue dollar goes to debt or unfunded liabilities, you’re operating with a hand tied behind your back,” said Jim Smith, the former CEO of Webster Bank and co-chair of the commission. “It’s a chicken and the egg question, but I think fiscal stability comes before economic growth. When you look at our 2018-19 budget, there’s no revenue growth, and our liabilities are growing by four, five percent every year.”
Though the commission has yet to make formal recommendations, Loree said fixing the state’s structural issues would require "some sort of tax reform.” Renegotiating the state employee pension system and reviewing their compensation would be a necessary part of the process, along with looking into consolidating state agencies to pare away inefficiencies.
In the last two years, Connecticut watched two of its cornerstones — Aetna and General Electric — move their headquarters out of state. Catherine Smith, commissioner of economic and community development, said the “high profile exits undermine the credibility of the state and make it incredibly challenging for us.”
Still, Smith pointed to long-term commitments negotiated with United Technologies and Sikorsky to keep crucial projects in Connecticut, and said a similar agreement with Electric Boat is in the works. The state’s Manufacturing Innovation Fund has shelled out $47 million in aid since 2014 to 879 small companies within the supply chains of the state’s larger manufacturers.
The commission also plans to address economic divisions between Connecticut’s urban and suburban enclaves, an issue that has plagued policymakers for years. Under the PILOT program, the state in theory reimburses cities for unpaid property taxes on tax-exempt buildings, like government offices and hospitals, which are used by the rest of the state. But Sullivan admitted “we don’t come anywhere close to reimbursing cities for lost property tax dollars.” He suggested re-evaluating the tax-exempt status of city buildings that are not houses of worship.
“You can’t have strong economic growth without strong urban cores,” Loree said. “Unfortunately, we’ve developed a situation where we’re a suburban state in many ways, and the cities don’t have the tax base to provide what they need to survive. And yet the people of the suburbs are availing themselves of those services without paying taxes on them.”
In December, the governor announced the state’s transportation fund was in crisis, and needed an infusion of a $1 billion to avoid cutting crucial projects. Loree called transportation “the backbone of the economy,” and said the commission viewed the near-depleted fund, plundered over the years for stopgap projects, as a priority. Sullivan, who said he doesn’t “have a clue why we don’t have tolls,” suggested toll revenues could go directly into a transportation fund lockbox, bypassing the general fund.