Economic Commission Focuses on Structural Reforms

The state commission charged with recommending legislative fixes for Connecticut’s competitiveness and economic growth is focusing on eight key structural problems.
Taxes, state employee retiree pension and healthcare benefits, transportation funding, workforce development, population loss, and regionalization of municipal services are among the issues identified by the Commission on Fiscal Stability and Economic Growth.

Stanley Black & Decker president and CEO Jim Loree, one of 10 business leaders on the 13-member commission, told a Jan. 8 public hearing at Yale University Connecticut’s economic struggles are linked to the state’s declining competitiveness.
In a presentation at the hearing, Loree said Connecticut, once a highly competitive state, now ranks among the lower 25% of states in several competitiveness indices.
He noted that the Beacon Hill Institute ranked Connecticut’s competitiveness eighth among all states in 2001, with gross domestic product averaging 3% annual growth prior to the 2008 recession.
By 2008, Connecticut ranked 21st, with economic growth averaging 2% during the recession years. In 2016, the state’s competitiveness rank slumped to 43rd, with post-recession growth averaging just 0.3%.

‘Glaring Deficiences’

He cited a range of independent reports and studies ranking Connecticut among the top states in several important areas, including education, quality of life, and workforce.
However, those strengths are “overpowered by glaring deficiencies,” with the state ranked near the bottom for its economy, infrastructure, high cost of doing business, and regulatory environment.
Connecticut also fares poorly for its budget and fiscal policies—ranked last, for instance, for its ability to balance budgets and 47^th for fiscal stability by U.S. News & World Report.
Connecticut’s tax rates—corporate, sales, personal income, property, and estate—are far higher than the national and regional averages.
And the legislature’s habit of hiking taxes to resolve budget deficits—marked by the two highest tax increases in history in 2011 and 2015—is contributing to an alarming exodus of residents.
Over 37,000 residents left the state between 2015 and 2016, taking more than $6 billion in income with them.
The average adjusted gross income of those leaving was $123,377, while the average income of new arrivals was around $93,000, Loree said.

Suburbs Subsidize Cities

He added that Connecticut relies too heavily on the personal income tax, making revenue collections vulnerable to recession and market downturns.
Other states, including North Carolina, Florida, and Texas, depend more on sales and excise taxes. Loree said Connecticut should emulate the business climates in those states.
State Department of Revenue Services commissioner Kevin Sullivan told the hearing Connecticut gets 36% of its personal income tax revenue from just 10 towns—Greenwich, Stamford, New Canaan, Fairfield, Westport, Darien, West Hartford, Norwalk, Milford, and Glastonbury.

"The suburbs of Connecticut are massively subsidizing the cities," Sullivan said.
Connecticut receives 64% of its income tax revenue from 36 towns.
And astonishingly, just 357 families pay 12% of the total income tax revenue Connecticut collects.

Growing Liabilities

Connecticut's total liabilities as of June 2016 were $85.5 billion.
The state's debt service ratio is the highest in the nation at 13.3%, and outstanding debt as a percentage of personal income is 14.8%, fourth highest in the U.S.
Commission co-chair Jim Smith, former CEO of Webster Bank, said Connecticut cannot recover economically when revenues remain flat as liabilities grow 4% to 5% each year.
"When 25 cents of every revenue dollar goes to debt or unfunded liabilities, you're operating with a hand tied behind your back," Smith said.
Unless something is done, Connecticut will have to triple payments to its pension fund over the next 15 years from $2.6 billion this year to $8.4 billion in 2032, a situation Loree called unsustainable.
He also noted that Connecticut state employees are, on average, the highest paid state workers in the country.
Connecticut public sector wages are 28% higher than the U.S. average and 16% higher than other Northeast states. Pension benefits are 38% higher than the U.S. and 26% higher than the Northeast.

Crisis Situation

"The platform is burning," commission co-chair Bob Patricelli, the former CEO of Women's Health USA, later told CTNewsJunkie.
"We're going to spend as much time as we need to to have a shared understanding of the legislature and the public of how serious the situation is.
"Maybe it's some situation of crisis and political cover that can make it different this time around."

Patricelli said the commission was unlikely to recommend reopening the State Employees Bargaining Agent Coalition agreement covering retiree pension and healthcare benefits.
The agreement, renegotiated by the Malloy administration and narrowly approved by the legislature last year, now does not expire until 2027.
"The question is, 'How do you fund it?'" Patricielli asked. "That's an area where we and labor could make some common cause."

Opportunities

Loree said the state's lack of competitiveness highlights a number of potential opportunities, including overhauling the tax system, public sector pension reform, the elimination or privatization of some state services, agency consolidation, and new transportation funding sources.
He said a long-term vision was required to "propel our state back to greatness," including:

• Targeting economic growth of 3% or better
• Implementing sustainably balanced budgets with manageable debt levels and unfunded liabilities
• Raising key competitiveness factors from the bottom quartile to above median within three to five years and into the top quartile by 2025
• Maintaining critical services while protecting vulnerable populations
• Achieving a sustainable, high quality of life for all Connecticut residents

The commission must present its recommendations to the General Assembly by March 1.

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For more information, contact CBIA's Pete Gioia at 860.244.1945 | @CTEconomist