How Can Connecticut Boost Its Business Climate Rankings?
National rankings of state business climates have generally not been kind to Connecticut. In fact, for many years, the state has shown a pattern of poor performance across a wide array of major business friendliness indexes.
To make matters worse, many rankings are publicized widely in the mainstream media: a fact that contributes to their negative impact on perceptions of Connecticut from within and outside the state.
Just how big an impact do they have? John Rathgeber, CBIA’s president and CEO, believes it’s significant.
“They influence business leaders and entrepreneurs outside Connecticut when they are making expansion decisions, taking Connecticut off their radar. They also contribute to an erosion of business confidence within our state, too often giving credibility to recruiters from other states who are constantly marketing their states to our businesses.”
Here are a few notable: and widely publicized: examples of business climate indexes that have placed Connecticut near the bottom nationally:
CNBC’s Top States for Business 2013 has Connecticut at number 45 (down one spot from 2012), based on measures such as the cost of doing business, economic conditions, infrastructure and transportation, and “business friendliness,” which considers states’ regulatory framework with emphasis on legal and liability climates.
Chief Executive magazine’s Best & Worst States for Business index also puts the Nutmeg State at 45 for 2013, down one position from last year. Indicators include taxation and regulation, workforce quality, state GDP growth, and unemployment rate.
Other rankings show some improvement, but still put Connecticut far back in the pack. For example:
Forbes’ 2013 Best States for Business list ranks Connecticut 33rd, up six places from 2012 on the strength of improvement in “growth prospects,” a measure of employment, income, and state GDP growth forecasts over the next five years. On the downside, the Forbes index ranks Connecticut 47th for business costs and 37th for regulatory environment.
Other rankings show similar outcomes for Connecticut. They include the Beacon Hill Institute’s State Competitiveness Index for 2012, which puts the state at number 36; the Tax Foundation’s 2014 Business Tax Climate Index (42); and the Small Business & Entrepreneurship Council’s U.S. Small Business Policy Index (42).
Connecticut’s poor performance in national rankings is reflected in the 2013 CBIA/BlumShapiro Survey of Connecticut Businesses. Of the nearly 400 business leaders responding, 80% had a negative or somewhat negative opinion of Connecticut as a place to operate a business.
A Modest Goal: Top 20
Although national business climate rankings aren’t indicative of everything a state has to offer or the totality of its economic competitiveness, they do play an important role in business decision-making. So rather than simply ignore them or dismiss them as inaccurate, Rathgeber suggests that we use them to our advantage.
“Working together, we can improve our rankings and at least break into the top 20 states, just as our neighbor to the north, Massachusetts, has done,” he says. “By demonstrating significant annual progress toward achieving that goal, we would create a national buzz about Connecticut and improve business confidence within our state. I firmly believe that a consistent, focused approach to improving our economic competitiveness would give business leaders the confidence to invest and grow in Connecticut.”
Barriers to State’s Economic Competitiveness
There is a lot to do in many areas if Connecticut is to become truly competitive, says Rathgeber, “and it’s important that we acknowledge that.” Typically, those are the areas that weigh Connecticut down in national business climate rankings.
The most critical of these, he points out, is fiscal policy, including reducing the state’s massive unfunded liabilities for state employee pensions and post-retirement health benefits, “which business leaders equate to future tax increases,” says Rathgeber. “We must also continue to rein in state spending by leaning state government and reform our tax system to encourage wealth creation, entrepreneurial activity, business investments, and more risk-taking.
“Business leaders consistently tell me that our recent budget deficit cycle, with the threat of increased taxes and unfunded liabilities down the road, is the biggest drag on their willingness to make investments in this state.”
Driving down the cost of doing business in Connecticut would also go a long way toward improving the state’s competitiveness and boosting its position in national business climate rankings.
“Connecticut is never going to be the cheapest state for business, but we can do much better, and the strides being made on the energy front are a good example,” says Rathgeber.
Healthcare, he notes, offers a similar opportunity.
“We need to go beyond the worthy goal of reducing the number of uninsured in Connecticut and address the cost-drivers in healthcare while continuing to improve patient outcomes. A value-based healthcare system will help reduce premium increases and make health insurance more affordable for everyone.”
Rathgeber also cites transportation infrastructure as an area badly in need of attention, pointing out that Connecticut has two things working against it: one of the oldest infrastructures in the country and harsh weather conditions. As a result, he argues, the state must continue to make and even accelerate strategic investments in our roads and bridges, transit systems, Bradley Airport, and our ports and stop diverting funds from the Special Transportation Fund to close holes in the budget or for other purposes.
A Good Start
Is Connecticut capable of solving those problems? Rathgeber is optimistic, citing past cases when policymakers and stakeholders pulled together to achieve positive outcomes when there were major problems that needed fixing. Examples include the sweeping workers’ compensation reforms of the early 1990s (which cut the state’s workers’ comp costs by an average of 50%) and, more recently, strides made in reforming Connecticut’s education system, reducing energy costs, and streamlining environmental permitting processes.
In all of these areas, CBIA has played an influential role in advocating for changes and educating policymakers about complex regulatory and other issues and the economic implications of failing to act.
Talent. In the last few years, the state has taken significant steps to ensure that Connecticut’s talent pool remains among the best in the country, says Rathgeber.
“The passage of landmark school reform legislation in 2012 will raise student achievement and help close the state’s achievement gap between students from low-income families and their more affluent peers,” he says, “but we need to continue to follow through on implementing the provisions of the law.”
The most recent national data from the National Assessment of Educational Progress (NAEP) suggest that the state’s education reform efforts are beginning to pay off. In 2003, for example, 37% of eighth-grade students were performing at or above the proficient level in reading. In 2013, 45% of students are performing at or above proficient.
In a statement released Nov. 7, the Connecticut State Department of Education observed that regarding the 2013 reading results for grades 4 and 8, no other state has a score that can be considered statistically higher.
In math, there is a bit more room for improvement. Although students continue to perform slightly above the national average, 10 states have statistically higher scores in grade 4, and 15 states statistically exceed Connecticut’s performance in grade 8.
Perhaps the best news is that Connecticut’s embarrassingly wide achievement gap appears to be narrowing. NAEP data can be used to rank states in 12 different ways regarding the size of their achievement gaps. In 2011, on seven out of these 12 indicators, Connecticut ranked first in the nation for the size of the gap. Based on the 2013 NAEP results, Connecticut ranks first in five out of 12 indicators: two fewer than last time.
“This means that Connecticut no longer ranks first in the nation on a majority of gap measures, which was a particularly dubious distinction,” says Stefan Pryor, state commissioner of education. “By no means should we declare victory based upon these rankings, but it’s certainly encouraging to see them moving in the right direction.”
The state has also moved to shore up higher education, implementing a sweeping plan in 2011 to overhaul its higher education governance and structure, a move designed to provide more resources for classroom instruction and graduate more students prepared to enter the workforce. It resulted in the consolidation of the Connecticut State University System, the regional community-technical colleges, and the online Charter Oak State College under a single Board of Regents for Higher Education.
Additionally, in 2012, the state Board of Regents selected three community colleges for the creation of manufacturing centers to meet the state’s manufacturing workforce needs.
At UConn (which is not under the purview of the Board of Regents), the state’s Next Generation Connecticut initiative, signed into law last June, is an ambitious program to boost the university’s standing as a research institution and increase the number of faculty and graduates in science, technology, engineering, and math (STEM) fields.
Energy policy. The passage of a bill largely based on the governor’s Comprehensive Energy Strategy earlier this year provides opportunities to control Connecticut’s energy costs: perennially among the highest in the nation and a significant barrier to business investment.
Among other things, the new law provides for increased use of natural gas and large-scale hydroelectric power as a way of moderating costs and increasing the state’s energy options.
On the natural gas side, however, an October report by the U.S. Energy Information Administration indicates that New England won’t see the benefits of planned pipeline expansions from the Marcellus Shale region until 2016, emphasizing the need for Connecticut to maintain a diversity of energy sources: and continue to increase energy efficiency, one of the state’s strong suits.
According to the American Council for an Energy Efficient Economy (ACEEE), Connecticut ranks fifth in the country for energy efficiency, up one place from last year.
“Joining Massachusetts in the top five are California, New York, Oregon, and Connecticut,” stated the ACEEE report. “These states continue to comprise the group of truly leading states that have made broad, long-term commitments to developing energy efficiency as a state resource. This is the first year that Connecticut has placed in the top five since 2009.”
Access to capital. In this year’s General Assembly session, lawmakers found ways to achieve some targeted gains for the business community, continuing the state’s Small Business Express grant/loan program, with an additional $60 million gained from the reallocation of small business development funds and the sale of $20 million in bonds.
A new law also allows the state Department of Economic and Community Development to give preference in the awarding of grants and loans to businesses seeking to sell their goods or services to new foreign markets. In addition, a law was adopted requiring DECD to develop a plan to facilitate the growth of the bioscience and pharmaceutical industry in southeastern Connecticut.
Regulatory climate. “Clearly the governor is serious about reducing the regulatory burden on business,” says Rathgeber, referring to an executive order issued by Gov. Malloy in October requiring all state agencies to conduct an independent review of regulations more than four years old in order to identify any that are ineffective, duplicative, outdated, or unnecessarily burdensome.
Rathgeber also points to recent strides made by the Department of Energy and Environmental Protection (DEEP) to streamline the state’s permitting and licensing processes. DEEP Commissioner Dan Esty, speaking at CBIA’s 2013 Annual Meeting in October, said that the department has reduced the time it takes to issue permits by 75% and “now has 90%-plus of our permits out the door in 60 days or fewer.”
Eric Brown, CBIA’s director of energy and environmental policy, applauds DEEP’s efforts but understands, as does Commissioner Esty, that there is more work to be done.
“DEEP needs to strive for greater consistency and predictability in its decision-making,” says Brown, “and continue to instill in each of its employees an appreciation for the link between a healthy economy and a healthy environment.”
There is much more work to do in many other areas as well: particularly when it comes to fiscal issues: if Connecticut is to become truly competitive. Fortunately, the state already has a host of competitive strengths that can serve as the building blocks for continued progress.
In fact, some indicators suggest that Rathgeber’s top-20 benchmark may not be that far out of reach.
For starters, Connecticut already ranks in the top 10 in two indexes focusing on science, technology, and innovation:
The Milken Institute’s State Technology and Science Index 2012: which evaluates every state’s tech and science capabilities and their success at converting those assets into companies and high-paying jobs: ranks Connecticut ninth in the country. The state was also ranked ninth in 2010, the last time the Milken index was released.
The Information Technology & Innovation Foundation’s 2012 State New Economy Index also has Connecticut at number nine, based on its capacity to adapt to the new technology- and innovation-based economy. (Unfortunately, ninth place represents a drop from the prior New Economy Index, in 2010, when Connecticut was ranked fifth).
“Connecticut’s success is not based on any one area or indicator,” says the ITIF. “In fact, Connecticut does not rank first on any of the 26 indicators; however, the state scores highly across most indicators, having a highly educated population, strong defense and financial industries, and robust R&D investment.”
Indeed, several individual indicators across a spectrum of economic categories compiled in the 2013 Connecticut Economic Review* tell the story of a state with a lot going for it.
Home to numerous world-class businesses on the cutting edge of technology and innovation, Connecticut is number one in the country in business R&D per capita ($3,162: 2.5 times higher than the national average); eighth in patents per 100,000 workers (130.6); and sixth in scientists and engineers per 100,000 employees (653).
The Nutmeg State is also seventh in venture capital deals per million residents (15.4) and seventh in contract awards from the U.S. departments of Defense and Homeland Security ($12.6 billion).
A productive, well-educated workforce, traditionally one of Connecticut’s greatest assets, is still a bright spot, although having enough skilled young people to replace an aging workforce has become a concern in recent years. Currently the state ranks third in the country in the percent of its population with master’s, professional, or doctoral degrees (15.3%), behind only Maryland (16.4%) and Massachusetts (16.7%); and fourth in the percentage of population with a bachelor’s degree or more (36%).
The value of a highly educated workforce can be seen in Connecticut’s economic productivity. The state is fourth in per capita gross state product ($64,258: 34% above the national average) and 10th in per capita exports ($4,484: 16% above the national average). In addition, each Connecticut manufacturing worker creates $278,654 in added value, 6.7% more than the national average ($261,261).
Connecticut also ranks in the top ten when it comes to quality-of-life indicators, another of the state’s traditional strengths. For example, the percentage of our population living in poverty is third lowest in the country at 7.2%; and the state’s rate of property crimes per 100,000 people is eighth lowest.
In addition, Connecticut is the sixth healthiest state overall, has the third lowest percent of adults who smoke, the seventh lowest obesity rate, the fourth lowest infant mortality rate, and the eighth highest number of residents with health insurance.
A Lot at Stake
Building on those strengths and continuing to address the state’s fiscal problems, high business costs, transportation infrastructure, and other issues holds the key to creating a more economically competitive Connecticut. And that matters, says Rathgeber, not only to businesses but to the individuals and families who call Connecticut home.
“Competitive states attract the private-sector investments that are critical to a growing, vibrant economy, one that creates good jobs and opportunities that offer family-supporting wages and the excellent quality of life Connecticut is known for,” he says.
At the same time, he points out, noncompetitive states will be plagued with high unemployment and be home to a growing number of families “stuck in generational poverty.”
Rathgeber believes it’s important to play up Connecticut’s strengths, but, he says, we also need to encourage all our public officials to adopt what Michael Porter of the Harvard Business School calls a “laserlike focus” on improving our economic competitiveness. That’s possible, he argues, if we pull together as we have in the past when faced with complex problems.
“Whether in government or the private sector, we need to work together: listen to one another as colleagues, not as competitors: with the shared goal of securing a brighter future for our state,” says Rathgeber. “It’s not about pointing fingers or assigning blame; it’s about getting something positive done for Connecticut.”
* The 2013 Connecticut Economic Review is sponsored by Connecticut Light & Power and Yankee Gas. Now in its 15th year, The report relies on the latest data from government sources, such as the U.S. Department of Commerce, the Bureau of Economic Analysis, the U.S. Census, and the Bureau of Labor Statistics, as well as various private sources, including universities and think tanks.
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