Looming fiscal crisis biggest challenge for 2013 state legislature and biggest threat to Connecticut businesses

By Bill DeRosa

The 2012 elections feature some high-profile contests in Connecticut, most notably the U.S. Senate race between Democrat Chris Murphy and Republican Linda McMahon and the 5th District U.S. House of Representatives race between Democrat Elizabeth Esty and Republican Andrew Roraback. And, of course, all eyes will be on the presidential election.

Perhaps most significant for residents and businesses in the Nutmeg State, however, is the fact that all 187 General Assembly seats are up for grabs: 36 in the Senate and 151 in the House. Twenty-eight seats (four in the Senate and 24 in the House) are open, meaning that the incumbents are not running or lost their primaries.

"The media will continue to pay attention to the glamour races," says CBIA President and CEO John Rathgeber. "But when it comes to the impact on people's lives and Connecticut's economic competitiveness, what happens at the state legislature is just as important or maybe even more so."

And since state legislative contests are often decided by very slim margins, single votes can make a big difference.

"In 2008, Barack Obama won the presidential election by six million votes," recalls Lisa McGuire, CBIA's director of public affairs. "In Connecticut, one state representative won by three votes. In 2010, there were 10 state races decided by fewer than 100 votes, so your vote matters."

And so do the candidates we elect. Although many factors affecting Connecticut's economy are outside the influence of state policymakers, the people we choose to represent us in Hartford can have a big impact on economic competitiveness, says Joe Brennan, CBIA senior vice president of public policy.

"We hear from employers regularly, not just about one specific bill or regulation, but often about the overall business climate in Connecticut and the general tone of the legislature, which can determine whether they grow their companies and create jobs here or elsewhere. Do lawmakers want to work cooperatively with the business community to find ways to make economic growth a priority, or are they constantly debating and sometimes passing laws that increase the cost of doing business or the regulatory burden on businesses?"

Challenging Session Ahead

In odd-numbered years, the Connecticut General Assembly is in session for approximately five months, two months longer than in even-numbered years. For lawmakers elected to the 2013 legislature, that may be a good thing, because they'll have their hands full.

The first order of business in next year's session (Jan. 9-June 5) will be to adopt a new two-year state budget for fiscal years 2014 and 2015: no easy task, says Rathgeber, pointing out that on Aug. 1, State Comptroller Kevin Lembo projected that the state would end Fiscal Year 2012 with a $120.3 million deficit. (The gap will be closed using funds slated to pay down borrowing the state did to balance the 2009 budget.)

"A lot of attention will be on lawmakers and whether they recognize that the state has finite resources and understand the need to trim the bureaucracy and focus on those services that most directly affect people's lives," says Rathgeber. "Unless the economy turns around dramatically, including growth in the financial markets, we're likely to be facing more serious short-term deficits as well as long-term unfunded liabilities that must be addressed."

Adding to that challenge is the fact that as the federal government grapples with its own budget problems, more responsibilities are being transferred down to the states.

All that translates into a high-stakes legislative session: and a high-stakes election.

"The people we elect to the state legislature will make important decisions that will greatly influence our fiscal position and economic competitiveness," says Rathgeber. "We need people who are willing to be serious about leaning the size and scope of government, making it more affordable for people and employers in the state so that they can make investments and create opportunities."

Short-Term Deficit Risk

The immediate hurdle for lawmakers in 2013, says Brennan, is crafting a state budget that will stay in balance without further dampening consumer and business confidence by increasing or adding taxes and fees. Whatever shape the new budget takes, it will have to account for the possibility of lagging state revenues if the economy continues to grow slowly, and that's where spending reductions must play a role.

"The short-term deficit risk is tied to state spending policy, not just potential revenue shortfalls that can result from an underperforming economy," he says, referring to the state's inability to achieve the spending reductions promised in 2011. "So, the challenge for the legislators who get elected in November will be to balance the budget without any additional tax increases during a time when our economy is still struggling."

In FY 2012, although revenue from the withholding portion of the state income tax was up 18.3% from the previous year, the estimated payment portion of the tax: related to capital gains and bonus payments: increased by only 5.9%, which was lower than historical post-recession patterns. As a result, at press time, General Fund revenue for FY 2012 was expected to come in $194.4 million short of original budget projections.

Rathgeber cautions against blaming the 2012 deficit on lower-than-expected revenues, however. He cites the deficit as evidence of the structural instability that's built into Connecticut's tax system, stemming from an overreliance on income tax revenue from capital gains, financial-sector bonus payments, dividends, and interest: historically unreliable sources because they fluctuate with the ups and downs of the financial markets.

"We should be concerned when we hear reports about how revenue didn't grow enough despite regular income tax revenue growing by more than 18% and claims that the deficit stems from a revenue problem rather than a spending problem," he says. "The state was expecting revenue from its taxes on capital gains, dividends and interest income, and bonus payments to be higher than it was. That tells you just what a volatile tax structure state government has created. People don't always earn big bonuses, and some years they get none."

Spending-Side Strategy

To avoid budget deficits going forward, CBIA Vice President and Economist Pete Gioia identifies several steps he believes the 2013 state legislature should take: steps he says could yield hundreds of millions of dollars in short-term savings:

  • Take a hard look at what other states have done in key budget areas and don't be afraid to steal good ideas and implement them aggressively.
  • Do more to transition the state's long-term care system from a reliance on institutional care to home care, a much more desirable, less expensive approach.
  • Develop a more comprehensive, coordinated strategy for intervening in failed family situations so that over time, these family members: particularly the children: become productive, working, taxpaying citizens with brighter futures. "Taking steps to address this issue can have short-term fiscal benefits and enormous long-term benefits," says Gioia. "To date, efforts have been fragmented and, for the most part, ineffective."
  • Secure the $1.6 billion in cost savings identified in the 2011 agreement with state employee unions.

"Hundreds of millions of dollars in union concessions and other savings have not been realized," says Gioia, recalling the savings that were supposed to come from sources such as state employees' cost-cutting suggestions and better use of technology in state government.

"As far as we can determine from talking with the state Office of Fiscal Analysis and the Office of Policy and Management, we don't see where those savings are. There needs to be an effort to sit down with the unions and secure the cost savings that were promised or get everyone back to the table and identify alternative ways of meeting savings goals. And there needs to be transparency in terms of communicating what is and is not happening."

Long-Term Obligations

In its Fiscal Accountability Report published Nov. 15, 2011, the state Office of Policy and Management indicated that Connecticut's long-term debt totaled $71.6 billion: $20,450 for every man, woman, and child in the state. The main culprit is the state's huge unfunded liability for state employee pensions and retirement health and life insurance benefits.

A report released in July by the nonpartisan Institute for Truth in Accounting (IFTA) indicated that Connecticut's unfunded retiree health benefits alone came to more than $29 billion as of June 30, 2011. The IFTA noted, however, that a subsequent report by Connecticut's outside actuarial firm showed an $11 billion reduction in that figure resulting from bargaining with state employee unions and changes in various assumptions, which may or may not prove valid over time. Nevertheless, the IFTA said that the remaining approximate $18 billion in unfunded health benefits is still too high and referred to Connecticut as "the Greece of the U.S. from a state financial perspective."1

Taken together, the risk for short-term budget deficits and the state's massive long-term obligations are eroding the confidence of employers in the state as a place to create and keep good jobs.

"A lot has been written and discussed about the state's unfunded liabilities," says Brennan. "And although we have made progress in some areas, reducing those liabilities is still an enormous challenge. There is still concern that between unfunded obligations and insufficient control over state spending, additional tax increases are a strong possibility for a lot of companies."

To be sure, says Gioia, there have been some improvements, for which Gov. Malloy should be congratulated.

"He's had more success than any other governor in recent history in achieving significant long-term savings." Gioia cites changes in pension and healthcare benefits rules and contributions and other steps. "Outside actuarial firms have projected over $20 billion in long-term savings."

He cautions, however, that there's a lot more work to do.

"We still have tens of billions of dollars in long-term unfunded liabilities, so obviously a second effort is needed to enact the structural reforms necessary to reduce the cost of government and avoid further tax increases. Whether it's an actual initiative or preparations for steps to take when state employee contracts change, there has to be an expectation that the status quo over the long-term is not acceptable."

Beyond the Budget

CBIA will be working hard to convince newly elected legislators not only to adopt a new two-year state budget that leans state government and addresses our long-term debt but also to act on a number of other business-critical issues, including upgrading the state's transportation and energy infrastructures.

"We must create a more modern, integrated transportation system: roads, bridges, and transit options: to ensure businesses have ready access to existing and emerging markets," says Rathgeber. "At the same time, there is a clear need to improve our interstate energy transit and intrastate distribution systems in order to take advantage of opportunities to bring low-cost electricity and recently discovered natural gas supplies into the state for commercial and residential customers."

On the regulatory front, good progress has been made on streamlining and clarifying rules and processes and convincing state agencies to adopt a more helpful rather than "gotcha" approach to enforcing compliance. But, says Rathgeber, we need to go further by:

  • Constantly benchmarking ourselves against other states so that we can keep pace with them as they improve their ability to be responsive in the regulatory arena
  • Ensuring that if the state is going to make a regulation in a particular area more stringent or restrictive than the federal government does, regulators are held to a very high standard when it comes to proving that the regulation is in Connecticut's best interest

Another key task for next year will be to see that the education reforms passed this year are implemented effectively, both at the state Department of Education and at the local level.

"Policymakers will need to make sure that the reforms are implemented in a way that makes real progress in improving student performance and closing the achievement gap," says Rathgeber. "If it turns out that the reform package is missing pieces necessary to fully achieve those goals, then measures to put those pieces in place should be put forward. The key is the correct implementation of the framework that was passed."

Right Time for Small Businesses to Speak Up

Employers and their employees throughout Connecticut can have a say in the direction of the 2013 state legislature. The first step is learning about the candidates' positions on economic issues and challenging them to explain specifically what steps they will take to cultivate investment and jobs and solve the state's ongoing fiscal problems.

"Two years ago, our economy was in tough shape," says Brennan. "All the candidates for the state House and Senate ran on a jobs platform, yet during the session, many voted for measures that have or would have increased costs for businesses and made it harder for them to expand and create jobs. So a good question to ask candidates is, What will you do to create a more competitive private sector that enables employers to grow their companies and increase hiring, and will you fully commit to following through and making good on those promises?"

Rathgeber reminds CBIA members also to talk to candidates and other voters about the challenges of running a business in Connecticut.

"Too many people have no idea about the barriers to being successful in operating a business in this state," he says. "You don't have to be loud about it, but you can be honest about it. Most people are concerned once they learn what those barriers are and why it's important to eliminate them. You can use any forum available, whether it's an organization you belong to; informal discussions with colleagues, friends, and family; or social media. I urge all our members to learn about the issues and become active practitioners of democracy."

He also argues that small-business owners in particular need to communicate with candidates, noting that although most politicians claim to support small employers, they sometimes aren't clear on what that means in terms of the policies needed to remove barriers and create growth opportunities for smaller companies.

Often, however, small-business owners may feel that unlike large corporations, they don't have the influence to get politicians' attention. That's not true, says Rathgeber.

"Many candidates will be more comfortable talking with small businesses than with large companies. It's more their experience base. They share a sense of trust with small- business owners and see them as part of the fabric of their community."

CBIA: Your Election Connection

During this election season, CBIA is providing a variety of opportunities to get engaged and influence the political debate. Our Election 2012 website has all the news, information, and tools you need to identify your candidates, let them know what you think, and ask them the tough questions. The site includes:

  • A listing of all the candidates running for state and federal office and their profiles and contact information
  • A tool for identifying candidates from your district and making comparisons
  • The voting records of all 187 state legislators on key business bills over the last two years (see special insert this issue)
  • Links to forms and resources, such as voter registration cards and absentee ballot applications
  • A calendar with key campaign- and election-related dates, including debates taking place around the state
  • Social media feeds from the candidates

In addition, CBIA is sponsoring Business Meets Politics Week from Oct. 15 through 19: a unique opportunity for companies to invite candidates to their facilities and for employees to learn about the candidates' positions on business-critical public policy issues.

"It's a great chance for business owners and employees to put a face to the names they see on the lawn signs around town," says CBIA's Lisa McGuire.

For additional information about how you and your employees can become more engaged voters, contact any of the members of CBIA's public affairs team:

Bill DeRosa is editor of CBIA News. He can be reached at bill.derosa@cbia.com.