What Will It Take to Get Connecticut Employers Hiring Again?

It’s no surprise to anyone who’s read a newspaper that Connecticut’s economy has received some bad publicity over the last few months. CNBC ranked our state as the 45th best place for business in the country. Forbes recently published an article titled, “How Did Rich Connecticut Morph into One of America’s Worst Performing Economies?” And an article in the Aug. 2 issue of The Economist pointed out that Connecticut is second only to Illinois in unfunded state employee pension liabilities and that the shortfall is 190% of our revenue.

In addition, our unemployment rate is still hovering around 8%, we had a shrinking GDP in 2012, and there’s been a flight of wealth from Connecticut over the last several years.

Connecticut’s Underlying Strengths

That’s the bad news, but considering Connecticut’s economic assets, there is something we can do about it. Connecticut has a diversity of world-class, economic base industries that are the envy of many states and many parts of the world. Companies in these industries: advanced manufacturing, healthcare, financial services, biotech, and others: pay very high wages, provide excellent benefits, and support local schools, charities, and other community organizations.

They’re often cited not only as being good places to work but also good stewards when it comes to protecting Connecticut’s environment and quality of life. Many sell their products regionally, nationally, and internationally: Connecticut ranks eighth in per capita exporting: which creates wealth back in our state and the opportunity for strong local economies.

Connecticut is also number one in the country in private-sector R&D investment, an often overlooked fact.

It’s no wonder, then, that our companies are constantly recruited by other states.

In the 2013 CBIA/BlumShapiro Survey of Connecticut Businesses, 56% of manufacturers responding said they’ve been actively recruited by another state in the last five years. Clearly, we have something that other people want, so we can’t continue to make it more difficult to do business here than it is elsewhere.

Other assets include Connecticut’s excellent quality of life, cited by 54% of survey respondents; our location near customers and major markets, such as New York and Boston (41%); and our skilled workforce (32%), which has traditionally been the state’s most recognized strength.

Our workforce is the most productive and innovative in the country. It has given companies the ability to justify making investments here in order to maintain and grow their operations. That workforce, however, is aging, and there are questions about the ability of the future workforce to drive leadership in the 21st century economy as that economy continues to become more complex and demands increasingly higher-level skills.

A Crisis of Confidence

So, given all of Connecticut’s strengths, why aren’t we doing better? The bottom line is that most business leaders in Connecticut do not have confidence that state government is on their side. In our survey, 80% of the respondents: the highest percentage in the 36 years I’ve worked at CBIA: had a negative or somewhat negative opinion of Connecticut as a place to operate a business.

Harvard Business School professor Michael Porter has said that the most important thing that the federal government should be addressing is improving our economic competitiveness. He defines economic competitiveness not as being the cheapest place to do business but the best place to do business. He argues that unless government focuses on improving our economic competitiveness, individuals, entrepreneurs, and businesses will choose to make investments elsewhere, because it’s in their economic best interests to do so. If that happens, we’ll accept lower wages and a lower standard of living. On the other hand, if we succeed, we’ll be able to sustain a higher living standard and create opportunities for advancement throughout society.

When you think about competition, you can’t think locally. Our competition is not New Jersey, New York, Massachusetts, or Rhode Island. Our competition is national; it’s global. And money is going to go where there is the best opportunity for a return on business investments. We have to start thinking in those terms.

Number-One Priority: Better Fiscal Policy

Is it possible to change our direction? Absolutely, but it’s going to take two major changes. It’s going to take a willingness to address serious issues that have gone unaddressed for too long, and it’s going to take a change in attitude on the part of state government toward the for-profit employer community.

The most important issue in my mind and according to our members is fiscal policy. If the General Assembly and the executive branch can work together on fixing our short-term and long-term fiscal problems, it would be the best job creation program in the state.

Business leaders consistently tell me that our continuing 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. When asked in an open-ended question what single action state government could take to grow Connecticut’s economy, respondents to our survey overwhelmingly cited a reduction in state spending.

State Spending

Since 1992, state spending has grown by more than 153%. (By comparison, median household income has grown by only 60%; inflation, 66%; and Connecticut’s population, 9%.) But have we seen a corresponding change in the quality of our schools and our roads and bridges? Have we seen lower property taxes at home?

The problem is that higher spending in other areas accounts for much more of the 153% increase: The cost of corrections is up 178%; Medicaid, 180% (driven in part by nursing home care for the elderly); debt service, 204%; pensions for state employee retirees, 583%; and state employee retiree health care benefits, 981%.

So given where that 153% increase in overall spending is going, it’s easy to understand the difficulty in directing funding to areas where most people in Connecticut would want their tax dollars to go: improved schools, improved roads and bridges, and increased support to local communities to hold down property taxes. So we not only have an increase in spending beyond our ability to pay, we also have a disconnect between the priorities people have and where the spending is actually going.

Fiscal Solutions

Groups such as the Connecticut Institute for the 21st Century, former U.S. Comptroller General Dave Walker’s Comeback America Initiative, and CBIA have published numerous reports detailing practical ways of reducing state spending in order to break Connecticut’s cycle of budget deficits.

When it comes to Medicaid, for example, we’ve made some progress in rebalancing elder care to rely more heavily on less expensive, more desirable home care versus nursing home care. But much more can be done to control medicaid expenses.

In the area of corrections, we can reduce recidivism by following the best practices of other states that have succeeded in this area.

We could also use our nonprofit community to deliver more of our social services less expensively. We have some of the best nonprofit providers in the country right here in Connecticut, but we underutilize them.

Dealing with the massive growth in the cost of state employee retiree benefits doesn’t mean eliminating benefits or pensions, but there are things we should be doing. For example, we shouldn’t allow people to spike their overtime in the last several years of their employment so that their pension ends up being higher than their base pay. We should be looking at changing the normal retirement age from 62 to 65, and the rule of 75 to a rule of 90. Those are not draconian measures. For newer state employees, we certainly should consider either hybrid pension plans or defined contribution plans in order to rein in expenses.

Impact of a Volatile Tax Climate

The other big fiscal issues are our long-term financial obligations, which are among the highest of any state in the country. They include our bonded indebtedness and unfunded liabilities for future state employee retiree pension and health benefits. All of this creates uncertainty regarding the future tax structure in Connecticut, which in turn, has a chilling effect on business investment.

For example, if you’re thinking about making a major business investment, you’re looking at a payback over a period of time. But if you have little confidence that the tax climate won’t change for the worse, then it’s more difficult to justify that investment.

In the early 1990s, Connecticut created a strong R&D tax credit, which incented a number of companies to come to the state and invest their own money in order to take a credit against their corporate income tax. Several years later, however, the legislature reduced the value of the corporate tax credit from 100% to 70%. For those companies that made a major investment in Connecticut, this change undermined their confidence in the state and had a negative impact on future investments.

The 2011 tax increases, particularly the hike in the personal income tax, negatively affected many small businesses and entrepreneurs. Even though the rates didn’t change dramatically, the computation of the tax was adjusted. So if you were a small business with an adjusted gross income between $400,000 and $700,000, you lost the value of the marginal rates as you went up. If you were at $700,000, you got about a 35% tax increase. It’s hard not to notice a 35% tax increase in one year and not have it undermine your confidence in the state of Connecticut.

Other taxes, such as the property tax and sales and use taxes, are substantial, but I would also argue that we’re exporting wealth from the state because of our estate and gift taxes. Connecticut is more restrictive than most other states when it comes to estate tax exemptions and is one of only two states with a gift tax. The gift tax was a particular drain on Connecticut’s economy as we went from the end of the Bush tax cuts last year, as individuals were looking to take advantage of the federal law’s more generous provisions.

Education and Workforce Issues

Year after year, Connecticut pumped more money into failing school systems and thought doing so would change the outcomes, despite continuing disappointing results. Last year, the legislature passed an education reform bill with the governor’s leadership and bipartisan support. It provides the framework for improving educational outcomes: and closing Connecticut’s worst-in-the-nation educational achievement gap between children from low-income families and their more affluent peers.

Many people think the achievement gap exists because high-achieving students do so well in Connecticut. But the sad reality is that students at the low end do no better than those in some of the worst school systems in this country. And yet, those children can and do learn in the right environments. The bill has a framework for making progress, but it’s going to be a long, hard struggle to make sure it’s implemented effectively.

One barrier is that we have some of the most restrictive certification requirements of any state at the district and school levels, which prevent bringing in real educational talent from outside. Examples include former Hartford school superintendent Steven Adamowski, Bridgeport superintendent Paul Vallas, and superintendent of New Haven schools Garth Harries. All had extensive experience turning around major school systems: Adamowski in Cincinnati, Vallas in Chicago and New Orleans, and Harries in New York City: yet all had difficulty obtaining their Connecticut certification.

We can’t keep talent out. We’ve got to welcome talent. We’ve got to measure success. We’ve got to do things differently to make sure that our children get meaningful educations.

When it comes to workforce and economic development, we believe that the University of Connecticut is a critical part of the equation. UConn has improved over the last several decades, and there has been significant public-sector money invested in the university. But we need the improvement to continue, particularly in STEM: science, technology, engineering, and math: because every economic model out there relies on a public-sector research university to be part of the formula. And, of course, we have numerous excellent universities and colleges across the state of Connecticut, but we also need UConn to be able to attract research dollars and create partnerships with the business community.

Business Costs and Regulations

As has been widely publicized, business costs in Connecticut are among the highest in the nation. The two biggest areas of concern are energy and healthcare. When it comes to energy, we have opportunities to control our costs going forward, and the current administration has developed a broad agenda that includes increased use of natural gas and large-scale hydroelectric power, which will help over time. However, we also have to preserve the diversity of energy sources available to us and continue to promote energy efficiency. And it’s important that Connecticut make investments to take advantage of the energy revolution that is occurring in America. If we fail to do so, high energy costs will continue to be an economic disadvantage for our state.

When it comes to the regulatory climate, it would be a tremendous boost to our economy if the legislature spent more time thinking of ways of making it easier to do business in Connecticut. Every year the business community faces new mandates and must work through mazes of state and local regulations.

Some state agencies, however, have shown improvement. A survey conducted by CBIA’s Environmental Policy Council (EPC), for example, showed that the Department of Energy and Environmental Protection (DEEP) has made measurable progress.

The EPC mainly comprises larger companies with multistate operations that have to deal with the complexity of environmental issues: often in the manufacturing space: as well as attorneys and practitioners in that area. For the first time, last October, our survey data showed that they saw a significant improvement in reducing the time for permitting, the kind of support they were getting from DEEP, and the approach they were seeing in the regulatory process. Those are all good things. Now we have to make that more universal across all state agencies and at the local level.

Transportation Infrastructure

In 1999, Michael Gallis wrote a report for the Connecticut Institute for the 21st Century arguing that if the region didn’t have a strategic policy linking its different transit assets, Connecticut would become an economic cul-de-sac. Our inadequate transportation infrastructure would cut off the potential for economic growth in the state.

Fourteen years later, we have yet to develop a regional strategy, and Gallis’s advice is more important than ever. We must ensure that goods and services can move quickly and efficiently in and out of our state if we’re is going to be competitive in the global economy.

Economic Competitiveness Is Good Politics

A change in attitude on the part of state government toward the for-profit employer community is the other part of the equation when it comes to moving Connecticut in a different direction.

As the late Democratic U.S. senator from Massachusetts Paul Tsongas was fond of saying, you can’t be pro-employee and anti-employer. A successful business must have good employees and good employee relations, and employees need profitable companies in their communities if they are going to have good jobs.

It’s time we take Tsongas’s message to heart and get back to making good economic policy a bipartisan effort and good politics on both sides of the political aisle. But that’s not going to happen unless many more voices are heard in the General Assembly. We need to be able to engage the public, and if you’re an employer, you need to engage your employees. That doesn’t mean telling them who to vote for but explaining the reality of what you’re dealing with as an employer in this state. Tell them about the challenges you’re facing and what it would mean if you could overcome those challenges. Paint the picture of the future of this state as being very strong if we make Connecticut economically competitive.

Michael Porter is absolutely right. Our laser focus in Connecticut should be to make our state the best place for companies: particularly those companies that are already here: to invest and grow. Imagine what our economy would look like if the investments our companies are making outside the state were being made in the state. And quite frankly, it would be easier to make them here if the environment was right.

We have to make economic competitiveness good politics, and we have to challenge the voices that say that a government program is needed to solve every problem. Often, the best solution for addressing a social problem is a good job. Restoring business confidence in the state is the key to unlocking the private-sector investments necessary to achieve that goal. I hope you’ll join us in getting that message across.

John Rathgeber is CBIA’s president and CEO. He can be reached at john.rathgeber@cbia.com. This article is based on a talk he delivered as part of the Connecticut Policy Institute’s Lunch Briefing and Policy Discussion series on Aug. 6 at UnitedHealthcare in Trumbull. A video of the presentation is available here.