Changing the Way Connecticut Does Business

On Dec. 9, state lawmakers approved spending cuts and modest business tax reductions in a special legislative budget session called to address Connecticut’s ongoing fiscal issues.
Acting largely on party lines, the Democrat-controlled legislature cut $350 million in spending for the current fiscal year and about $210 million from next year’s budget.

While state lawmakers closed the current year shortfall, the legislature’s nonpartisan Office of Fiscal Analysis had been projecting these deficits prior to the latest budget cuts:

• FY 2017—$552 million
• FY 2018—$1.72 billion
• FY 2019—$1.87 billion
• FY 2020—$2.21 billion

CBIA president and CEO Joe Brennan calls the Dec. 9 legislation a “necessary step” toward mitigating the fallout from the two-year budget passed earlier this year and solving the state’s long-term fiscal problems.
“While there were some modest tax reductions and progress on the spending side, it certainly wasn’t everything the business community was looking for,” says Brennan.
“We wish more was done on the structural reforms that the state really needs so that we can deal with the budget deficits coming up next year and years after.”
The special session followed weeks of discussions between Gov. Malloy and Democrat and Republican legislative leaders.
Bipartisan Process
While those discussions didn’t result in bipartisan agreement—no Republican lawmaker voted for the deficit mitigation bill—Brennan notes the importance of having both parties involved in the process.
“Even though the Republicans didn’t support the bill in the end, they played a big role in this,” he says.
“We give the governor credit for making these discussions bipartisan, which helped move the ball down the field. He took the lead on this to try and make Connecticut more business friendly because of everything that happened over the last year.”

In a statement released after the special session, Gov. Malloy said that while the legislature’s action made important changes to the tax code and provided savings in future fiscal years, more needed to be done.
“The legislation passed tonight is not perfect, but it helps make progress for the State of Connecticut this fiscal year and beyond,” he said.
“We no doubt have more to do in the General Assembly session ahead [in 2016], but this is a positive step to improve the state’s business climate and deliver long-term predictability that will allow our families and businesses to thrive.”
Business Tax Cuts
Prior to the December special session, the governor and many lawmakers acknowledged that the state’s fiscal health directly impacts economic growth and job creation, a fact that has been central to CBIA’s message for years.
“Solid state fiscal policy gives business leaders assurance that they can predict tax liability over the span of their investments,” says CBIA economist Pete Gioia.
“Poor or uncertain fiscal policy leaves them guessing.”
Recognition of this fact led policymakers to roll back some of the business tax increases adopted in the budget earlier this year.
Business tax policy changes adopted in the deficit mitigation plan include:

• Restoring corporate tax credits—allowing credits of 50.01% of a company’s tax liability in 2015; 55% in 2016; 60% in 2017; 65% in 2018; and 70% in 2019
• Modifying unitary combined reporting by adopting a single sales factor system and capping the amount of increased tax liability to $2.5 million
• Easing restrictions on the net operating loss carryforward that companies can claim as a deduction against corporation taxes—restrictions that threatened much-needed investments in research and development
• Providing a 15-day exemption to the personal income tax for employees who come into Connecticut for business development activities, such as training

Other Moves
The special session also saw lawmakers create a commission to study the state’s constitutional spending cap, which Attorney General George Jepsen recently said has “no legal effect” because the legislature never ratified it into law.
Connecticut voters overwhelmingly approved the spending cap in 1992 after the state income tax was instituted, but policymakers have found ways around it for many years.

The legislature also restored about $30 million in funding to hospitals, diminishing some of the impact of earlier cuts.
About $135 million in General Fund savings for this fiscal year will come from diverting or sweeping other funds, including the public university and college reserve accounts, and the Biomedical Research Trust Fund.
Lawmakers also postponed a $35 million payment to the Special Transportation Fund.
“Some of what was done results in one-time savings, moving things from one fund to another,” says Brennan.
“That’s not going to solve our problems going forward, and lawmakers must keep that in mind in the 2016 legislative session, which begins next month.”
Long-Term Reforms: Now Is the Time
Brennan says it is critical that lawmakers focus on structural reforms to keep state government spending within taxpayer’s means.
He cites a number of proposals, including delivering essential state services and programs at a lower cost, criminal justice reforms, and aligning state employee compensation and benefits more closely to what is offered in the private sector.
Lawmakers made some progress on structural reforms in last month’s special session, creating a task force to evaluate the efficiency of state services that cost, on average, more than $250,000 per recipient annually.
In addition, OFA will now be required to issue quarterly reports on the use of overtime in each state agency in an effort to rein in state employee compensation costs.
A key to implementing the right structural reforms in Connecticut is learning what changes other states have made to deliver services and carry out the core functions of government more cost-efficiently and effectively.
“It comes down to how you manage agencies,” says Gioia.
“Our government leaders must promote a culture of learning from others, realizing that 49 different experiments are taking place trying to address many of the same challenges we face.
“With some exceptions, the state hasn’t been as aggressive as it needs to be in learning how other states are solving these problems.
“We need to become the best adopter of the best solutions and practices and rapidly implement them as a change in the way we do business in Connecticut.”
Achieving that goal involves change at many levels of state government, including the adoption of a more thorough, comprehensive, and complete approach to lean management of all state agencies.
Every agency, Gioia argues, needs to find out now if they are taking actions that are not mandated by laws or regulations.
“Some state agencies have already begun to implement lean practices, and they frequently find that they are committing staff, time, and resources to things they are not actually required to do.”
The next step is to—as much as possible—get state workers out of the business of providing state services as opposed to managing the contractual provision of services.
“The areas in state government that scream out most for this change are information technology and the delivery of social services,” says Gioia.
Two areas where some progress has been made in effecting structural changes are the state’s corrections system and the rebalancing of long-term care from institutional care to more home-based care.
In both cases, however, much more work needs to be done.
“The state needs to find ways to accelerate the pace of change and eliminate any obstacles to change,” says Gioia.
“The governor’s Second Chance Society initiative, designed to reduce the prison population, is the right way to go, but it needs to target half the prison population, not just a small fraction of it—probably 1,000 prisoners out of about 16,000 at this point.
“They’re still running the program as a pilot rather than as a systemic change. We need systemic change.”
Finding a Balance
Gioia also contends that systemic change is what’s needed when it comes to striking a better balance between state employee compensation and benefits and what the state can afford.
Here, as in so many other areas of state government, studying other states’ practices is a key to solving the problem.
“We need to take a look at the mix of public employee salaries and benefits in the other Northeast states, from Pennsylvania to Maine, and determine where they are, on average, compared to where we are. Then we need to adjust to that average.
“These are all pro-union states, and they’re not seen as particularly conservative, yet they do not compensate their state workers anywhere near as richly as Connecticut does.
“Policymakers need to find a balance with a fair state employee compensation package that is affordable for taxpayers.”
Transportation: Lock It and Lean It
In last month’s special session, the General Assembly was unable to push through a resolution seeking a 2016 referendum vote on a state constitutional amendment protecting transportation funding.
While the Senate unanimously approved the resolution, it passed the House of Representatives on a 100–40 vote, 14 votes short of the super majority needed to put the question before the state’s voters next November.
Proponents of the constitutional lockbox—designed to prevent legislative raids on dedicated transportation funds—saw the vote as a critical step toward gaining public and legislative support for investments in the state’s transportation infrastructure.
Gov. Malloy has said he will introduce another lockbox bill in the upcoming regular legislative session.
CBIA surveys have shown that member companies overwhelmingly support the concept of a constitutional lockbox for transportation funding.
“If you’re going to move forward with a massive new transportation plan, as the governor has proposed, taxpayers are going to want to know that money intended for transportation is being spent on transportation and not siphoned off for all sorts of other purposes, including deficit reduction,” says Gioia.
“Giving taxpayers assurances that their money is being used for transportation is an important step.”
Gioia also argues that more aggressive adoption of lean practices throughout the state Department of Transportation will allow planned major transportation projects to be completed on time and on budget.
Bullish on Connecticut
“Despite all the challenges the state faces, I am still very bullish on Connecticut’s future,” says Brennan.
“We just need to make smarter policy choices, and what happened in December shows that we’re starting to change our approach, but we still have a long way to go.
“It’s a challenge, and tough choices need to be made, but fiscal stability and predictability are critical to rebuilding the business confidence necessary for investment, economic growth, and job creation.”
Contributors: Bill DeRosa, editor, CBIA News; Dave Conrad, CBIA senior writer