The 2017 General Assembly session opens Jan. 4 with Connecticut, yet again, under a dark fiscal cloud.
Huge projected budget deficits and more than $74 billion in unfunded state pension and other liabilities continue to create business uncertainty and make funding economically critical state functions difficult.
But the beginning of the new year also holds the promise of new opportunities for Connecticut, as several economic bright spots emerge.
For starters, the latest employment report from the state Department of Labor showed that Connecticut employers added 2,100 jobs in November, reversing four straight months of declines.
The state’s unemployment rate fell four-tenths of a point to 4.7%, the lowest mark in nine years.
Another reason for (cautious) optimism is the success CBIA and its members had in backing candidates from both parties committed to fiscal reform and economic growth in November’s state-level elections.
For the first time since 1983, the Connecticut state Senate is evenly divided, with the GOP gaining three seats and creating a 17–17 split between Democrats and Republicans (another two seats are vacant following post-election resignations, one from each party, and will be filled through special elections).
Republicans also gained a net eight seats in the Connecticut state House, narrowing the Democrat majority to 78–72, with one vacant seat.
For CBIA President and CEO Joe Brennan, the upside is that we’re likely to see a more bipartisan approach to problem-solving in 2017.
“The numbers in the House and Senate are going to require lawmakers to work together to get things done,” he says.
“You get better results when you get the best ideas from both sides of the aisle and lawmakers have to reach consensus.
So we’re hopeful that we’re going to see better results when it comes to solving the budget crisis and finding ways to make the state more economically competitive.”
‘We Can’t Wait’
CBIA Vice President and Economist Pete Gioia encourages policymakers to move forward on those issues with a sense of urgency.
“The state elections gave us an opportunity to eliminate some serious negatives that have held back business investment and the economy in Connecticut,” he says.
“We have to seize upon it; we can’t wait.”
The state has tremendous economic potential, adds Gioia, likening it to a “magnificent horse” that’s been slow out of the gate.
“Connecticut is in a horse race, and while other states were quicker out of the gate, we’ve been slower because of prior fiscal mismanagement and deferred maintenance,” he said.
“How do we catch up and overtake the rest of the horses in the race?
“We need to do things that tell companies Connecticut is a good place to invest, which starts with cleaning up our fiscal mess and reducing the cost burdens and mandates that make companies feel it’s safer to invest elsewhere.”
One of the things that hurts our business climate is so many anti-competitive mandates either get enacted or considered in Connecticut first.
“One of the things that has hurt our business climate is that so many anti-competitive mandates either get enacted or considered in Connecticut first versus other states, and that has a chilling effect on companies’ desire to be here or invest here,” he said
“It’s bad enough to increase costs and regulations on business during periods of strong economic growth, but many of the proposals that have been considered here—and in some cases approved—have come when economic growth was poor and our business climate was already perceived as less than friendly.”
An example is the passage last year of a bill requiring businesses with five or more employees to enroll any full- or part-time employee not eligible to participate in an employer-sponsored plan into a retirement savings plan.
Employers are responsible for making payroll deductions and sending employee contributions to the plan administrators and could be subject to penalties for failing to do so in a timely manner.
The proposal was approved following a year in which Connecticut’s economy grew by just 0.6%, and the state placed near the bottom in many national business climate rankings.
“If bipartisanship holds sway in this legislative session, measures like that are less likely to be adopted or even get out of committee, and that’s a positive from the business community’s perspective,” says Brennan.
He also expects that by working across the aisle, legislators will be better able to come up with budget solutions that avoid further harm to the state’s economy and business climate.
“Lawmakers taking a more bipartisan approach gives us a better opportunity to build on last year’s success, when we closed a nearly $1 billion budget gap without increases in state taxes,” says Brennan, recognizing, however, that the immediate challenges this year are even bigger.
During this legislative session, the governor’s administration and lawmakers must produce a new, balanced biennial state budget in the face of some intimidating fiscal and economic realities.
To begin, they’ll be confronting deficits of $1.5 billion and $1.6 billion in fiscal 2018 and 2019 respectively, the two years covered by the next budget.
Long term, the state remains saddled by $74.3 billion in unfunded liabilities, including obligations for state employee pension and retirement health benefits.
To ease the annual budgetary impact of ballooning payments to the pension fund in future years, the governor and state employee unions struck a deal last month to spread out those payments over 30 years.
“Although no one likes to see these financial burdens passed on to future generations, there was no alternative in this case because of the enormity of the payments in the out years,” says Brennan.
It’s essential, however, that the state be able to reach an agreement on structural changes—for example, increasing employee pension contributions and eliminating the use of overtime in pension calculations—that would reduce the cost to Connecticut taxpayers going forward.
Contracts covering state employee pensions and benefits aren’t scheduled for renegotiation until 2022, but unless those talks happen much sooner, more layoffs and deep budget cuts across state agencies are likely in the coming months.
Poised for Growth in 2017
Of course, any upswing in the state’s economy would go a long way toward relieving pressure on state finances, and there are signs that Connecticut is poised for growth in several key economic sectors in 2017.
According to Gioia, one is financial services, which he thinks will benefit from Brexit’s negative impact on London as a global financial center.
As a result, he foresees a relocation of some global financial operations from London to New York, a trend that will ultimately benefit Connecticut.
“Increasingly, the European Union is going to look to New York for financial services, and some of that business will flow into Fairfield County.”
Another promising growth sector is tech, says Gioia, citing a report released in November by the Information Technology and Innovation Foundation.
The report ranked Connecticut in the top 10 in vital areas like high-capacity broadband coverage, high percentage of STEM workers, higher IT share of all services exports, more patent filers, and patents per worker.
The state was strong in all of the report’s 20 key indicators, close to and even exceeding the U.S. average.
“So it’s not just Silicon Valley and Boston receiving all the hype,” says Gioia. “Connecticut also is recognized as a national hot spot for tech innovation.
“The challenge for the state is exploiting this advantage to create more jobs, keeping and attracting young, high-tech talent, and building upon an already solid foundation.”
Gioia is also bullish on Connecticut’s advanced manufacturing sector, as companies in Connecticut’s aerospace, shipbuilding, and other supply chains ramp up hiring and production to meet new demand.
One of those companies, ACMT Inc. in Manchester, manufactures components for new-generation jet engines—including Pratt & Whitney’s Geared Turbofan—and is expanding and hiring.
“We’re expanding into two, eventually three, facilities in Manchester,” says ACMT President and Founder Michael Polo. “We’re growing like crazy.”
Polo is also establishing operations out of state, but not because he doesn’t think Connecticut is a great place to do business.
“We’re setting up a facility down South, because if you have 100% of a contract, you’re required to be making stuff in two different places to mitigate risk; you can’t have a single point of failure,” he says.
“In case there’s a hurricane or blizzard, you can be shipping product out of another facility.”
All of the very intricate, complex manufacturing—the stuff that takes a lot of expertise—will definitely stay in Connecticut.
“Repair and overhaul won’t come in on all the new [engine] programs for years, because the parts have to fly,”he explains.
“In 2015 it was a 50–50 split between the OEM work and the repair work, but the OEM, the new manufacturing, has now dwarfed that because of all the new programs out there.”
Polo believes the growth his company is experiencing is indicative of what’s happening in advanced manufacturing statewide.
“There’s a renaissance coming,” he says.
“All of the ‘me-too’ type of product lines will probably go offshore or to other states, but all of the very intricate, complex manufacturing—the stuff that takes a lot of expertise—will definitely stay in Connecticut.”
ACMT now has more than 80 employees—up from 46 in 2014—and is in the process of hiring 25 more. Polo says state programs to boost training in advanced manufacturing helped his company acquire key talent.
“The governor has really stepped up the focus and the funding for manufacturing, and without him and Catherine Smith at DECD, we would have never been able to grow like we are and like we’re going to. They realized that every manufacturing job adds four service jobs to the state,” he says.
“We’re growing a lot of our new associates internally. We’re doing internships and apprenticeships, and we’re hiring certificate program graduates from Manchester Community College, Asnuntuck, and Goodwin.
“As long as they get the basics there, we can bring them in and give them additional training for what we’re doing.”
Polo also finds that military veterans are a great fit for his business.
“We’re doing a lot of hiring through vet programs,” he says.
“We’re focusing on that, because vets are so detail oriented and disciplined. Everything we do here is written and standard work, so everyone does it the same way, and vets get that.”
‘A Growing Bioscience Ecosystem’
Another economic bright spot is biopharma, a sector with high growth potential in Connecticut.
“For decades, the biopharma model everywhere has been ‘big pharma,’ meaning a few large campuses staffed by thousands of employees,” says Paul Pescatello, senior counsel and executive director of CBIA’s Connecticut Bioscience Growth Council.
“The trick now for Connecticut is to truly pivot to biotech—using a broad definition of biotech to include information technology—and grow hundreds of companies, each with dozens of employees.”
Pescatello believes that certain areas in particular within biopharma are poised for growth.
“One I would single out is personalized, or genomic, medicine—a melding of IT and biology,” he says
“It’s important to Connecticut, because it’s really the future of biomedical research, and if the state can become the center of this kind of research, it will draw more venture capital and companies in.”
The trick now for Connecticut is to truly pivot to biotech and grow hundreds of companies, each with dozens of employees.
“I definitely think there’s an opportunity for us to grow,” says Todd Arnold, managing director of the Branford lab.
“I know there’s a big commitment for Mount Sinai to grow here, and we’re hiring. And I’m hearing really positive things from my colleagues at a lot of the startups here and the pharmaceutical companies; folks are doing a lot of good things.
“That’s not to say that there’s no work to be done,” he adds, “and I think the legislature is starting to hear that, and there’s activity to suggest that they get it.
“I also think you’re going to see a lot more recognition of biotech and high-tech manufacturing getting more legs here, because people understand that this is a real opportunity for the state.”
Usha Pillai, founder and president of biopharma consultancy Aria Management Consulting in Ledyard, also believes biopharma here is on an upward trajectory.
“We are a growing bioscience ecosystem,” she says, “so companies interested in being part of that growth phase would truly benefit from being in Connecticut.”
Location, Talent, and More
What makes Connecticut such fertile ground for biopharma investment?
Pillai says location is important.
“We may not be the top in terms of access to capital, but location-wise, we’re proximal to New York and Boston,” he says.
“That makes it really attractive to be able to stay in a state that provides a good balance between work and life—a great place to live and raise your family—but also with access to capital just within two hours on either side of the state.”
Another major plus for Connecticut when it comes to attracting biopharma companies is a highly skilled workforce and a commitment by the state and the higher education community to continue developing it.
“We have 46 people, and only three were not hired directly from the state of Connecticut,” says Arnold.
“A lot of state and local officials get the need to build that local, highly trained set of workers, and when that happens, people are going to be able to hire from within the state and it’s going to catch people’s attention.”
“We have a history of large pharma being in the state and therefore a lot of talented people,” she says.
“That talent has evolved and learned to operate in small bioscience or biotech companies, so we have a valuable spectrum of biopharma talent here.”
Arnold points to several academic programs, including those at Southern Connecticut State University, the community colleges, and UConn that are helping to bolster the talent pool and keep Connecticut in a strong position to attract more companies.
“UConn has an applied master’s in genetics and genomic sciences, and they’ve been awarded a Professional Science Master’s in genetic counseling, which is huge—a skillset in short supply and high demand.
“As entrepreneurs start seeing that they don’t have to recruit people from Boston, you’re going to be able to start bringing people in at entry-level or mid-entry-level positions and develop that talent internally.”
‘Let the Horse Run’
Pescatello credits the state for the investments it made in biopharma, citing as examples the incentives that brought the Jackson Laboratory to the UConn Health Center campus in Farmington and Alexion Pharmaceuticals to its brand new world headquarters facility in New Haven, which now houses 1,000 employees.
But he also sees the potential for continued fiscal troubles to undo a lot of what’s been accomplished and urges policymakers to take aggressive action in the 2017 legislative session to fix the problem.
“Companies look at the state for the next 15 years and see the deficits and unfunded liabilities and worry that the only way out is reducing state services, putting off infrastructure improvements, and raising taxes—unless, that is, real fiscal reforms are made, including changing the state employee compensation and benefits structure,” he said.
Because the state created its fiscal problems, it can definitely solve them, says Gioia. All that’s required is the political will.
“It’s fixable, something we inflicted on ourselves. It’s not coming down from the feds or from anywhere else,” he said.
“We have to open the gate and let the horse run.”