Experts offer their insights at 2015 Economic Summit & Outlook
The 2015 General Assembly session opened Jan. 7, bringing with it renewed hope for policy changes that improve Connecticut’s economic competitiveness and the state’s national business climate rankings.
Our newly elected legislators—including 33 freshmen—have until midnight June 3 to get their work done.
During those five months, lawmakers and the administration must devise a new state budget for Fiscal Years 2016 and 2017—no walk in the park given the state’s precarious fiscal position.
Based on consensus revenue estimates released Jan. 15 by the governor’s Office of Policy and Management (OPM) and the legislature’s nonpartisan Office of Fiscal Analysis, Connecticut faces budget deficits in excess of $1 billion in each of the next two fiscal years.
And, although the governor and the legislature have taken steps in the last few years to reduce Connecticut’s long-term debt, the state remains saddled by nearly $70 billion in unfunded liabilities, including obligations for state employee pension and post-retirement health benefits.
In his state of the state address to open the 2015 session, Gov. Malloy chose not to discuss the budget but instead announced a major initiative to improve Connecticut’s transportation infrastructure as a way of strengthening the Nutmeg State’s economic competitiveness.
Among other things, the governor proposed widening I-95 and fixing its entrance and exit ramps, building new rail stations and upgrading branch lines, and creating a statewide bus transit service.
His speech did not address how the improvements would be paid for, although he promised more details in the biennial budget he’ll present to lawmakers Feb. 18. He also called for protecting Connecticut’s Special Transportation Fund in a “lockbox” to ensure it would be used for transportation purposes only—a step CBIA has long supported.
A Lofty but Achievable Goal
Although the governor called Connecticut’s aging transportation infrastructure “one of the largest challenges we face,” the state’s fiscal condition is perhaps even more daunting—and the most critical factor in strengthening the business climate.
Shoring up Connecticut’s long- and short-term finances without resorting to tax increases or borrowing is the top priority in CBIA’s 2015 Government Affairs Agenda released Jan. 14 and the CT20×17 campaign—a multiyear initiative to make Connecticut a top 20 state for business and economic competitiveness by 2017.
The campaign is backed by more than 80 business, professional, and community organizations, including CBIA.
“Becoming a top state for business as measured by national business climate rankings is a lofty goal for Connecticut,” said CBIA’s president and CEO Joe Brennan on opening day of the legislative session, “but it’s achievable with collaboration from both sides of the political aisle. Our economy is not a Democratic or Republican issue; it affects all of us.”
In practice, says Brennan, that means “state lawmakers need to view every legislative proposal through the lens of whether it will help or hurt Connecticut’s economic competitiveness.
“We have enormous economic potential here, but for a variety of reasons we’re not reaching that potential. We’re optimistic that if business leaders and legislators work together in a bipartisan manner, we can make Connecticut one of the best places to live and work.”
The Power of a Balanced Budget
At the same time state lawmakers were convening at the Capitol, 500 Connecticut business leaders gathered across town at the Marriott for the 2015 Economic Summit & Outlook, where a main topic of discussion was the importance of fiscal stability to the state’s economic health and business climate.
Presented by CBIA and the MetroHartford Alliance and sponsored by Webster Bank, the event featured a keynote address by LEGO Systems President Soren Torp Laursen and expert commentary on the state’s finances, its economy, and its potential to become a top 20 state for business.
Nick Perna, economic advisor to Webster Bank, shared an upbeat short-range forecast for the state’s economy, saying that Connecticut’s post-recession recovery is “not that far behind” the nation’s: 1.5% job growth statewide, versus 2% nationally.
Noting that the state added 25,000 jobs in 2014, Perna forecasts gains of 25,000–30,000 jobs this year, but his economic optimism chills when it comes to next year.
“I worry more about 2016,” he said, citing the projected $1.3 billion state budget deficit.
Quoting a recent statement by OPM Secretary Benjamin Barnes, he described Connecticut as being in a “permanent fiscal crisis.”
“It’s important not to underestimate the power of a balanced budget…in terms of what it does for business confidence and public perception,” said Perna, who used New Hampshire’s rise and fall as a cautionary tale.
“For years I…held New Hampshire up as an example, an economic leader in New England,” he said. “Today, they have fewer jobs than when the recession started.”
He acknowledged that part of the Granite State’s problem is a combination of rising costs and an aging population but also pointed to a mix of revenue shortfalls, spending surprises, and a budget thrown out of balance.
Connecticut’s Rocky Revenue Stream
Perna pointed out that Connecticut’s income tax revenue system is much more sensitive to economic cycles and fluctuations which, he said, is not necessarily a problem as long as we use that volatility to our advantage.
Taxing increasingly volatile income, such as bonuses and stock options, has created major budgeting challenges as demands for state spending increase.
“When times are good and revenues are high, we spend,” said Perna.
Instead, he suggested that during good times, Connecticut solidify its Budget Reserve (Rainy Day) Fund “to smooth out the economic impact when things are bad,” adding that the way lawmakers address the state’s fiscal challenges “will determine our future prospects.”
The state’s Rainy Day Fund has been insufficient to cover revenue shortfalls during recent economic downturns.
Two days before the Economic Summit and Outlook, state Comptroller Kevin Lembo made the same recommendation in a statement announcing a plan to boost the Rainy Day Fund by, among other things, establishing automatic deposits whenever the most volatile tax revenue streams produce one-time excess revenue*.
Such a plan, says Lembo, would enable the state to build predictability into the state’s General Fund revenue stream and “limit the need for crisis-driven tax increases and program cuts during economic downturns.” [Read More...]