Connecticut’s Economy: Stuck in neutral

November 21, 2013

(The following op-ed from Sen. Frantz appeared in the Nov. 20, 2013 edition of the Greenwich Citizen.)

It should be stunning to us all that Connecticut’s economic recovery is so anemic that it earned the distinction of being the only state in the nation last year to show negative growth.

Hand-in-hand with that statistic is a stubbornly high unemployment rate of 8.1 percent that in all likelihood underestimates the problem throughout the state in that thousands have decided not to look for work or are significantly underemployed.

We continue to lose manufacturing jobs at an alarming rate, particularly in the aerospace and defense sectors. We have been downgraded by the credit rating agencies numerous times, received last place in the country in terms of credit quality by at least one firm and been identified as the most heavily indebted people on a per capita basis in the nation.

Given that Connecticut used to be the go-to state when it came to starting or relocating a company, especially in manufacturing, financial services and defense, we should all be shocked that we are today consistently ranked between number 45 and 50 in far too many important categories.

Then again, if we take the time to connect the dots as to how we could have gotten here, it becomes very clear.

The unacceptably high fixed cost structure of state government combined with imprudent fiscal leadership for over a generation in the legislature, which is where the purse strings lie, has pushed the cost of government beyond the capabilities and willingness of the tax base to pay for excesses in current spending and for up to $81 billion of unfunded liabilities that exist today.

The cost of state government over the last 22 years to you, the taxpayer, has tripled while the population grew a meager 8 percent and personal income only doubled.

So much for the idea of a constitutional spending cap that was put in place simultaneously with the implementation of the income tax allowing spending to increase only as much as the rate of inflation or personal income growth to assure that there would be no runaway government spending.

Unfortunately for all of us in Connecticut, this poor fiscal management has forced the state into a corner.

Since Washington has the monopoly on printing presses, we have no choice but to borrow, tax more or both just to stay afloat if the legislature is going to continue to increase the size of the state budget every single year going forward as they have in the past.

The long-term structural problem with this is that taxes and debt are the enemies of a healthy growing economy, which virtuously brings in more revenue to the state, eases the individual tax burden and avoids burdening future generations with unmanageable liabilities.

It may be a little clearer to you why the state has not created a net new job in two decades, why the state has 40,000 fewer jobs today than at the beginning of the recession and why you read every day about one or more companies moving their jobs and operations elsewhere.

Adding to the burdens of future generations is the money borrowed to essentially buy jobs for Connecticut residents.

With nearly 20 years of economic development experience at the state level, I can attest that a well thought out economic assistance strategy can be quite successful if there are reasonable levels of committed resources per job created using low cost loans that are, importantly, repayable.

Over the years and on average, the state would commit to loaning or investing funds to companies to the tune of about $15,000 per job retained and/or created.

The program has worked for a long time with minimal default rates and the capital reinvested multiple times in the process.
Over the last three years, $880 million has been committed to economic development projects. Given that this is money that the state borrows, this is an extraordinarily large amount of resources for a state that is ranked by some as dead last in credit quality.

Adding to my concern is that the bulk of the financial assistance is in the form of forgivable loans (i.e. grants) and that commitments have recently ranged from $108,000 per job to an astounding $970,000 per job.

The question we should all be asking is would a better economic development policy have been to reduce taxes by $880 million to benefit companies already in the state and to make ourselves that much more competitive?

Other states appear to understand how this all works. North Carolina, Ohio, Kansas, Tennessee and others have already initiated tax cuts and are benefitting from much healthier growth rates than Connecticut.

Instead, we have seen the largest tax increase as well as the largest outflow of economic development funding in the history of the state.

When making decisions about moving to a new state, businesses and individuals tend to pay very close attention to potential fiscal problems that could ultimately adversely affect them.

One area of particular concern because of several high profile examples recently of what can happen as a result of mismanagement and lack of funding is that of the State Employees Retirement Fund.

Despite recent claims that the pension fund is funded, Connecticut continues to rank in the bottom five of the 50 states in terms of pension health.

We should all be skeptical when our own state pension fund, funded at approximately 25 percent a few months ago, is all of a sudden completely solvent.

Additionally, it should raise a few eyebrows that Connecticut’s fringe benefit rate is in the neighborhood of 85 percent of an employees’ salary, a rate three times that of the private sector.

This is not only an area where promises once made to state employees are in danger of being broken, it can also put an entire entity into bankruptcy.

Look no further than Bakersfield, San Bernardino, Jefferson County, Harrisburg and Detroit to know that a poorly funded pension fund can destroy a city’s fiscal house as well as any chances of revival.

Detroit was a thriving city of over 2,000,000 people a few years ago. Today, there are 600,000 residents living among 80,000 abandoned buildings, unacceptably high crime rates and some of the highest unemployment in the country.

The question we should all be asking is could this ever happen to a state?

Decision makers also tend to see through budget chicanery. In a recent financing that leaves many of us scratching our heads, the state issued $590 million in bonds to cover a 15-year obligation to pay down the state’s Generally Accepted Accounting Principles deficit.

While the transition to GAAP accounting rules is one we should pursue, the questions we should all be asking here are why did we borrow this amount all at once and why is none of it budgeted for this purpose for the next two years?

Since there is nothing prohibiting the transfer of funds from bond proceeds to other general fund accounts, we can guess with a level of certainty that the extra money is needed for general fund cash flow purposes.

This is exactly the kind of practice that the credit rating agencies frown upon, and Connecticut will pay a price.