UP CLOSE: Picking up the pieces of Connecticut’s economy

UP CLOSE:
Picking up the pieces of Connecticut's economy

Published on April 12, 2019

Hop on a Metro-North out of New York City on the New Haven Line. Soon, you’ll hit the pristine picket fences and well-manicured mansions of Fairfield County — the wealthiest metropolitan area in the nation, where finance and industry titans rake in million-dollar incomes and send their children to elite private schools the likes of The Hotchkiss School and Choate Rosemary Hall.

But leave behind the golf courses and glittering beaches, and you will come to the Devon Bridge in Milford. Built in 1905, the bridge carries more than 150 trains over the Housatonic River between Milford and Stratford each day — making it one of the busiest railroad bridges in the nation.

Rated as structurally deficient and in “serious condition,” the 114-year-old structure is covered in rust and requires emergency work on its three main towers. The Devon Bridge is not alone in its state of disrepair. The Federal Highway Administration classified hundreds of Connecticut bridges as structurally deficient in 2018. Statewide, the average grade in 2018 for key infrastructure network components was an abysmal C-minus, according to the Connecticut Society of Civil Engineers Section of the American Society of Civil Engineers. Around 15.4 percent of Connecticut bridges’ deck surface area is rated in “poor condition,” compared to 4.8 percent nationwide.

In spite of Connecticut residents’ impressive personal finances, for the last few years, the state’s economy has ranked among the worst in the nation. In 2017, Connecticut’s economy was one of two in the nation to shrink in size, according to the U.S. Bureau of Economic Analysis.

This contradiction between the state’s immense private wealth and its struggling economy has driven a rift between the state’s two political parties. Republicans have blamed excessive taxes and a bloated entitlements system for the economic downturn, while Democrats have decried the state’s extreme income inequality and called for a greater investment in Connecticut’s cities.

Newly elected Gov. Ned Lamont SOM ’80 has crafted his platform and his early policy decisions around his ability to use his knowledge of the private sector to bring more business to the Nutmeg State. But Connecticut’s fiscal quagmire requires more than a one-stop solution.

A DECADE OF BLUNDERS

The leafy suburban tranquility of Greenwich transformed into an atmosphere of quiet panic in 2008, when the New York-based investment bank Lehman Brothers collapsed on Sept. 14 as a result of the subprime mortgage market crisis that started in 2007.

The financial collapse contributed to the greatest global economic crisis since the Great Depression. Unemployment in the United States jumped from 4.7 percent in November 2007 to 10.1 percent in October 2009 — and monthly consumption per capita dropped by around $175 in the same period.

Two of Connecticut’s major industries faced especially large losses between 2008 and 2018. The nondurable goods manufacturing industry contracted by 75 percent, and the finance and insurance market shrunk by 30 percent, according to the Connecticut Center for Economic Analysis. As the recession raged on, Connecticut residents elected Democratic Gov. Dannel Malloy in 2010. Malloy — the four-term mayor of Stamford — came into office facing not only the economic downturn, but a multibillion-dollar deficit as well.

Malloy responded to the deficit by implementing two of the highest income tax increases in state history and courting large corporations with tax breaks to keep them in the state.

“We didn’t have leadership that really understood private sector activity,” said Gary Rose, chair of the Department of Government, Politics and Global Studies at Sacred Heart University. “A lot of business owners and corporate executives under Malloy did not feel that there was enough support from the governor to facilitate investments and so forth.”

A decade later, the rest of the country has — for the most part — bounced back from the recession. According to the U.S. Bureau of Labor Statistics, the nationwide unemployment rate is at a mere 3.8 percent, and the economy grew by 2.7 percent in 2018.

But this growth has not extended to the Nutmeg State. At the end of 2017, the Connecticut economy was smaller than it was in 2004, and even the state’s fastest-growing markets like the information sector lag behind neighbors in the region.

TAXATION AND MIGRATION

Republican legislators have tended to blame this economic stagnation on the state’s high tax burden and what they view as a hostile business environment in the state. The state and local tax burden is now at 12.6 percent, leaving Connecticut behind only New York among states with the highest individual taxes. According to the Tax Foundation’s State Business Tax Climate Index ranking, Connecticut ranks 44th in the U.S. for its ability to attract and keep businesses in the state.

As a result, it is becoming increasingly difficult to convince potential residents — especially young families and retirees — to make Connecticut their home. According to the most recent National Movers Study, 62 percent of moves in the state were outbound rather than inbound. This places Connecticut third in the nation among states with the most residents moving elsewhere.

The outflux of primarily wealthy residents who contributed significantly to government revenue streams has caused a “vicious cycle”. While the state needs to cut taxes to attract new residents, it also needs to increase taxes to raise more revenue, according to Rep. Gail Lavielle GRD ’81, R-Norwalk and the ranking member of the Connecticut General Assembly’s Appropriations Committee.

“We have a huge revenue vacuum,” Lavielle said. “If you’re going to attract people back here who have a lot of resources, you need to lower the taxes or they won’t bother. But at the same time you need to grow the tax base.”

Individuals are not the only ones leaving the Nutmeg State en masse. The state has also seen an exodus of big corporations, especially in the pharmaceutical and insurance industries.

Among the big corporations to leave were Fairfield-based General Electric in 2016 and New Haven-based company Alexion Pharmaceuticals, Inc in 2018. Both companies set up shop in Boston, although Alexion kept a number of employees at its Elm City building.

The biggest hit came in June 2017, when health insurance giant Aetna announced it was moving its headquarters to New York from Hartford, where it had been located since 1853. But CVS Pharmacy acquired Aetna later that year, and the move was cancelled. CVS promised that Aetna would stay at its Hartford headquarters for at least another decade.

“Today’s announcement confirms that Connecticut is a tremendous place to do business, with a talent pipeline and quality of life that are second-to-none,” Malloy said in a statement at the time of the announcement.

But in spite of this victory, the overall tide is still pushing companies out of the state.

In an effort to stem that tide, Malloy instituted tax breaks and “corporate welfare” programs giving direct state assistance to large corporations — policies that drew criticism from both the left and the right. This aid, which totaled more than $250 million in 2016, went to 13 companies almost exclusively employing more than 200 workers, bypassing many small businesses who felt they were struggling more than the corporate giants receiving government benefits.

But many of the companies leaving are not moving to states with low taxes. Two of Connecticut cities’ greatest rivals in the fight to recruit growing companies are Boston and New York: cities with some of the highest tax burdens in the country, even in light of tax breaks that these cities have offered some companies to win them over. Boston’s reputation for its significant taxation has even prompted a new nickname for the state: Taxachusetts.

MILLENNIAL FLIGHT

Why are companies leaving Connecticut for high-tax cities? Many think the answer can be traced to the preferences of millennials.

“The trend of millennials — as well as certain retirees — has been to go toward urban areas,” said David Lehman, the recently confirmed state commissioner of economic and community development. “This trend toward urbanization has been happening for the last 15 to 20 years, and I expect it to continue.”

Whereas young people used to move back to the Connecticut suburbs from cities like New York in their 20s, millennials are staying single longer and postponing heading back to smaller cities and towns — if they move back at all, according to Mark Abraham ’04, the executive director of the New Haven-based data analysis nonprofit DataHaven.

As a result, companies are flocking in large numbers to where they can find the most millennial talent.

University of Connecticut political science professor Ronald Schurin said that addressing “deep structural problems” like demographic shifts and debt issues is no easy feat.

As a first step, he said, Connecticut should capitalize on its intrinsic advantages, such as its proximity to New York City. According to the U.S. Bureau of Labor Statistics, the number of jobs present in the New York metropolitan area numbered almost 10 million in July 2018.

The number of Connecticut residents traveling into the city every day has made the Metro-North New Haven Line the busiest commuter railway in the nation, with about 125,000 riders daily.

The cracks in the system from so much use — combined with an insufficient level of funding — have started to show. On March 29, a power transformer along the railway in Westport failed, reducing trains to 50 percent of their normal electrical power and causing massive delays.

Commuters travelling on the road instead encounter similar delays. According to a Connecticut Department of Transportation study in 2016, the segment of the Interstate 95 between New Haven and the New York state line experiences “extraordinary amounts of recurring delay.” Often, more than half of the 47-mile distance between the two cities is congested in both the mornings and evenings.

In addition to harnessing the full advantage of Connecticut’s location, University of Connecticut economics professor Fred Carstensen GRD ’76 argued that the government must better utilize the quality of the Nutmeg State’s institutions of higher education.

Carstensen commended institutions like Yale for engaging more with the “real world” in recent years, as evidenced by Yale’s growing number of annual patents, its role in starting dozens of new companies and its collaboration with Wesleyan University and the University of Connecticut on stem cell research under former U.S. President George W. Bush.

But universities can only do so much without state support.

“We have no collaboration between institutions of higher education,” Carstensen said. “The whole in Connecticut is much less than the sum of its parts.”

Even if Connecticut fixes its transportation infrastructure and encourages educational collaboration, its economy will remain precarious if it does not weaken the stranglehold that a few key industries hold on available jobs.

According to U.S. Census Bureau data from 2015, Connecticut has the most insurance jobs per capita nationwide. The finance and insurance industry accounts for $16 billion in annual payroll. The second-largest sector — healthcare and bioscience — employs almost 20,000 Connecticut residents.

“Connecticut has relied on a few key industries, and when they have not done well, the state has a whole has not done well,” Schurin said.

VANISHING OF THE MIDDLE CLASS

While Republicans rally behind the call for lower taxes, Democratic legislators often point to the extreme income inequality in the state as a major cause of Connecticut’s struggling economy.

According to a 2018 study by the Economic Policy Institute, Connecticut has the largest gap between the richest one percent and the poorest 99 percent in the country. And as wages for low-income residents remain stagnant, the state’s revenue streams have also faced a growing crisis.

“We’ve added a lot of people who are down at the very bottom of the income spectrum,” Lavielle said. “There’s nothing wrong with people down at the bottom of the income spectrum, but they don’t contribute to income taxes and sales taxes at a high level.”

The growing gap between rich and poor is also visible in the state’s geography. According to a 2015 DataHaven report, the percentage of Connecticut residents who live in neighborhoods of concentrated wealth or poverty has grown by 30 percent since 1980. Meanwhile, the percentage of Connecticut residents living in middle-income neighborhoods has shrunk by seven percent.

The fastest rate of growth was among residents who are poor and live in an area of concentrated poverty — a phenomenon that DataHaven terms “double jeopardy” due to the difficulty of overcoming poverty under these circumstances. This group — which comprises people below the federal poverty line — grew 66 percent since 1980 to four percent of all Connecticut residents, which came about largely due to an influx of Hispanic immigrants to the Nutmeg State.

The gap between rich and poor in the state also intersects significantly with race. As the result of a long history of redlining — or refusing housing loans in predominantly black neighborhoods — and other racist housing practices in the 20th century, Connecticut cities still see extreme levels of housing segregation, according to 2018 DataHaven report.

The segregation between white and black neighborhood in the Milford-New Haven metro area was rated very high in 2015, while segregation between Hispanic and white neighborhoods was ranked in the worst 10 percent in the country.

FALTERING CITIES

Many of Connecticut’s worst-hit residents live in the state’s biggest cities, including Bridgeport, Hartford and New Haven. In addition to providing for their own residents, these cities also function as resources for the entire region — without any increase in revenue to provide services to more people.

“Cities like New Haven are centers of commerce, education and healthcare,” said mayoral spokesman Laurence Grotheer. “But there is no regional support structure for cities.”

City governments rely heavily on property taxes to fund municipal services. But a variety of exemptions from such fees often deprive city governments of much-needed revenue.

In New Haven, for example, almost half of property in the city is exempt from property taxes, according to Grotheer. Much of this property belongs to Yale, which is largely exempt because state law grants property tax exemptions to universities and hospitals. Although Yale makes a voluntary annual contribution to the city of around $8.7 million, this is a fraction of what the University would pay without exemptions.

“The city effectively has to provide all its programs and services while only being able to generate revenue from 45 percent,” Grotheer said.

City officials blamed much of the controversial 11-percent tax hike in the most recent New Haven budget on these missing tax streams and called for greater financial support from the state.

But at the state level, spending often already outpaces revenue — in large part due to the cost of funding the pensions of state employees. These payments totaled over $1.9 billion in 2018, according to Transparency Connecticut.

According to Lavielle, the state’s failure to rein in this entitlement system in recent years stems from the influence that public worker unions exert on the Democratic party.

“In order to keep their captive constituency happy, the folks in the majority don’t want to bring [public employee unions] in line with people in the private sector,” Lavielle said.

MALLOY’S AWKWARD EXIT

For a record-setting 123-day period in 2017, the state government left Connecticut residents and municipalities without a state budget, as Malloy and legislators in the Connecticut General Assembly were unable to reach a final budget agreement by the time the previous budget expired in June. Negotiations dragged on for months until both Democrats and Republicans decided to lock Malloy out of the budget talks and eventually passed a veto-proof budget.

Although residents were relieved to finally have some certainty, the budget nevertheless made significant cuts. The University of Connecticut, for example, lost $130 million in funding over the course of two years.

“It’s better than the worst-case scenario, but it’s still going to be difficult,” University of Connecticut Deputy Spokesperson Tom Breen told the News days after the budget passed.

The political crisis prompted by the state’s poor fiscal performance had almost caused Malloy to lose his reelection bid against Republican opponent Tom Foley in 2014.

But the painful eight-month budget process was the final nail in the coffin. Malloy left office in a state of disgrace, with fewer than 15 percent of voters expressing approval for the governor, according to an October 2018 joint survey by Sacred Heart University and Hearst Connecticut Media. At the same time, President Donald Trump’s approval rating in the state was more than double at 35 percent.

Connecticut has long been one of the bluest states in the nation. Hillary Clinton easily carried the state in the 2016 presidential election, garnering 54 percent of the vote compared to 40 percent for Trump. The state also voted Democrat in the six previous presidential elections.

With Trump as the Republican boogeyman on the right and Malloy as the Democratic nightmare on the left, the stage was set for a contentious gubernatorial race.

A NEW AGE?

Enter Ned Lamont and Bob Stefanowski.

In an election year marked by historic numbers of women and people of color running for office, Lamont and Stefanowski stood out for their traditionality. Both men are white, middle-aged and exceptionally well-off. Stefanowski and his wife reported $9.7 million in income in 2017, while Lamont and his wife reported $18 million in income in the past five years, according to tax returns they released before the election.

These numbers are no coincidence. Both candidates drew on their experience as successful businessmen — Stefanowski as a former General Electric executive, Lamont as a telecommunications tycoon — as evidence that they had the necessary economic insight and business acumen to turn the state around.

Lamont started off strong in the polls, holding a 53 to 37 percent lead over Stefanowski in an August 2018 Quinnipiac University poll. But his once clear path to victory became increasingly convoluted as Bob Stefanowski doubled down on his anti-taxes platform, dubbing his opponent, “New Tax Ned.”

By October, most major polls showed the two candidates neck and neck. On a nail-biting election night with unprecedented voter participation for midterm election, Stefanowski held the lead until early in the morning. But Lamont cinched a narrow victory in the end thanks to wide Democratic margins in Connecticut’s cities.

In his inaugural address, Lamont pledged to reinvent Connecticut.

“For generations, Connecticut was the most entrepreneurial, inventive, and fast-growing state loaded with amazing opportunities. And we still can be,” Lamont said in his speech. “I will not allow the next four years to be defined by a fiscal crisis. Together we will craft an honestly balanced budget which does not borrow from the future, but invests in the future.”

That night, as Lamont’s awkward-yet-endearing dancing at his inaugural ball made local headlines, Connecticut voters asked themselves: Will he really be able to follow through with these promises?

As Lamont heads toward his hundredth day in office next week, a preliminary answer to the question is starting to form.

The first clues came at Lamont’s presentation of his budget proposal on Feb. 20.

The budget, which is projected to generate $19.3 billion in fiscal year 2020, eliminated several sales tax exemptions and made changes to health care prices for state workers, among other changes.

Many Democratic legislators applauded the practicality of the budget and Lamont’s support for progressive policies like increasing the minimum wage to $15 per hour and a paid family and medical leave program.

But municipalities have expressed concern about a lack of municipal funding from the state as the services required of them increase.

Grotheer expressed hope that the final budget would include sufficient funding for the payment in lieu of taxes program, or PILOT. The program gives municipalities funding to make up for the loss of revenue due to real estate exempted from property taxes.

In theory, this funding should cover around 45 percent of lost revenue, but state funding for the program has dropped steadily over the past decade. In the most recent fiscal year, municipalities made back only 14 percent of the funds they could not collect.

In fiscal year 2018, municipal aid including funding for PILOT totaled around $356 million, which Lamont proposed to cut down to $325 million in 2020 and $328 million in 2021.

The proposed budget has come under fire for its changes to education funding. Lamont proposed that municipalities cover 25 percent of teacher pension obligations, which Lavielle said would cause further increases in property taxes.

Union officials similarly opposed the change in teacher pension obligations.

“We’ve already made clear we’re not willing to shift more risk onto the backs of retired state employees, which threatens to pick the pockets of seniors living on fixed incomes,” AFT Connecticut President Jan Hochadel said in a statement on the day Lamont presented his budget proposal.

Lamont has received the most flack for his plan to institute tolls on Connecticut highways — a turnaround from his stance during the campaign. The administration has justified the proposal by pointing out that an estimated 40 percent of vehicles on Connecticut highways come from out of state.

Lavielle emphasized that Lamont’s budget is just a proposal and that the approval budget is still far from over.

“So far we’re not seeing a proposal that would [fix the economy,]” Lavielle said. “Essentially the budget that he has proposed … is all based on new taxes.”

Lamont’s economic policy extends beyond the confines of the budget. The governor has brought a host of top private-sector executives into his administration, including Lehman — a former partner at Goldman Sachs — as well as former PepsiCo CEO and chairman Indra Nooyi SOM ’80 and former Webster Bank CEO and current chairman Jim Smith as co-chairs of the Connecticut Economic Resource Center.

These administrators are tasked with reversing the outflux of businesses from the state. Lehman emphasized the importance of “proactive recruitment” of companies that does not rely solely on the bilateral deals of tax breaks and direct state aid to big companies that characterized Malloy’s economic policy.

Lehman pointed out that Connecticut is not suffering from a lack of jobs but rather from a lack of qualified and educated employees. Although the number of jobs in Connecticut has increased over the past few years, jobs coming into the state pay significantly less than the jobs that are leaving, according to Carstensen

As a result, Lehman said that Lamont’s new strategy will revolve around drawing in skilled, educated employees and the companies hoping to hire them by playing to Connecticut’s strengths, from its great schools and beaches, to its proximity to metropolitan centers like New York City, to its potential for greater collaboration between universities and businesses.

To improve Connecticut’s infrastructure, the state hopes to implement what Gov. Lamont has dubbed his “30-30-30” plan, which would invest significantly in the state’s rail system to decrease train travel times to 30 minutes between three pairs of cities: Hartford and New Haven, New Haven and Stamford, and Stamford and New York City.

If the plan succeeds, commuters would be able to reach New York City from New Haven in 60 minutes, which Lehman called a “game changer.” The journey on Metro-North currently takes about two hours one-way.

But the number one priority for Lehman is addressing the problem of Connecticut’s cities and their inability to retain young talent. He hopes Connecticut will be able to at least double the size of its four biggest cities: Bridgeport, Hartford, New Haven and Stamford.

“One of the keys toward the success of the Connecticut of tomorrow is [growing] our cities,” Lehman said.

HOPE ON THE HORIZON

In spite of the gloomy statistics on the economy, there is still reason for optimism. The state’s nonpartisan budget office has projected a surplus of more than $500 million for the current fiscal year ending on June 30 — $512 million in the general fund and $70.5 million for the Special Transportation Fund.

“2018 might be the first year with solid economic growth in ten years,” Carstensen said.

Although the office also projected a deficit of $1.5 billion for the following fiscal year, Lamont has vowed to close the gap with his proposed budget. And in spite of concerning statistics regarding employment and population trends, Connecticut residents still have reason for hope in the current economy.

“When people say the economy is performing poorly, mainly they’re talking about jobs and productivity. Those indicators are the ones that don’t look good,” Abraham said. “If you look at average wages, how much people earn relative to the cost of living and all of that, Connecticut is up there as one of the strongest economies.”

There is hope on the political front as well. As tensions between Democrats and Republicans peak at the national level, Connecticut state politicians expressed hope for renewed collaboration across the aisle.

“He’s created a very different atmosphere than we had under Gov. Malloy,” Lavielle said. “It’s a much more civil environment.”

Lamont started his political career as a progressive outsider, but his first months in office have seen him strike a more moderate and conciliatory tone, according to many — especially in comparison to his predecessor.

As his toll proposal demonstrates, the governor has been willing to change his policies in light of feedback from legislators, advisors and constituents.

“Malloy was ‘my way or the highway,’” Rose said. “Lamont will come in with a plan, but if it gets blowback from various people, he immediately thinks, ‘Well, then let’s talk and see if we can make adjustments.’”

On a brisk day in March, Lamont stood before a small group of transportation advocates holding up banners calling for more jobs in Milford to ask the legislature to increase funding for the state’s infrastructure.

“We have an aging infrastructure in Connecticut that greatly impacts the daily lives of our families and the development of our businesses,” Lamont said. “Modernizing our infrastructure would employ thousands; it would improve the quality for our residents and advance us towards the state we deserve to be.”

The rusting Devon Bridge loomed behind him.

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