State’s economic future unclear as budget arrives

Are we over the crisis or is it an illusion that Connecticut’s economy seems to be recovering?

Eleven months into the COVID-19 pandemic that shut down the state legislature and threw the economy into a tailspin, Gov. Lamont on Wednesday will have strong tailwinds as he proposes a two-year, $44.5 billion budget. Still, his plan will be a big gamble at a time when the recovery, and the federal aid supporting it, remain impossible to predict.

If congressional Democrats and President Joe Biden succeed in pushing through their planned $1.9 trillion relief bill, Connecticut’s share should at least equal last year’s $1.4 billion in pandemic support.

The governor also is hoping for a continuation of the surprise flood of sales and income tax revenues, which recently turned an $800 million

deficit into a modest surplus for the current budget year, ending June 30. The unexpected momentum cut huge projected budget shortfalls for the next two fiscal years in half.

And the state’s emergency reserves are projected to reach as much as $3.7 billion or more this year, a record.

All of that — the rising federal aid, tax revenues and bank account — points to easy ways around Connecticut’s perennial budget gap, the headache governors and lawmakers have had to wrestle almost every year for decades as the state economy sputters. It will ease talk of tax increases and cuts in state services.

But those shortfalls haven’t gone away. There is a $1.2 billion-dollar gap predicted for the 2021-22 budget year that starts July 1 and another large gap for the following year. Lamont has repeatedly said he doesn’t want to raise tax rates, despite the clamoring from progressive Democrats willing to flex their muscular majorities in the House and Senate to force the state’s wealthiest to pay more.

The state’s economic landscape, to say the least, is anything but clear, with an 8.2 percent unemployment rate, retail and hospitality industries still hurting from the pandemic, and no clear engines of growth.

While the COVID vaccines are set to be a gamechanger by the time enough people are inoculated this summer for a return to social normalcy, huge long-term budget hurdles remain — not the least of which is more than $40 billion in unfunded liabilities in the retirement plans for state employees and public school teachers.

Good news, bad news

Good news about the recovery from the pandemic recession has left the progressive wing of the Democratic Party pushing for more programs to help people in need.

State Treasurer Shawn Wooden recently reported that the state’s available cash pool for expenses is $6.4 billion, amid the improved projections for future years and an expected $138 million surplus for this year.

“This has put Connecticut in a much better financial position when compared with other states but there is still plenty of work to be done,” Wooden recently wrote. “We know that the real economy, thousands of hard-working families across Connecticut, are hurting. Our work remains to rebuild an inclusive economy that helps state and local governments bridge budget shortfalls and addresses deep inequities that have caused overwhelming economic pain to thousands through no fault of their own.”

In fact, we’re no better off than we were at the height of the Great Recession, warns Fred Carstensen, professor of finance at the University of Connectiut School of Business and director of the Connecticut Center for Economic Analysis.

“The reality is Connecticut has a failing economy, never recovering from 2008 in either output or employment,” Carstensen said last week. “There is little indication that it is likely to do better going forward absent dramatic and visible changes in economic development strategy — like having one — and supporting policies and initiatives. I don't hear any discussion by the Governor or legislative leadership about the challenges of economic growth/development.”

Carstensen believes that the Office of Policy and Management, which is Lamont’s budget office, as well as the General Assembly’s nonpartisan Office of Fiscal Analysis are both overestimating future revenues. Those are the agencies that in January slashed projected shortfalls by $1.2 billion a year.

“Economic growth has averaged 2.3 percent the last four years; there is no reason to think we will do better than that and it is more likely we will do less well, given the weaknesses in our economy and lack of dynamism,” Carstensen said, stressing that the state is losing highly skilled, high-paying jobs and gaining low-skill, lowwage employment.

“Deficits are more likely to be $6-8 billion, of which the rainy-day fund might cover $4 billion,” he said, looking ahead to the next several years. “So we are still in a deep hole on the fundamentals. Gambling on high capital gains tax revenue is not a good way to go. Sometimes you win when you gamble, but you often lose. Given the instability of capital gains tax revenues, the likelihood is Connecticut will lose big on one of its sequential gambles.”

False sense of security?

House Minority Leader Vincent Candelora, RNorth Branford, said Friday he believes the federal pandemic support might have helped hide some of the state’s weaknesses.

He wants to see more of a focus on school kids at a time when manufacturers and trades need workers. He wants to make it easier for some children with learning difficulties to accepted into vocational high schools.

“Traditionally the governor speaks with optimism, and I expect that tone,” Candelora said. “Obviously he does not have an interest in broad-based tax increases.”

Chris DiPentima, president and CEO of the Connecticut Business & Industry Association, said Friday he is worried about a false sense of security, between the federal support and the unexpected revenue surge.

“Obviously we’re in a better place than we were in April, and the deficit was recently knocked in half, but we certainly for the need to keep our foot on the gas and address our structural and systemic issues,” DiPentima said in a phone interview. He stressed the need to hold down taxes and use legislation to expand the tax base, including the fostering of thousands of new start-up companies spawned during the pandemic, including new manufacturers of personal protective equipment and cleaning services.

“We can’t count on more ‘found money,’ because they can breed complacency,” DiPentima said. “We have a little bit of wind at our backs but we need to build Connecticut stronger, with moderate fiscal reforms to continue to move the state forward.”

Max Reiss, Lamont’s communications director, said Friday that recent data from the U.S. Postal Service indicates a net increase of 16,494 Connecticut addresses in 2020, compared to a net loss of 7,525 in 2019. “Businesses and people are beginning to see the strength of our state,” Reiss said, noting 40,000 new businesses, the growing budget surplus and record-level budget reserve.

“We feel these are all good signs that Connecticut is in a position of growth, which everyone wanted to see for a long time,” Reiss said.

In the current climate, on the cusp of budget negotiations between Lamont and legislative leaders and vaccines finally flowing into the state, only time will tell how Connecticut handles the continuing crisis.