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February 27, 2017 OTHER VOICES

CT’s poor fiscal health threatens quality of life

Jeff Klaus

There is a memorable scene during “Godfather II,” one of the all-time great movies, in which the Cuban dictator Batista on the eve of his overthrow gives his farewell address at a swanky dinner in Havana.  Even before he announces his imminent resignation, the crowd — sensing that revolution is at hand — uneasily starts to migrate toward the exits to head out and get on their boats or private planes to escape the impending coup. 

Over the next few scenes, the pace of the exodus speeds up as chaos consumes the island.

While the current scene in Connecticut isn't that of 1952 Havana, there are some unfortunate similarities. Specifically, successful business people are slowly moving toward the exits. And so are their businesses. This trend cannot be denied as it has been happening for many years.

As a commercial banker in our state, I see it firsthand every day. Dozens of our most successful business owners have already or are thinking about re-establishing their residency, not just in Florida where the weather and tax climate are more favorable, but also in neighboring Massachusetts and New York — direct competitors.

IRS data show that the state has seen a net loss of $6.3 billion in taxable income between 2011 and 2015. Of that amount, $4.3 billion was from households earning more than $200,000.  And according to the Yankee Institute, census estimates since 2013 show that Connecticut has shrunk by 19,551 people (3,596,003 in 2013 to 3,576,452).

This is a worrisome pattern. Each time one of our largest taxpayers picks up and leaves, Ben Barnes, the state's budget director, has to take out his eraser and re-do the budget. For the most part, our wealthiest residents don't own ranches, or factories, or oil wells in Connecticut. They own laptops. And so do their employees. The fact is that we have a highly mobile financial sector and when people start to sense confiscatory tax policy coming, they can pick up and leave with relative ease.

At the recent Connecticut Business and Industry Association annual meeting, Gov. Malloy pointed out that just 1 percent of our state's residents pay 35 percent of our state income tax, a fact that begs the question: Just what do the proponents of higher taxes on the wealthy think is a “fair” level of state tax progressivity? 45 percent? 55 percent? 90 percent? Whatever number you pick I can assure you that the wealthiest among us are not waiting around for the answer.

And we have to begin to be honest with ourselves. The story we've been told over the past few years is that businesses like General Electric leave our state because our fiscal situation is just too “un-predictable.” I disagree. It's actually the opposite. GE left in part because our state's fiscal situation is entirely too predictable in that we have shown absolutely no collective will whatsoever to fix our well-known problem: What to do about the $54.9 billion of unfunded liabilities.

If a fiscal crisis hits, it will be our most vulnerable citizens who will be injured the most. Because before it happens, the wealthy will have gone. And it's not just the 1 percent who are leaving. There are also an estimated one out of five state retirees who have also chosen to reside outside of Connecticut.

The politicians say that some of us in the business community are being too negative and we don't focus on all the positives that the state has to offer. Well, I've lived here all my life. I love this state and yes, I plan to stay and fight rather than move. But for all of the wonderful assets that we enjoy — geography, intellectual capital, a proud tradition of manufacturing, a strong financial-service sector, and accessible and livable small cities — the threat of fiscal insolvency dwarfs all of them. Our fiscal situation threatens to devalue every single asset that I mentioned.

I hesitate to offer a rather bleak prediction but it needs to be said: If we don't collectively get our arms around this soon, we will see a continuing deterioration in our bond rating, slowly at first and then faster. Our interest costs will rise with the economy and the risk premium for Connecticut debt will grow. This will result in a vicious cycle of increased debt service obligations, which will put even more strain on our budget. And as the writing on the wall becomes clearer, this will lead to an accelerated exodus of the affluent, punching a final fatal hole in the state budget.

But while the picture is bleak, it's not hopeless. So how can we start to reverse course? 1. Enact a hard spending cap. All state spending needs to be under the cap with the only exception being debt service; 2. Fulfill the promise to switch the state books to Generally Accepted Accounting Principles (GAAP), otherwise we continue to pretend that the situation is not as bad as it is; 3. Switch from defined-benefits to defined-contribution retirement plans for current state workers, like much of the private sector; 4. Index state government healthcare benefits to private-sector levels; 5. And finally, underlying all of these crucial changes is the importance of establishing the right legislative process for enactment. We must require that the legislature vote expressly on all elements of the state employee collective bargaining contracts. 

Jeff Klaus is the regional president in Connecticut at Webster Bank.

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