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March 30, 2020

State can’t print money, but it can guide economic rise from pandemic

HBJ Photo | Joe Cooper The Russell Grab and Go on Hartford's Pratt Street remains open for takeout sales.

While Gov. Ned Lamont was watching his emergency business loan program max out in two days last week, administration officials were reminding disconsolate companies here that hundreds of billions of dollars in federal aid to small businesses remain to be tapped.

States cannot come close to matching the federal government’s ability to mobilize resources in a crisis, administration officials noted. Connecticut also has a balanced-budget requirement in its Constitution and lacks Congress’ power to effectively print money.

But while Lamont earned praise for his first attempt at state-sponsored relief, one state lawmaker said it didn’t go far enough.  And Connecticut policymakers, economists, and  business leaders said there are more cards the state can play to provide financial relief amidst the pandemic.

Still, those options chiefly involve borrowing and tax relief — choices Connecticut officials must weigh carefully, given the state’s ugly history with massive debt and unstable revenues.

“I didn’t think $25 million was enough and I hope they revisit this and start working on a second phase right away,”said Senate Minority Leader Len Fasano, R-North Haven, referring to Lamont’s initial proposal to fund the state’s business relief program. The governor doubled the program to $50 million before closing applications on Friday, just two days after it launched and after receiving close to $200 million in requests for aid.“Government has told them they can’t operate 85% of their business,” Fasano said, referring to restaurant industry estimates that 85% to 90% of restaurant business involves dine-in patrons. “I think we need to respond to those businesses that have been shut down or had their business substantially impaired. They should go to the head of the line.”

Deferring tax payments is an interest-free loan
But while dollars are important, so is timeliness, said Joseph F. Brennan, president of the Connecticut Business and Industry Association.

States, in general, can move faster than Washington, and sometimes local needs slip through the cracks in federal relief efforts.

Lamont tried to address both of those this week with a $25 million, no-interest loan program for small businesses. But some said Connecticut businesses may need even more immediate assistance than the bridge loans provide.

The Connecticut Restaurant Association has asked Lamont to waive or at least defer collection of up to three months of sales tax receipts the industry owes the state.

Connecticut’s 8,500 restaurants generated $8.9 billion in gross sales in 2019, according to the association. Based on those sales, and the current 6.35% tax rate — plus a 1% surcharge on prepared meals — three months of sales tax receipts would be roughly $160 million.

“This is our Number One ask,” said Scott Dolch, executive director of the CRA, adding that about 160,000 jobs hang in the balance.

It’s been more than a week since Lamont closed restaurant dine-in service, and the average operation in Connecticut gets only 10% of its business from takeout, Dolch said, adding more than four out of 10 restaurants here have shut down completely.

And with extremely narrow profit margins — on average just over 3% — “every day that goes by is make-or-break for some restaurants,” he added. “Unfortunately I can promise you a lot of them will not be able to reopen.”

Simply forgiving $160 million is unlikely when the current state budget is already $178 million in deficit and analysts are fearing huge revenue shortfalls in the coming months.

But Lamont already has already delayed state income and business tax filing deadlines.

University of Connecticut economist Fred V. Carstensen, who heads the Connecticut Center for Economic Analysis, didn’t weigh in on the restaurants’ request for a sales tax payment delay. But he said deferring tax payments can make a huge difference for businesses on fiscal life-support.

“Every household, every business knows, when you have to pay, look first where you’re going to suffer penalties if you can’t pay on time,” Carstensen said. “You send a very positive sign. It’s symbolic. It says we’re trying to help you stay afloat.”

Billions in property tax bills a few months away

And while the state income, sales and business taxes all are considerable, an even larger tax bill hits mailboxes in just over three months.

Connecticut municipalities generate about $11 billion per year from property taxes. And, in most communities, the first half of real estate and personal property tax bills — and all of the motor vehicle tax — is due in July.

And if these payments are late, the penalty is a whopper. By statute, delinquent property taxpayers face a penalty of 18% per year.

Leaders of both the Connecticut Conference of Municipalities and the Connecticut Council of Small Towns said state officials have begun discussions about tax relief options here.

Most talk has centered on whether to give communities the option of deferring those penalties, effectively giving taxpayers a grace period.

Betsy Gara, executive director of COST, said any waiver would need to be handled carefully.

With the prospect of more late tax payments than normal — coupled with the additional burdens municipalities already are facing, deferring tax payments or penalties could place even more of a strain on communities — particularly poor cities and rural areas.

Those communities that opt to do so likely would be forced to drain their reserves to stay afloat, and not all can afford to do so, she said. “Certainly towns are spending a lot more on public health and safety than they anticipated,” Gara said. And like state government, municipalities now face skyrocketing pension costs as their respective pension investments lose value amid a weak stock market.

“There’s a tremendous amount of uncertainty at the municipal level,” she said.

Connecticut has a big credit card limit
Lamont tried to eliminate business uncertainty last week with his no-interest, state loan program. It was designed to cover three months of a business’s expenses, was capped at $75,000, and can run for up to 18 months. The loans are limited to businesses with no more than 100 employees. 

And while they wouldn’t commit to launching more state-sponsored relief after the first program maxed out, neither would administration officials rule anything out.

Lamont’s first program was funded utilizing revenue on repaid loans administered by DECD.

But the administration also can draw upon the new, two-year bond package approved earlier this month by the 187-member General Assembly, which leaders sent home two weeks ago for public safety.

In fact, over many years, legislatures have authorized almost $4 billion in general obligation bonds that still haven’t been issued. And while many are tied to specific purposes, many others have considerable flexibility built into them.

So if Lamont needs to borrow again, the credit card is fully loaded.

Leaders: General Assembly is still working — remotely
Without question, Connecticut’s biggest role in providing relief is to become the arms of Washington, D.C., focusing and distributing federal relief to hospitals, other care providers, businesses, the sick and the needy, said Office of Policy and Management Secretary Melissa McCaw, Lamont’s budget director.

But if the state budget must supplement that role, it also remains healthy — but it’s less clear how long that will last.

“We have tools available to us given the federal stimulus package, the state’s strong cash position and historic reserves, and existing programs,” said Lamont’s budget director, Melissa McCaw. “This may not present an ideal situation for our state budget and fiscal forecasts, but these are extraordinary times that require extraordinary efforts.”

Even with a $178 million deficit, this fiscal year’s budget — which ends June 30 — is fine thanks to a $2.5 billion rainy day fund.

But after that things get dicey with some economists declaring the U.S. already is in recession and predicting unemployment will approach 13% by summer.

Connecticut at least has a budget in place, thanks to the legislators who in 1991 put the state on a two-year fiscal cycle.

Lawmakers adopted a preliminary budget for 2020-21 last May. They left the Capitol earlier this month before they could adjust that budget.
But Lamont has limited flexibility to move money around between one appropriation and another. And he is getting advice.

And leaders say the legislature hasn’t gone fully dormant. Democratic and Republican caucuses, in both chambers, meet by conference call.

“At least twice this week I’ve had my entire caucus on a conference call,” House Speaker Joe Aresimowicz, D-Berlin, said, adding other leaders are doing the same. House and Senate leaders then connect by phone.

And while legislators from both parties praised Lamont for taking input from leaders, they said it’s crucial this continue if the pandemic blocks full legislative action for months rather than weeks.

“We are the ones getting information from our constituents,” said House Minority Leader Themis Klarides, R-Derby.“It’s a new world for now and this has to be a team effort.”

“At some point some statutory changes will be needed by the legislature to validate or sustain what is being done on an emergency basis,” added Senate President Pro Tem Martin M. Looney, D-New Haven.

And it’s at this point, economists said, that state government’s relief role will be most tested.

While Connecticut must provide immediate assistance, once the recovery begins, the economy itself must change, Carstensen said.

“This pandemic is fundamentally changing the way we’re going to work, the way we’re going to do education,” he said. “We’re kind of a black hole on I-T infrastructure.”

Connecticut needs to make more use of its credit card when the smoke clears.

Fiber-optic cable, server rooms, data centers and any other aspect of information technology infrastructure is as important in a post-coronavirus-world as any highway, rail or bridge, Carstensen said.

Connecticut also can spur companies to grow by mobilizing billions of dollars in stranded tax credits — tax relief companies have earned but effectively cannot use because of annual limits.

The state could lift those caps for firms adding jobs and expanding operations in key areas.

“If you structure it correctly, there is no net loss of revenue to the state. We do not lose a dime in terms of current revenues,” he said. “It rewards you for doing something to reshape your future. That’s been our problem. We weren’t doing anything and the world was changing.”

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