Economist calls on state employee union leaders to come to table

By Scott Benjamin

With a projected budget gap that is wider than the gulf between the Greenwich mansions and the Quiet Corner farms, Connecticut's legislators are expected to meet in special session this summer to try to take steps to bridge it.

Can it be done without increasing taxes?

Former Gov. Dannel Malloy (D-Essex) raised taxes in each of his two terms in office. CT Mirror has reported that Gov. Ned Lamont's (D-Greenwich) budget for the current two-year cycle didn't include an increase in the income tax rate but is projected to generate $705 million in revenue through hikes in taxes and fees and the canceling of previously approved tax cuts that hadn't yet taken effect.

The fiscal repercussions of the 2010s were not as severe as the fallout from the pandemic.

The figures are staggering: 288,400 jobs lost between March and April combined.

Economist Donald Klepper-Smith of DataCore Partners says that is 259 percent of the jobs created in Connecticut in the last 10 years.

To put it in perspective: Klepper-Smith said in a phone interview that there were 150,500 jobs lost between February 1989 and December 1992 during the biggest employment downturn in recent Connecticut history.

The results from what happened during the economic downturn of the late 1980s and early 1990s indicates that taxes will be increased.

In 1989, former Gov. William O'Neill (D-East Hampton) signed the "largest tax increase in Connecticut history" during the onset of that recession, according to The New York Times.

Two years later former Gov. Lowell Weicker (ACP) signed the state income tax.

Lets take it back to the 1970s.

According to ConnecticutHistory.org, in 1971, former Gov. Thomas Meskill (R-New Britain) let an income tax sit on his desk for 10 days and become law without his signature. The public outrage forced the Democratic-controlled General Assembly to rescind it. He then signed an increase in the sales tax from 5 percent to 6.5 percent, the highest rate in the country at that time, as Connecticut's economy faced a deficit of over $250 million in a budget that was less than $2 billion.

In 1975, when former Gov. Ella Grasso (D-Windsor Locks) was in her first year in office and the Great Inflation was raging nationwide, The New York Times reported that she signed a budget with a "record-breaking laundry list of taxes."

Taxes also increased when there were sluggish times in the start of the 21st century.

CT Mirror has reported that in 2003 former Gov. John Rowland (R-Middlebury) raised income tax rates across the board as Connecticut emerged from the national dot.com bust..

In 2009, Rowland's immediate successor, M. Jodi Rell (R-Brookfield) increased the income tax rate on wealthy households to 6.5 percent and increased corporation and estate taxes, and let the proposed budget sit for 10 days and become law without signing it, according to CT Mirror.

CT Mirror reported on May 1 that there is a projected $7 billion gap in the state budget over the next three years.

So can Connecticut balance is budget without tax hikes following the shock from the pandemic?

"If you increase taxes it's going to lead to more outmigration," said Klepper-Smith.

He told Patch.com last year that Connecticut had a net loss of 428 people each week.

"Connecticut is one of the highest taxed states in the country, and it has been living beyond its means," declared Klepper-Smith. "You have to attack the spending side."

However, the leaders of the state collective bargaining units have said that - among other cost-savings measures - their employees, according to a consultant to the state Office of Policy & Management - will save taxpayers $24 billion over 20 years through concessions in the contact that was signed in 2017. They also have accepted wage freezes at various points over the last 20 years.

"Demonizing them [the state employees] drives me crazy," state Rep Bob Godfrey (D-110) of Danbury said in a 2019 interview with Patch.com. "For at least the last decade they have come forward and helped out."

However, Klepper-Smith said Moody's Investor Services has rated Connecticut's pension debt as the second worst in the country. In 2018, the state Commission on Fiscal Stability & Economic Competitiveness reported that the state's pension obligations are only 29 percent funded.

"There has to be a realignment at some point," he declared, noting that the nation and the state will probably be in a recession for at least a year.

CT Mirror has reported that Lamont has taken a "friendly" approach in getting the leaders of the state employee collective bargaining units back to the negotiating table.

"Either they come to the table and agree to changes [in their benefit packages], or they will be imposed upon them at some point," said Klepper-Smith, who chaired Rell's economic team and was until recently the economist for Liberty Bank. "The average taxpayer is paying for benefits that they don't receive in their own job."

Gov. Gina Raimondo reformed the pension system - which was only 48 percent funded at the time - in neighboring Rhode Island while she was state treasurer from 2011 to 2015. In May, Washington Post columnist George Will wrote that "she told 'crowded angry union halls' that cities and towns might go bankrupt and that promised pensions would disappear. Her reforms - pausing cost-of-living increases, raising the retirement age and the ratio of defined contribution to defined benefit plans - passed the state House 57 to 15 and the Senate 35 to 2."

Klepper-Smith said that Connecticut , likewise, needs "to have fiscal discipline without the rhetoric and address the spending side."

"There is going to be a new economic landscape," said Klepper-Smith regarding the impact of the pandemic.

The New York Times reported that Stanford economist Nicholas Bloom said based on an analysis that he co-authored 42 percent of the recent job losses will result in permanent layoffs.

The Wall Street Journal reported that, "Facing higher costs to keep workers and customers safe and an indefinite period of suppressed demand, businesses are navigating on an even narrower path to profitability."

"The commercial office market will change," said Klepper-Smith. "You could see a sea change" as a result of people working remotely from home during the pandemic.

He has said for years that the economy was undergoing structural changes as companies invested more in capital than labor.

ABC News reported in 2017 that a study indicated that 38 percent of the current jobs could be eliminated by 2032 through automation and digitization.

Chicago Sun-Times sports columnist Rick Telander stated last year that the worldwide web, which was established in 1991, was the biggest development in publishing since the printing press, which has been invented six centuries earlier. He noted that Sports Illustrated, where he wrote from 1972 to 1995, became a "victim of digital pervasiveness," leaving it now a shell of its former self.

In an effort to reduce a national unemployment rate that has surged to 14.7 percent, Democrats are squabbling with their Republican counterparts and GOP President Donald Trump over the $3 trillion Heroes Act, which would provide stimulus to states and municipalities as well as direct payments to individuals. It was narrowly approved in the U.S. House on May 15.

The Republicans are taking a wait and see approach to determine the impact of the $2.2 trillion stimulus that was approved on March 27. Their next move is not expected before early June.

Klepper-Smith said he shares their concern about adding to the federal debt.

"How does that get paid for?" he said. "You can lose your ability to control your means."

No president has submitted a balanced budget since Democrat Bill Clinton on October 1, 2000 - 20 years ago.

Klepper-Smith said, "You need to have good policies. You can't be all things to all people."

Washington Post economics columnist Robert Samuelson recently wrote, "The economy seems to have a split personality. The stock market suggests that things aren't so bad. On Monday [May 18], the market had an explosive day."

Klepper-Smith explained, "The Fed has propped up the stock market from behind the scenes. What is happening is from very active work from the Fed and not from a lot of private investments."

Reports indicate that Trump may seek a payroll tax cut.

"Incentives can be good," remarked Klepper-Smith. "But jobs are created because of profitability and productivity. With a payroll tax cut you might be throwing good money after bad."

Federal Reserve Board Chairman Jerome Powell said in May 13 speech to the Peterson Institute that he is disinclined toward establishing negative interest rates, which have been utilized in Japan, Germany and Switzerland.

Said Klepper-Smith "To think that negative interest rates are the answer is a folly."