Economist says Connecticut government faces 'massive deficits'

By Scott Benjamin

A noted economist insists that “there is no politically credible combination of tax reform” or “tax increases that will mitigate” a projected combined state budget deficit of at least $10 billion deficit over the next three fiscal years.

University of Connecticut Finance Professor Fred Carstensen – the director of the Connecticut Council for Economic Analysis – wrote in a prepared statement to Patch.com that the state government faces “massive deficits, much worse than those to which” the state Office of Fiscal Analysis (OFA) – the General Assembly’s fiscal arm – or the state Office of Management & Budget (OPM)– the governor’s budget arm – “admit.”

Carstensen stated that OFA and OPM had until recently been projecting deficits of about $7 billion through the next three fiscal years, which would conclude in June 2024. He contends that “a more reasonable projection would anticipate $10+ billion” as the economy recovers from the pandemic.

Economist Donald Klepper-Smith of DataCore Partners, who served as chairman of former Gov. M. Jodi Rell’s economic team, stated in an e-mail message to Patch.com that Carstensen’s projections on the projected state budget deficits “seem reasonable” to him.

However, CT Mirror budget reporter Keith Phaneuf wrote on January 15 that, “Gov. Ned Lamont’s [(D-Greenwich)] prospects for balancing the next state budget without tax hikes took a big leap forward as revenue projections for the coming two years skyrocketed by almost $1.7 billion.”

The story stated that it might be possible with a record $3.1 billion in the state’s rainy day fund to avoid tax increases in the two-year budget cycle that will begin on July 1 and also keep a small amount of the surplus fund intact.

State Rep. Stephen Harding (R-107) of Brookfield said in a phone interview with Patch.com that he was “pleasantly surprised” by the more optimistic economic projections.

“It probably is largely based on capital gains receipts,” said Harding. “It is surprising considering the level of unemployment. It doesn’t seem to add up.”

Connecticut’s unemployment rate was 3.8 percent in November 2019 and 8.2 percent in November 2020, according to the Labor Department. The Hartford Courant has reported that, according to the Connecticut Restaurant Association, 600 restaurants in Connecticut have closed since the pandemic began last March.

However, Kiplinger reported last year that Connecticut has the third highest wealth concentration in the United States. Former state Sen. Jamie McLaughlin, a former Brookfield resident who now lives in Darien, told Patch.com in 2018 that without nine municipalities in the Fairfield County Gold Coast - which is the home for many financial services executives - Connecticut’s economy would probably be similar to that of Kentucky.

Why is there an apparen split personality between the general economy and the stock market?

Harding said there appear to be “parallels” with the 2008 recession when “Wall Street appeared to emerge more strongly than Main Street.”

However, Harding – who represents Brookfield, the Stony Hill section of Bethel and a slice of northern Danbury - said that despite the more optimistic state revenue projections and the vigorous Wall Street activity, he supports further federal stimulus on top of the nearly $4 trillion that has been allocated during the pandemic.

“I think that there is more than can be done through federal stimulus,” he remarked.

Brookfield First Selectman Steve Dunn also told Patch.com in a recent interview that he believes that additional stimulus will be needed to revive the economy.

However, after months of inactivity, there are fears that some jobs – particularly those in the entertainment and fitness sector – may not return.

Said Harding, “I do share that concern. There is a question mark as to whether the restaurants and movie theaters will return to normal, for example, but I am optimistic that once the pandemic ends those sectors will return to normalcy.”

Lamont will deliver his proposed budget to the General Assembly in February.

Dunn said that during his first five years in office there has been a reduction in municipal aid each year and that municipal officials across the state should be prepared for even deeper reductions over the next two years as a result of the pandemic.

Carstensen, who was among the economists on a panel discussion sponsored last October by the Yankee Institute, wrote that over “the next few years” there will be “hundreds, perhaps thousands of public sector” layoffs.

To address the revenue shortfall, in part, he recommended that the state improve auditing and enforcement in the state Department of Revenue Services (DRS), upgrade its balance of payments with the federal government and boost economic growth in advanced manufacturing, biomedical technology and information technology.

Regarding DRS, Carstensen stated that it “is profoundly understaffed” and that as “a result of poor auditing and enforcement” sales tax revenues “have fallen perhaps $225 million annually.”

In response, DRS spokesman Jim Polites stated in an e-mail message to Patch.com that “The tax professionals at DRS are dedicated public servants and excellent at what they do. The DRS is grateful to Gov. Lamont and the Legislature for their ongoing support, which includes investments in a multi-year modernization initiative that will streamline tax administration and improve the taxpayer’s experience.”

Polites added that, “Connecticut is a national leader on marketplace fairness efforts requiring online retailers to register with DRS, and to collect and remit sales tax for online purchases made into the state, which have increased exponentially. On these and other fronts, DRS will continue to deploy resources in the most efficient and effective manner possible.”

Carstensen also wrote that Connecticut has the worst “balance of payments” ratio in the nation with the federal government.

He stated that “The state gets back a measly $0.82 for every dollar it sends to Washington. Only a handful of other states even have deficits; most break even or are in surplus.” He estimated that Connecticut could be losing as much as $1 billion a year.

Harding said he believes that the balance of payments can be improved through “work with Connecticut’s congressional delegation” and added that there could be improvement since U.S. Rep. Rosa DeLauro (D-3) of New Haven recently became chairman of the powerful U.S. House Appropriations Committee.

Carstensen also contends that Connecticut’s economy “is now the same size it was in 2006 and that it has been “the worst performing state economy in the nation since 2008.”

Therefore, he stated that he believe that the state government should develop public-private partnerships to spur growth in advanced manufacturing, biomedical and information technology.

CT Mirror has reported that during a tour of southeastern Connecticut shortly after being elected in November 2018, Lamont said that Connecticut “is the Silicon Valley of advanced manufacturing.” He appointed a Work Force Council in 2019 which distributed a report last fall on how to improve training for jobs that are available.

The governor told Patch.com during his 2018 campaign that there are jobs that go vacant in Connecticut because employers cannot find qualified applicants and that he wanted to resolve that issue.