Economist Says State Needs More Concessions From Bargaining Units

By Scott Benjamin

Noted economist Donald Klepper-Smith says the budget impasse at the state Capitol is “undermining confidence” in Connecticut’s economy and signals that legislators “are out of touch with the average household.”

Nearly a month after the start of the fiscal year, the General Assembly still has not approved a budget for the current two-year cycle. There is a projected $5.1 billion deficit.

Klepper-Smith said he agrees with former state Sen. David Cappiello (R-24) of Danbury, who said in 2008 that after finishing 14 years in the General Assembly that the legislative body suffers from having very few legislators who have ever owned a business.

“We need to decide if we want to save the state economy or we want to save the public sector,” the economist said.

He said the state Senate should next week reject the proposed contract with the state collective bargaining units. Supporters of the package say it will save $1.57 billion over the next two fiscal years and $24 billion over the next 20 years. The economist said the lawmakers should seek additional concessions on pensions and health care coverage. He said Gov. Dannel Malloy (D-Stamford) and legislators also should not make layoffs exempt for four years nor should they extend the benefits package from 2022 to 2027.

The package was approved this week on a 78-72 mostly party-line vote in the state House.

CT Mirror reported this spring that retired Webster Bank economist Nick Perna of Ridgefield also has said that the most important step to reviving Connecticut’s economy would be establish stable state finances.

State Senate Republicans also have proposed suspending binding arbitration, which CTNewsJunkie columnist Susan Bigelow stated would likely lead to a prolonged court battle.

Nevertheless, Klepper-Smith, who chaired former Gov. M. Jodi Rell’s (R-Brookfield) economic team, said the issue should be addressed, noting that Pew Charitable Trusts in Philadelphia has reported that Connecticut is one of only four states that provide binding arbitration to their public employees.

He said Connecticut’s lack of “fiscal discipline” was largely responsible for General Electric’s decision to move its world headquarters from Fairfield to Boston and Aetna’s recent announcement that it would move part of its operation from Hartford to New York City.

“Connecticut is the only New England state that hasn’t recaptured all of the jobs lost in the 2008 recession, and the General Assembly is considering a wage and benefits package for the state employees that most middle class Connecticut residents will never see,” said Klepper-Smith, who is the chief economist for DataCore Partners in New Haven and Farmington Bank.

Klepper-Smith said there may be another recession before Connecticut reaches the prior peak of 1,713,300 jobs that it had in March 2008 before the financial crisis.

“The taxpayers aren’t going to be able to pay for the unfunded obligations,” he said. CTNewsJunkie reported earlier this year that the state’s pensions were only 35.5 percent funded. Typically, at least 80 percent is considered a good plateau.

“On average, we’re losing 574 residents per week,” the economist said in a phone interview.

Klepper-Smith said young people are attracted to the innovation hubs in Boston, Seattle and San Francisco.

“The Mellenials are going elsewhere because there are more meaningful jobs, affordable housing and a higher quality of life,” he said. “With high student college debt, they’re not going to be seeking the houses at $300,000 and up.”

A decade ago, before the Great Recession, Connecticut’s economy was rated first in New England. Stamford ranked fourth in the world in financial services and The New York Times reported that ESPN in Bristol was the most profitable cable-related company in the world.

The Wall Street Journal reported in March that the Nutmeg State’s real estate insurance and financial services sectors have recaptured 20 percent of the jobs lost during the recession, compared to a 77 percent recovery rate in Massachusetts and 69 percent in New York state.

Cord-cutting resulting from streaming options prompted ESPN to lay off workers this spring. Business Insider has reported the sports media giant has 12 million fewer subscribers than six years ago.

The Native American casinos – Mohegan Sun and Foxwoods - which had been contributing as much as $450 million combined annually from their slot revenues a decade ago are now contributing less than $300 million and have sought approval for a satellite facility in East Windsor to compete with a casino that is to be built in nearby Springfield, Mass.

Klepper-Smith said Connecticut can’t rely heavily on gaming, since many of the jobs are lower-paying.

Interestingly, he said Connecticut could have significant job growth in manufacturing. That area experienced a 50 percent reduction in positions between the early 1980s and the early 2000’s, according to former U.S. Rep. Jim Maloney (D-5) of Danbury.

Klepper-Smith pointed to a 2012 report that he co-authored that noted that manufacturing in the Nutmeg State had grown the previous year for the first time in decades and there could be a growing export market for high-end manufacturing products.

The report indicated that some Connecticut companies were moving back manufacturing jobs that had been shipped overseas and China’s manufacturing costs had increased, making it less attractive than during the early 2000’s after the United States established permanent normal trade relations with the Asian country.

The report also cited a study that usually each manufacturing job creates 1.5 to 4 additional positions in a state.

University of Connecticut economist Fred Carstensen told CTNewsJunkie last month that his school should establish an aerospace engineering center that would supplement the work being done at Francis Pratt and Amos Whitney in East Hartford, which makes airplane engines, and at the Lockheed Martin operation at Igor Sikorsky in Stratford, which manufactures military helicopters.

“With the increase in aerospace manufacturing, I think we need to build further on that economic engine,” Klepper-Smith said. “We need to have diverse elements – manufacturing, real estate, insurance, finance and entertainment – that are growing.”

On another topic, the economist called Malloy’s Five Five/Next Five program a “shoddy” approach to job growth since it has done little to improve Connecticut’s economy. The program has provided financial incentives to companies such as Charter Communications in Stamford, ESPN in Bristol and Bridgewater Associates in Westport to increase their state workforce.

Klepper-Smith said that in Connecticut and elsewhere there will be continued pressure on bricks-and-mortar retail stores as Amazon and other online retailers acquire a larger share of the market.

He said the online retailers are “in the growth stages,” and that their current five percent share of the market will probably grow “to eight or nine percent” in the next few years.

“The local retail outlets are not going to go away and people will continue to go out on a Saturday afternoon or a rainy day and spend considerable time shopping,” Klepper-Smith added.

However, he said he expects the online retailers to “become more aggressive, since they have a distinct advantage since their cost structures are lower."

Klepper-Smith said a sign of their aggressiveness is the 855,000-square-foot fulfillment center that Amazon is building in North Haven. The New Haven Register has reported that the $255 million facility will have 1,800 employees. Amazon already has a fulfillment center in Windsor and a sorting center in Wallingford.

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