Stemerman declares Connecticut needs to reduce high fixed costs

By Scott Benjamin

STAMFORD – It used to be that Connecticut officials would report that there was a budget deficit and months later – usually after the capital gains taxes from the Fairfield County Gold Coast were counted – there would be at least a slight surplus.

Former Gov. M. Jodi Rell (R-Brookfield) said in December 2004 that her budget director indicated there was a $1.2 billion shortfall for the fiscal year ending that next June. But when the fiscal year concluded there was a surplus of about $600 million.

Since the 2008 recession those positive swings have largely been absent.

Wall Street 24/7 has reported that Connecticut’s “flailing economy” contracted 1.1 percent in 2017, the worst performance in the country. It ranked the state government’s pension-funded ratio as the fourth lowest in the country. Overall, Connecticut was rated the 35th best-run state in America.

Between the inaugural on January 9 and the space between Ground Hog Day and Valentine’s Day, a month later, Ned Lamont (D-Greenwich), the 89^th governor of Connecticut, will have to develop a budget that will resolve a projected $1.7 billion deficit for the fiscal year that starts on July 1.

Lamont has warned against using the projected $2.1 billion in rainy day fund to balance the budget.

Greenwich businessman David Stemerman, who was third in the Republican gubernatorial primary last summer, said in an interview, the state government should follow the example of many of Connecticut’s municipalities and seek to keep at least a healthy fund balance to guard against unexpected expenses and maintain a higher bond rating.

“I think that having a benchmark of 10 percent in the rainy day fund should be the goal,” said Stemerman. “We should not be using that money when we have a growing economy.”

Rain may be in the national economic forecast.

Ray Dalio – the Greenwich resident who owns Bridgewater Associates in Westport, the largest hedge fund in the world – told Market Watch this fall that the nation will likely face a recession within two years that will largely be due to debt on health care and pensions, an opportunity gap and a central bank that due to changes in regulations is less able to correct economic downturns.

Former Republican gubernatorial candidates Tim Herbst, the former first selectman of Trumbull, and Danbury Mayor Mark Boughton have said surging college student loan debt also is slowing the economy.

Lamont also has said he won’t increase taxes, although he has indicated that more consumer items may be subject to the 6.35 percent sales tax.

The state Commission on Fiscal Stability and Economic Competitiveness stated in its revised report in November that 53 percent of the state budget consists of fixed costs.

“The fixed costs continue to increase by six percent a year,” Stemerman said. “It adds $500 million to the deficit annually.”

Regarding concessions from the state employee bargaining units, Lamont said as far back as at least July that he will speak with the state employee collective bargaining units about further givebacks following the agreement that was narrowly approved in the summer 2017 by both chambers of the General Assembly. He said then that he disagreed with some of the Republican gubernatorial contenders who wanted to take the unions to court if there are no further concessions.

When asked about continuing the efforts of departing Gov. Dannel Malloy (D-Stamford), who has trimmed the full-time state work force by 13.1 percent since 2011 even though in six of his eight years in office there have been no layoff provisions in the contracts, Lamont told Brookfield Patch.com last July that he would only cut positions via attrition after doing a” forensic audit.”

The governor-elect, who was endorsed by organized labor, said this summer that he didn’t want “any layoffs.”

In its recent revised recommendations, the state Commission on Fiscal Stability and Economic Competitiveness has called on the governor to seek concessions from the state employee collective bargaining units.

The union leaders have said that they’ve made concessions three times since the summer of 2009 and have accepted six wage freezes in recent history. A report from a consultant to the state Office of Policy & Management indicated that their most recent concession package would save the state $24 billion between 2017 and 2037.

Jody Barr, the executive director of the Association of Federal, State, County and Municipal Employees Council 4 in Connecticut, which represents nearly 15,000 Connecticut state employees, stated recently in response to the Fiscal Stability Commission’s report that, “It’s not collective bargaining that needs reform. It’s our antiquated tax structure that benefits the ultra-wealthy and big corporations at the expense of working people.”

The collective bargaining units currently have a no layoffs provision until the middle of 2021 and a benefits package that has been extended to 2027.

After decades of neglect before Malloy’s arrival, their pension system is only 29 percent funded, according to the Fiscal Stability Commission.

CT Mirror has reported that 85 percent of the state employee fringe benefit expenses are accounted for by sins made in the past.

Is there anyone this side of Mandrake The Magician who could balance the budget?

Stemerman, the former hedge fund manager who has written columns for The Hartford Courant and done political commentary for WFSB Channel 3 since the primary, said the state could seek action through the 11th Amendment of the U.S. Constitution, which could “protect the state against accumulated debt.”

He declared that state employee pension debt is soaring throughout the country and although he doesn’t want the state to have to take any legal steps, the 11^th Amendment provisions might get the state employee collective bargaining units back to the bargaining table.

“It is a question of whether we’re first or New Jersey or Illinois is first,” said Stemerman, who gained recognition for a series of detailed policy proposals during the primary. He received The Hartford Courant’s endorsement in the GOP primary and praise from its political columnist Kevin Rennie, a former state legislator.

In a recent column in the Courant, Stemerman repeated his call from this spring on the state to seek a deal similar to what the Big Three auto companies and the United Auto Workers accomplished in the early 2000s.

“Management offered the union a one-time payment and the unions would administer in a benefit plan of their design,” stated Stemerman, who has a bachelor’s degree from Yale and both a master’s degree in business and law degree from Harvard

He said the current system is not sustainable since eventually there won’t be enough money to pay for the pension benefits that won’t be paid for.

When Stemerman first presented his pension restructuring plan last spring, Daniel Livingston, the chief attorney for the State Employees Bargaining Agent Coalition, told CTMirror that it was wrong on “legal, moral and economic grounds.”

Stemerman said the position of the collective bargaining units is that, “All we have to do is raise taxes to provide adequate services. That has been pursued over the last eight years with disastrous results.”

Malloy and the General Assembly approved tax hikes in 2011 and 2017.

Economist Donald Klepper-Smith of Data Core Partners in New Haven, who was chairman of former Gov. M. Jodi Rell’s (R-Brookfield) economic team, has often noted that Connecticut is the only New England state that hasn’t captured all of the jobs lost during the last recession and will likely not do so before there is another economic decline.

Stemerman said, “The companies in this state have seen a series of budget deficits and tax increases. They see that as a source of future taxes.”

He added that human resources consultants that he’s spoken with have said that they usually don’t recommend Connecticut as a relocation destination.

Regarding the teachers pensions, which the state has paid since 1939, Stemerman said the current system in which the local boards of education negotiate the contracts and the state pays for the pension benefits “is not sustainable.”

The Fiscal Stability Commission reported this last winter the teacher pensions were only 54 percent funded.

In 2017, Malloy proposed having the municipalities pay up to one-third of the costs. CTNewsJunkie has reported that no money was set aside for the pensions until 1982 – more than 40 years after the state took over the program.

CTNewsJunkie has reported that Ben Barnes, who has served as the secretary of the state Office of Policy & Management, the governor’s budget arm, for the last eight years, has said that “the biggest obstacles to Connecticut’s fiscal stability” are municipalities and hospitals.

Barnes said during a recent forum in Hartford that the hospitals can plow their tax payments back into their bottom line and the municipalities have been resistant to paying for at least part of the teacher pension costs and have not embraced regional services to lower their expenses.

Stemerman said the system of paying the teacher pensions is one piece of the state-municipal fiscal puzzle. “

“The financial relationship between the state and the municipalities will probably have to change since it is also not sustainable,” he said.

Barnes said at the forum in Hartford that, “We are spending a lot of money on communities that have plenty of money.”

Connecticut had large tax increases in 2011 and 2017. The Fiscal Stability Commission reported last winter that the state economy contracted eight percent between 2007 and 2016.

Regarding the hospitals, Stemerman said in August during the primary that the Malloy administration had incorrectly taken an “antagonistic” approach with them.

On another topic, the revised report from the Fiscal Stability Commission stated that the average salary for a Connecticut state employee is $69,963, the second highest in the country after New Jersey. The commission stated that the national average is $60,105.

“The pay for state employees should be more comparable with that in surrounding states and in the private sector,” Stemerman said. “I think those discussions should start sooner than 2020 when the current pay freeze will end.”

As for economic growth, Stemerman said he believes the state could add jobs in advanced manufacturing through the defense sector and its related industries; the financial services through the addition of financial technical operations; and in health care and education. For example, during the Republican primary he praised the work being done at Jackson Labs in Farmington in the life sciences.

That company had received state assistance from the Malloy administration to move from Maine to the University of Connecticut Health Center.

Stemerman said that the increase in artificial intelligence will be another step in technology improvement, which will both eliminate some existing jobs and create new ones.

He noted, for example, that the automatic teller machine has abolished some bank-related positions but the increased productivity and added positions in other parts of the industry.

Stemerman said he is “encouraged’ with the selections on Lamont’s transition team, which have included New Britain Mayor Erin Stewart, who made a bid for the GOP lieutenant governor’s nomination this summer, and Thad Gray of Salisbury, who was the Republican candidate for state treasurer.

“The election is over and it is now time to come together,” he said, adding that his recent column in The Hartford Courant with recommendations for Lamont was developed in that spirit.

On a separate subject, Stemerman said he disagrees with U.S. Sen. Elizabeth Warren’s (D-Mass.) proposal to require that 40 percent of corporate board members be elected by the corporation’s employees as a way to address wage stagnation.

“That has been the approach that has been active in some European countries where there is stale growth,” he said.

He said wage stagnation has been largely related to low economic growth and that the current expansion of the American economy and the low unemployment rate is starting boost working class salaries.

He said another reason for the slow economic growth following the 2008 financial collapse was the establishment two years later of the Dodd-Frank financial regulations authored, in part, by former U.S. Sen. Chris Dodd (D-East Haddam).

Financial services executives have said it has made it “more complicated” to make transactions on Wall Street.

Stemerman, who owned a hedge fund company in Greenwich before running for governor, said he agrees with the legislation’s requirements on having banks maintain higher levels of capital and liquidity in an effort to avoid a crisis similar to the 2008 turbulence.

However, the bill also has forced financial institutions to multiply the number of compliance officials.

“When you think of the costs of the regulators, it has created a burden that is significant and is borne by consumers and lenders,’ said Stemerman. “That is one of the reasons that growth was so slow for many years after the financial crisis.”

He said Dodd-Frank has made it “particularly burdensome” for the community banks, which often make small business loans. He’s pleased that revisions in the legislation have at least party addressed that issue.

On Connecticut’s elections, he said that Republican President Donald Trump “played an outsized role” in Lamont’s victory over former GE and UBS executive Bob Stefanowski of Madison, the GOP nominee, by about 44,500 votes, with unaffiliated candidate Oz Griebel of Hartford, the former head of the MetroHartford Alliance, finishing a distant third.

For the first time since 2008, Republicans experienced a net loss of seats in the state House and the state Senate.

“The red states got redder and the blue states got bluer,” Stemerman said of the president’s impact on Connecticut, a Democratic state which no Republican presidential candidate has taken since George H.W. Bush in 1988, and that hasn’t had a Republican congressman since Chris Shays of Bridgeport was defeated in 2008.

Stemerman called on the party to improve its get out the vote operation. Some observers believe the Fight Back CT canvassing organized by U.S. Sen. Chris Murphy (D-Cheshire) was a factor in the Democrats’ success. CTMirror has reported that Fight Back CT made 1 million phone calls and 250,000 home visits on behalf of Democratic candidates.

The former GOP gubernatorial contender said Connecticut also should elect its nominees through direct primary.

Connecticut is “one of only four states that select their candidates at a statewide convention,” said Stemerman, who did not have the required 15 percent of the convention delegates and instead petitioned his way onto the primary ballot.

Critics have said too many months are largely devoted to candidates interacting with the 1,500 or fewer delegates that will vote at the state convention.

Stemerman said the state should have open primaries which would include the unaffiliated voters. Under that system, he believes candidates would be less inclined to hew to the party’s political base and the overall turnout would be higher.

He said the primary should be held in “May or June” instead of early August during the height of the summer vacation season. He added that the earlier date also would give the nominees more time to develop their platforms.