Investing in business climate will be a tall order for CT

It’s relatively easy to find consensus on where Connecticut must invest to improve its business climate.

The bigger challenge for state government, said economists and business leaders Wednesday, will be to find the resources to invest — in transportation, information technology and higher education — as the cost of public-sector retirement benefits spikes over the next decade to 15 years.

While politicians battle over what role recent state tax hikes might have played in General Electric’s decision to move its global headquarters to Boston, economist Nick Perna said there is a larger issue.

Economist Nick Perna

CTMirror.org file photo

Economist Nick Perna

“We can talk about the things we need,” said Perna, economist for Webster said. “But can we pay for them?”

“The legislature doesn’t look consistently at issues over time,” said University of Connecticut economist Fred V. Carstensen, who heads the Connecticut Center for Economic Analysis. “We fly blind most of the time. That has to change.”

Connecticut has long had a huge blind spot, economists and business leaders have argued, when it comes to the pension and retirement health care obligations that have taken an increasing share of budgets for more than a decade — and threaten to take even more through the mid-2030s.

The state failed to save anything for more than four decades for pension programs, both for retired workers and for public school teachers. And while that changed by the mid-1980s, the state on numerous occasions afterward contributed less than was necessary to keep them in sound fiscal health.

Despite their problems, the cash-starved pension funds look relatively healthy compared with a retiree health care program for which Connecticut has enough assets to cover less than 1 percent of its long-term obligations.

All totaled, the state has more than $45 billion in unfunded retirement benefit liabilities.

This means retirement benefit costs increasingly consume more of annual spending growth, squeezing other priorities out of the budget.

For example, the general fund contribution to the state employees’ pension fund grew by 13 percent this fiscal year, while retiree health care costs shot up almost 17 percent.

Together they represent a tenth of the budget, which grew by more than 14 percent. The rest of the general fund grew by just over 3 percent.

Gov. Dannel P. Malloy said Wednesday he is very aware of the limits this decades-old problem places on state government’s ability to assist economic growth and is developing plans to address it.

“I’m very committed to it,” he said. “I understand the significance to the business community, and I want to get it resolved.”

Malloy has recommended restructuring the pension system to effectively stretch costs due over the next 17 years over an extra decade or two. Critics have noted that while this would limit cost spikes between now and 2032, it also would cost Connecticut more in the long run. It specifically means Connecticut would invest billions of dollars less to cover future pension expenses between now and 2032 than it would under the current system.

Joseph F. Brennan, president of the Connecticut Business and Industry Association

CTMirror.org file photo

Joseph F. Brennan, president of the Connecticut Business and Industry Association

The state has made progress under Malloy’s administration in trying to control overall budget growth, but these factors still threaten to push spending up rapidly over the next decade-and-a-half, said Connecticut Business and Industry Association Joseph F. Brennan.

“We need to redouble our efforts to make the business climate more attractive so we don’t see other companies making similar decisions” to GE’s, he said.

“It’s time for an urgent and honest assessment of the state’s business climate,” he added.

State officials can take an important step in that direction by scaling back their reliance on one-time revenues, borrowing and other fiscal gimmicks used to prop up the budget, Perna said.

This fiscal year the state is counting on almost $150 million in borrowing to cover debt payments. And Connecticut’s use of the credit card to make other credit card payments is scheduled to rise to $170 million in 2016-17.

“There’s almost no truth in budgeting in Connecticut,” Perna said, adding that borrowing practices such as these help mask the state’s fiscal challenges, not resolve them. “This all leads to the (budget) unpredictability that really drives businesses up a tree.”

Carstensen long has urged state government to expand both its data collection and economic modeling capacity so it can better assess how its limited resources are best used — and which investments and tax breaks aren’t paying dividends.

The head of the new state Council on Economic Competitiveness, Joseph McGee, said it would be a mistake to try to cast GE’s decision to leave as a simple response to recent state tax hikes.

McGee, who is vice president of the Business Council of Fairfield County, said the Fairfield-based GE’s choice of Boston reflected that city’s successful efforts to develop a talented, innovative young workforce and cutting-edge businesses.

“Connecticut was not developing quickly enough the talent pool that drives innovation,” McGee said, adding that his panel recently commissioned a diagnostic analysis of Connecticut’s economy, how it compares with other states, and the factors that both weaken and strengthen it.

That report, due in February, will look at the factors that limit Connecticut’s business investments, including the long-term retirement obligations.

“We have grown a government that is bigger than our revenue can support,” he said. “That has been a problem that has really hamstrung our state.”

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