Connecticut’s billion-dollar error?

A new report is accusing Connecticut’s government of failing to make wise investments in growing the state’s economy and wages, resulting in the loss of billions of dollars.

“The purpose of this annual report is to provide an overview of Connecticut’s economy, especially its labor market, and to dive deeper into the status of certain workers and to provide policy options to support Connecticut’s economy and workers,” said Dr. Patrick R. O’Brien, research and policy director at the nonprofit Connecticut Voices for Children, which published “State of Working Connecticut Report.”

The report’s findings were delivered in three sections. The first was an overview of the current state of the economy, followed by an overview of wage growth in the state and Connecticut Voices for Children’s policy proposals to help close the gaps it identified.

O’Brien used a Sept. 7 press call to examine the report’s finding. He began with an examination of job growth, noting it “is important because hourly wages and annual salaries are the primary source of income for most families. Employment growth is also important because it substantially impacts personal income growth and GDP growth both of which substantially and directly impact the state’s budget and in turn the state’s ability to provide support for low- and middle-income families.”

According to O’Brien, Connecticut’s non-farm employment growth rate has lagged behind the national average by 3.1 percentage points for the period between February 2020 to June 2023.
“If Connecticut’s non-farm employment growth had simply mirrored the growth rate for the US over this period,” O’Brien reported, “the state would have nearly 53,000 additional jobs.”

If the state’s jobs growth were compared to that of the nation as a whole since the start of the Great Recession, O’Brien added, the state fell behind by 14.4 percentage points, roughly 246,000 additional jobs.

“Also notable,” he continued, “both figures show that Connecticut’s slower job recovery is due in part to the decline in state and local government jobs. For example, in the US from December 2007 through June 2023 state and local government employment is up 0.9% whereas state and local government employment in Connecticut is down 10.5%, or the equivalent of about 25,000 jobs.”

O’Brien indicated that wage growth is among the most important indicators of not only the general economic health of residents, but a vital one for budgeting purposes as spending caps use it to help set the allowable growth in budget appropriations.

“The key finding is that when using the pandemic induced recession as a baseline, Connecticut’s total personal income growth through the fourth quarter of 2022 is 4.2 percentage points lower than the growth rate for the US as a whole,” he said.

According to O’Brien, keeping pace with the nationwide personal income growth rate would mean nearly $200 million would be available for the state to invest in critical projects every year. The situation becomes even more dire when the rate since the Great Recession is considered, coming to a 30.2 percentage point deficit compared to the national average.

To illustrate his point, O’Brien proposed a hypothetical where the state had a $10 billion budget and the 4.1% wage growth rate of the national average between 2007 and 2022. It would yield a budget of $18.3 billion after 15 years, while the actual growth rate of 2.8% would only come to $15.1 billion.

O’Brien allowed that it would be difficult to state those exact numbers with certainty, but he said that hundreds of millions of dollars were lost due to those slow growth rates.

Likewise, the state’s GDP lagged far behind the national averages. A bigger GDP means that even a fixed percentage of it becoming tax revenue can be substantially increased. If the state had stayed on par with the national average even if the total tax revenue stayed at 6.5% of the state GDP the state would have $5.6 billion more revenue, without raising taxes at all.

“That could have been used to pay down the state’s high level of long-term obligations while also increasing on critical public investments and providing tax cuts for middle- and low-income families to make the tax system fair,” O’Brien said.

The top priority among the policy proposals O’Brien shared was housing.

“The first broad policy option is to make housing more affordable, especially by increasing the supply of housing. This will make it easier both for existing workers to stay in the state and for potential workers to move to the state,” O’Brien said, noting that both outcomes would help to grow both personal income and the state’s GDP. “At the same time, it will help offset the negative impact of wage inequity and wage gaps by reducing the percentage of income workers spend on housing.”

O’Brien also put forward efforts to make it easier for the formerly incarcerated to rejoin the work force, which can both positively impact the economy and reduce recidivism. A similar effect could also be achieved by strengthening the state’s early childhood care and education programs. Better access to care and education for young children would allow more parents to join the work force, help close achievement gaps, and potentially create valuable jobs within the sector by creating more roles for childcare professionals.

O’Brien emphasized the potential of these policies, particularly when combined with tax cuts for lower- and middle-income families, to help address the third highest level of income inequality in the country, which is even more pronounced along racial and ethnic lines.

“I think it’s useful to highlight that over the last several years Connecticut has been running surpluses of billions of dollars and been using that to pay down additional pension debt payments, and that is essentially operating as a fiscal drag,” O’Brien said of immediate remedies the state could consider, allowing that this act had a positive long-term benefit for the state while insisting that implementing improvements to the tax system and services that can better stimulate the state’s economic growth would have immediate benefits as well as long term pay offs.

“It’s an unfairness from an intergenerational perspective because the whole cost of the additional payments is coming from the current generation of families that are essentially paying the tax revenue now and creating that surplus, whereas the benefits from paying down the additional pension debt payments are accrued over several decades,” he said.