MARC S. RYAN – Some hopeful news

Addressing concerns raised over the state budget crisis, members of Gov. John G. Rowland’s administration were on hand at this year’s BankWorld 2003 conference to offer predictions about where Connecticut is headed economically.

BankWorld 2003, a daylong forum offering bank management, mortgage bankers and other financial services professionals the opportunity to learn about new business techniques and technology, was held Tuesday at the Radisson Hotel & Conference Center in Cromwell. It was sponsored by the Connecticut Bankers Association and The Warren Group, parent company of The Commercial Record.

Marc S. Ryan, secretary of the Connecticut Office of Policy and Management, spoke at the invitation-only CEO/CFO Luncheon held at BankWorld. People’s Bank President and Chief Executive Officer John Klein, whose bank hosted the lunch, noted that as OPM’s budget director, Ryan is “responsible for the policy, planning and management of state government.”

Klein added, “This is a watershed year for state government, and we all have our opinions on how to address this budget crisis. I think we all agree that this is very much an expense issue as well as a revenue issue.”

He noted that the state has made “remarkable progress” during the last eight years and expressed his hope that all of that work isn’t undone in the process of repairing the budget.

Ryan, who is also an adjunct professor of state government at the University of New Haven, spoke of Rowland’s biennial budget submitted by the House Appropriations Committee on Tuesday – a document which had just been released and reviewed during the morning before his speech.

He offered some encouraging news, citing a new report that found consumer confidence is rising on a national level.

“Consumer confidence rose about 0.4 percent, and personal income is going up as well. I hope that this trend will help to put life back into the state’s economy,” said Ryan. He added that Connecticut is one of a dozen or so states where the economy is primarily driven by the stock market and capital gains.

In what Ryan called a “staggering” development, the state saw a 500 percent increase in capital gains at the turn of the century.

“That was really driving the rest of our economy,” he said. However, once into 2001 and 2002 gains started to drop about 50 percent, so the 500 percent increase was down to only 250 percent. Ryan predicted that gains will drop another 25 percent in 2003.

“Not only will they drop this year, but I don’t think capital gains will come back to life they way were again,” said Ryan. At the peak of capital gains, 60 technology companies were commanding 10 percent of the stock market, and not one of them had turned a profit.

“That really drove a frenzy in the market,” said Ryan, who added that telecommunications companies also took a huge hit. They were expected to experience 1,000 percent increases every year, but instead only saw 100 percent increases.

“The telecom industry saw a tremendous fallout that will take years to sort out. That’s had a major impact on all sectors of the economy,” he said.

Layoff Woes

Ryan believes the economy will be fundamentally struggling for the next three to five years. However, he remarked that the only thing currently driving the economy forward is consumer spending.

“Business purchases are way down, and consumer refinancing made up for the real loss in disposable income,” he said, adding that car purchases also have helped the economy considerably.

“But there is a limit to how many times you can refinance, and how many cars you can buy,” he said. “All debt is at all-time highs and consumer debt has tremendously spiked up in recent months.”

Now that the war in Iraq is rapidly winding down, however, Ryan said things will slowly start to get back on track. He noted that it was the anticipation of war, rather than the cost of war itself, that had been scaring businesses. The fact that the war was shorter than expected is good and should drive the economy forward, he said.

The bad news that Ryan brought was that he expects to see multiple corporate surcharge taxes at the state level in the biennial budget proposal. He said that plan echoes the corporate tax structure of the Connecticut government in the late 1980s and early 1990s – a period that he described as anti-business and anti-capitalism.

The proposed budget also comes very close to the budget spending cap, and Ryan said if that isn’t looked at, Connecticut could see itself anywhere from $100 million to $300 million over the cap.

“It’s really up to the governor to protect the integrity of the spending cap,” he said.

Rowland’s emergency one-year budget passed in February included $650 million in increased taxes, and the current budget proposal includes about $800 million more, according to Ryan. He predicted that legislators will look toward a millionaire’s tax as well – something that he feels will drive businesses from the state as it has done in the past.

In “a good year,” 7,000 residents raise one-third of the income tax for the state of Connecticut, he said. There are 1.4 million residents overall. Therefore, he said, a millionaire’s tax could be detrimental to the state.

The February budget, however, already increased the average per-household taxes by $700. The proposed budget will raise taxes by another $900 per family.

During the quarterly meeting of the Connecticut chapter of the U.S. Small Business Administration held during BankWorld, state Comptroller Nancy Wyman spoke briefly on the state’s economy and business climate.

“I don’t have the greatest news,” said Wyman. “At one point I used to use the word ‘surplus’ a lot, but now I think it’s been taken out of Webster’s [Dictionary].”

Wyman said the state has endured many layoffs in recent months, with about 5,000 employees losing their jobs in February. Of those, roughly 2,800 were state employees. Also, many state employees are being forced into early retirement. As of June 1, about 5,000 state employees will be retiring.

“These are not elderly people,” said Wyman. “These people will be out there looking to do something else, so don’t be surprised if they’re knocking on your door as lenders.”

Wyman predicted that more small businesses will be cropping up in the coming months because there will be numerous unemployed workers and not many businesses that are hiring.

“We’re not going to see the economy secure until businesses are hiring again,” she told the audience of bankers and lenders. “I’m worried about Pfizer [Inc.]; I’m worried that there will be more layoffs. That’s the worst part for us and we’ve got to see a flattening off of layoffs and get people back to work.”

Compounding the current problem with layoffs is the fact that business spending is declining.

“This is one of the few areas that Marc [Ryan] and I agree on. Our taxes just aren’t coming in. The businesses in Connecticut scare us because they aren’t hiring and they aren’t buying.”

Despite the fact that business spending is in decline, however, consumer spending appears to be stabilizing.

“The average consumer is spending, and the sales tax is doing OK,” she said.

Wyman noted that the state government’s deficit is still a major issue. Even though a deficit-reducing budget was passed in February and the new budget submitted on Tuesday is aiming to solve the crisis, the state will still end up with a $100 million-plus deficit this year and next year it will be close to $1 billion, said Wyman.

She expects to see numerous budget cuts and tax increases this year, and said the governor’s proposed biennial budget is off balance because it expects larger revenues than those currently being received.

“What we are seeing is more tax increases and more spending cuts, but when the governor came out with his cuts they were at the city and town level, affecting every business in the state,” she said. Because the only way a city or town can make up lost revenue is to raise property taxes, many municipalities will be forced to do so at the expense of local businesses.

Currently, the largest cost for Connecticut businesses is health insurance, which is a national trend. The state runs the Municipal Educators Health Insurance program, which legislators are trying to get offered to small businesses to help with rising costs.

“If our budget increase is in the area of 2 to 3 percent, the health insurance increase is over double digits,” said Wyman.

The state has been able to negotiate its expected expenditures this year, and freed up $20 million in the process. Wyman said that might seem like a lot of money, but not compared to the overall budget.