Hartford Business Journal

20 Hartford Business Journal • March 2, 2015 www.HartfordBusiness.com Editorial Malloy's economic policies send mixed signals F or the second time in four years Gov. Dannel P. Malloy has proposed a budget that cuts spending on certain programs and raises taxes, drawing the ire of many interest groups at the State Capitol. Such is the life of a governor leading a state shackled by a slow economic recovery. Malloy's two-year, $40 billion budget has something in it for just about everyone to dislike, whether it's Medicaid cuts that will squeeze nonprofit healthcare providers or an extension of the corporation tax surcharge that will make Connecticut less competitive for job growth. While the short-term pain is palpable, it's the long-term outlook that is more concern- ing. Malloy's budget director Ben Barnes warned late last year that Connecticut has entered into a period of "permanent fiscal crisis." What that means exactly is unclear, but if the new normal is Connecticut facing sizable budget deficits every two-to-four years, the state's future is in trouble. Operating in an environ- ment where there is a constant threat of tax increases will not promote business confidence. At the same time, a slash-and-burn approach to state spending won't be a cure-all. With more than half of the budget paying for entitlements, debt service, and already agreed upon labor contracts, there's little wiggle room to avoid budget cuts that have a significant impact on Connecticut's neediest residents. Yes, Connecticut must tighten its purse strings, particularly spending on state employee benefits, but that alone will not ensure long-term fiscal health. The only way Connecticut is going to cure its budget ills is by expanding its tax base through strong, consistent economic growth. That means adding well-paying jobs that not only boost employment but also personal income levels. Yet, it's not clear if we have a long-term plan or vision to make that happen. Malloy's economic policies have been inconsistent at best. While he's made big bets on economic development initiatives that aim to encourage long-term job growth, his budget proposals continue to raise the cost of doing business in Connecticut. His latest spending plan, for example, includes extending indefinitely the 20 percent surcharge on the corporation tax, which was supposed to sunset in July, and further limiting employer's use of tax credits. Connecticut's business taxes traditionally have been competitive with other states, but Malloy's budget will erode some of that competitive advantage. Maintaining a per- manent 20 percent surcharge essentially raises the state's corporation tax rate from 7.5 percent to 9 percent, one of the highest rates in the nation. On the flip side, Malloy's $1 billion Bioscience Connecticut initiative has earned acclaim from the business community and could anchor a growing industry. Already, it has attracted Jackson Laboratory and New York's Icahn School of Medicine at Mount Sinai to establish research operations in the state. The Democratic governor's $400 million in tax breaks for United Technologies Corp., while controversial, also made sense because it allows the state's largest employer to use tax credits it previously earned, but couldn't actually use, to invest in research and development and new facilities. More importantly, it ensures hundreds of Connecticut aeroparts suppliers that their biggest customer will remain here long term. Malloy's renewed focus on transportation infrastructure is also good, although pitching a $100 billion, 30-year investment without saying how the state will pay for it leaves much to be desired. These big bets offer promise, but their potential for improving Connecticut's long- term prospects diminish with each passing legislative session that introduces higher taxes and fees and new employer mandates. Connecticut's fiscal picture won't get better on big government projects alone. We need a competitive environment that gives the private sector confidence Connecticut is a smart, cost-effective place to do business. n rulE of law Subjecting UConn Foundation to freedom of info. act bad idea By John M. Horak T here is legislation before the General Assembly that would subject the Uni- versity of Connecticut Foundation to the Freedom of Information Act (FOIA). This is an example of an unfortunate trend in which cash-strapped governments are trying to assert influence over the operations and assets of private nonprofit organizations. The slope is slippery, and state nonprofit leaders should protect their turf by opposing this or any simi- lar legislation. Our socioeconom- ic system is akin to a stool with three legs. The first is the private sector (activities and assets controlled by private interests for a private benefit); the second is the public sector (activities and assets controlled by government for the public benefit); and the third is the intermedi- ate or nonprofit sector, which has private and public sector features: activities controlled by private boards of directors with private assets used for a pub- lic benefit. There are two features of nonprofit organizations to keep in mind. First, they are private entities because individuals create and fund them as a mat- ter of their personal constitutional rights to associate and to decide how to use their prop- erty. The freedom of association allows us to form associations, to designate their public purpose, and to decide who will govern them. Similarly, as a matter of individual choice peo- ple voluntarily donate their property to these associations to support their public missions. Second, private nonprofit organizations can lawfully support a governmental activity. This is because the term "charitable" (typically used for nonprofits) is really synonymous with the term "public benefit" (typically used for governmental agencies). The law allows people so inclined to make voluntary tax deductible charitable con- tributions (over and above their tax obligations) directly to the state of Connecticut (or to its agen- cies and universities) in the same way they can, for example, contribute to the Hartford Founda- tion for Public Giving or a local homeless shelter. The UConn Foundation is a part of the third leg. It is a private association managed by a fiduciary governing board of private individuals; and its purpose is to raise money from private donors for a public benefit. The same is true for the Hartford Foundation and the homeless shelter, though the public ben- efit is different in each case. In contrast, the Freedom of Information Act is designed to open the records and meet- ings of "public agencies" (the second leg of the stool) to public scrutiny. So, the questions for the General Assembly are these: What is the rationale, in law or poli- cy, to hoist FOIA upon the back of the UConn Foundation, and would that rationale also apply (to choose an attention-grabbing exam- ple) to the Hartford Foundation (which has an endowment in excess of $900 million used for the public benefit in central Connecticut)? The only discernable rationale in this puzzle that makes sense is to put the kibosh on the FOIA debate quickly, for the following reasons: First, the fact that nonprofits provide a public benefit is not sufficient to re-charac- terize them as public agencies. In a Jan. 15 editorial ("End Secrecy at UConn Founda- tion") the Hartford Courant opined that the state should "strip away much of the secrecy" that protects the foundation because it has "a very public purpose..." The Courant should learn the difference between "secrecy" and "privacy," and note that neither the UConn Foundation nor the Hartford Foundation operates secretly — they operate privately. Second, the fact that nonprofits enter into contracts with the state does not make them public agencies. The UConn Foundation has a contract with UConn under which it is paid to cover the administrative costs of its fundraising on UConn's behalf. However, the state contracts with differ- ent social service and other nonprofits, and they are not subject to FOIA. Moreover, I would hope the Gen- eral Assembly real- izes that if the UConn Foundation did not do this work, UConn would have to do it on its own (and bear the same costs direct- ly). If folks want FOIA level scrutiny of these activities it would be simpler to terminate the contract and bring them in-house where FOIA already applies. Third, it is likely that the UConn Foundation is successful precisely because donors prefer to give to a private organization so that their con- tributions will be a step removed from the state's budgetary high-wire act and the political pro- cesses by which UConn spending priorities are determined. Private and political governance are different beverages best left unmixed. The funds in the UConn Foundation are not state property — as much as the General Assembly might want to get its hands on them. Fourth, there is virtue in privacy. It permits nonprofit governing board members (who have a fiduciary duty of confidentiality) to speak with the type of deliberative candor not pos- sible in the public arena; and privacy does not mean that nonprofits are above reasonable regulatory and public scrutiny. Under exist- ing law the Attorney General has the power to investigate and hold board members per- sonally liable for a breach of fiduciary duty; independent annual audits in conformance with Generally Accepted Accounting Auditing Principles are required; and nonprofit federal tax returns (which require detailed disclosure) are available for free on the internet if anyone wants a glimpse of what is going on. The state should not only leave these orga- nizations alone, it should be grateful they are here. n John M. Horak has practiced law at Reid and Riege P.C. in Hartford since 1980. The views expressed are his own. HartfordBusinEss.com Poll Should Tesla be allowed to sell electronic vehicles directly to consumers in CT? ● Yes ● No To vote, go online to HartfordBusiness.com. Last week's poll results: Will Gov. Malloy's two-year budget hurt or improve CT's business environment? 81.6% Hurt 8.2% Improve 10.2% Minimal impact OpiniOn & commEntary John M. Horak ▶ ▶ Private and political governance are different beverages best left unmixed.

• Cover