Hartford Business Journal

www.HartfordBusiness.com July 20, 2015 • Hartford Business Journal 9 CT budget needs economic growth By Brad Kane bkane@HartfordBusiness.com C onnecticut's economy must grow at a faster rate — at least double — in the years and decades ahead to grapple with an aging population that will increase demand for social services and constrain the state budget in other ways, state officials and economists warn. If that growth doesn't happen budget deficits will haunt state lawmakers for years to come, increasing the prospects of further tax increases or service reductions to accommodate an aging population. And the key to Connecticut's economic fortunes, econ- omists say, will be attracting young workers while hoping older workers retire outside the state. Connecticut's gross state product (GSP) grew 0.6 percent in 2014. The best case scenario for near future years is 2 percent annual growth, economists predict, which pales in comparison to the 4 percent growth in nearby states like Massachusetts. "If we don't change the trajectory, things are really going to go downhill in as little as three to four years," said Fred Carstensen, director for the Connecticut Center for Economic Analysis. Working population Ideally for the state budget, Connecticut's population would be comprised of a maximum number of working-age individuals (18-65) and a minimum number of those aged below 18 or above 65, who generally have a greater need for social services like health care, education and food. As Baby Boomers (those born between 1946 and 1964) retire, however, Connecticut doesn't have enough of the next generation (Generation X, born between 1964 and 1979) to fill all the vacant positions, said Ken Gronbach, a futurist based in Haddam. Millennials (born between 1980 and mid-2000s) will actually supply the largest labor force in history, but at ages 11-30, that generation is still too young to be earning the peak wages of those aged 40-65 who contribute the bulk of income taxes and con- sumer spending that funds the state budget. "What is going to happen is the Boomers are going to leave the workforce, and you are going to see a flood of Gen Xers coming into Connecticut," Gronbach said. "Since that workforce is smaller, you are going to have to pay them more to get the top talent." Will they leave? One way Connecticut can avoid paying the costs of an aging population — at least the ones it doesn't have a pre- arranged obligation to, like state workers — is for older residents to leave Connecticut. If they flee, Connecticut will shift the social costs of caring for older residents to other states, putting less financial pressure on the state budget. Gronbach said he believes there will be an exodus of retired workers to states with warmer climate or lower costs. Additionally, the housing market is improving, giving the older workforce more money to move around the country. State Comptroller Kevin Lembo, however, said he isn't so sure Baby Boomers will have the financial flex- ibility to move, citing retirement savings studies that show only 59 percent of full-time workers have enough saved for retirement. Will they come and stay? Attracting younger workers will be key to generat- ing the economic output the state budget needs to grow, Carstensen said. Connecticut's advantage over nearby job hubs like New York City and Boston is its lower costs and more open setting, said Gronbach, who is bullish about the state's prospects of attracting younger workers. "Where else can you live in a rural setting and still be right in the middle of every- thing? Who wouldn't want to come here?" Gronbach said. Carstensen disagrees that Connecticut can attract young workers, simply for the reason that the state has had little job growth for the last 15 years. That is why Con- necticut's median age of 40 is nearly three years older than the national average, because there are no jobs for younger workers, he said. "We have an aging popu- lation because we have no job growth," Carstensen said. "If you have no job growth, there is no reason for people to stay here." If Connecticut can get economic growth to create jobs, then the ensuing state budget revenue increases should be spent on servic- es like schools and health care, which will be condu- cive to young workers rais- ing families, Gronbach said. "We've been short on babies," Gronbach said. "Ultimately, you need younger workers to replace the older ones." n Economic Growth Rates The U.S. Bureau of Economic Analysis revised its preliminary figures for Connecticut's economic growth from 2011-2013, revealing that instead of having the second-best economy in the Northeast, Connecticut actually had the third worst. Economic Growth Rates State 2014 2013 2012 2011 CT GSP 0.6% 1.0% 0.3% -0.9% U.S. GDP 2.2% 1.9% 2.1% 1.4% S O U R C E : U C O N N C O N N E C T I C U T C E N T E R F O R E C O N O M I C A N A L Y S I S Losing Workforce Connecticut is among 22 states expected to shrink their workforce in the next 15 years. % Workforce Lost by State 2030 Vermont 11.5 Maine 9.5 West Virginia 9.5 Michigan 6.7 Rhode Island 6.0 Ohio 5.8 New Hampshire 5.6 Pennsylvania 5.6 Wisconsin 3.7 New York 3.6 Connecticut 3.3 Illinois 3.2 Alaska 3.0 Massachusetts 1.5 Mississippi 1.5 Missouri 1.0 Iowa 1.0 Wyoming 1.0 Kansas 0.3 Kentucky 0.2 New Mexico 0.2 Montana 0.04 S O U R C E : T H E C O N F E R E N C E B O A R D State health benefits Connecticut's other obligation to its state workers — OPEB, which is mostly healthcare costs — is underfunded by $22 billion, according to Standard & Poor's. That is nearly 10 times worse than the national median of $2.7 billion in unfunded OPEB liabilities. OPEB costs can be harder to predict, Lembo said, and the state needs to be vigilant in keeping healthcare costs in check, including shaving $13 billion off that obligation by keeping peo- ple healthier and creating a trust that all employees pay into. The unfunded OPEB liability could increase dramatically, though, Lembo said, if the state decides to offer early retire- ments again, as it did for about 4,700 workers in 2009 and again in 2011 for a much smaller number under Malloy. Early retirements put workers into the OPEB system at a much younger age, meaning the state is paying for their medi- cal benefits longer until they reach age 65, when Medicare takes over as the primary insurer. "We need to stop doing early retirements. It doesn't save money," Lembo said. Unfunded costs Having a $47.2 billion unfunded liability costs Connecticut in indirect ways too. The state, for example, has less money to invest and get a return on. In fiscal 2014, State Treasurer Denise Nappier was able to grow the State Employees' Retirement Fund 15.6 percent through various investments. Combined with the teachers' retirement fund, that growth equated to an extra $3 billion. If the state pen- sion system had been fully funded — instead of 49 percent fund- ed — those investment gains would have been more than double. Substantial unfunded pension and OPEB obligations also put downward pressure on the state's credit ratings. S&P in June gave Connecticut's "AA" rating a negative outlook based on its debt overhang. Those credit ratings influence interest rates the state pays on borrowed money for major capital projects like road improvements. "The good news is Connecticut has moved to fully fund its [pension system]," said David Hitchcock, Standard & Poor's primary analyst for the state of Connecticut. "If they continue to make their full [annual payments], then they will meet all their obligations at some point in time." Expected, unexpected expenses The short- and long-term burdens placed on the state budget by Baby Boomer retirements are impossible to nail down exact- ly, said Gian-Carl Casa, spokes- man for the Office of Policy & Management, because it's dif- ficult to forecast how much of the general population will stay in the state once the mass retirements begin and how much state revenues will change as the Connecticut economy adjusts to a younger workforce. Some expenses like health care and the cost to the Med- icaid system are easier to nail down, although they can be somewhat fluid. The state is working to mitigate the expected rise of its $1.6 billion in annual payments for long-term, nursing home care — whose patient population is anticipated to grow 26 percent over 10 years — by advocating for more home care. An aging workforce will also create increased demands on transportation, housing and food assistance, and technological infrastructure, further constraining the state budget. Meanwhile, unlike state workers who receive a pension, the majority of the general population will rely on their 401(k) plans and other investments to fund their retirements, Lembo said. In Connecticut, 41 percent of full-time employees don't have a retirement plan, so it is reasonable to assume a similar percentage of the retiring workforce won't be ready for retirement expenses, which could shift the burden onto government, Lembo said. "If they are financially unprepared, that has the potential to whiplash back on government, both state and federal," Lembo said. n Peter Gioia, economist, Connecticut Business & Industry Association NEXT WEEK: The aging population is creating signifi- cant business opportunities for some companies. Find out how some Connecticut entrepreneurs plan to cash in on the wave of Baby Boomers that are getting older and heading toward retirement. The key to Connecticut ensuring that its economy grows fast enough to deal with the higher social costs of an aging population is to attract younger workers who can replace older workers, particularly in manufacturing. P H O T O | H B J F I L E

• Cover