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Connecticut must go big to rescue small business and safeguard rainy day fund

Former Norwalk Mayor Alex Knopp.

Alex Knopp was Norwalk’s Mayor from 2001 to 2005 and a Norwalk State Representative from 1987 to 2001. He’s also a former Visiting Clinical Lecturer at Yale Law School.

This proposal is endorsed by Bill Cibes (former Secretary of OPM and Chancellor, CSCU), Fran Pastore (CEO of the Women’s Business Development Council), Fred Carstensen (Professor of Finance and Economics, and Director, Connecticut Center for Economic Analysis, UConn) and Sue Merrow (former First Selectman of East Haddam) for the purpose of urging legislators of both parties and the Governor’s Office to consider its recommendations. [Organizations shown for identification purposes only.]

“Going Big” is the economic revival strategy that Connecticut needs to rescue our state’s small businesses, especially family-owned restaurants, mom-and-pop food services, family-operated motels, bars and other segments of the locally-owned hospitality sector.

Fortunately, there is a legislative device available for bold action.  In a “normal” year, this budget device may have prevented legislators from acting, but in the midst of this extraordinary once-in-a-century public health crisis,  this little-known and never-used budget procedure, ironically, may turn out to be the unexpected life-saving source of a small-business financial recovery without raising taxes or raiding the Rainy Day Fund.

This article will:

  • Document the urgency of small business relief;
  • Detail why “surplus surplus” funds are available for relief;
  • Explain how the 2017-18 “strict budget controls” block access to relief funds;
  • Describe the process to unlock access to funds in this fiscal year; and
  • Portray the potential bipartisan support for “extraordinary relief action.”

 

Why does this proposal focus on rescuing small businesses when there are other needs?

Small businesses were among the most directly impacted by the COVID pandemic as a result of mandatory public health closures and travel restrictions imposed by the government. According to the February 22 report of the Office of Legislative Research, “As of February 4, 2021, the number of small businesses open in Connecticut had decreased by 44.1% compared to January 2020; the number of open small businesses in the leisure and hospitality industry decreased by 60.9%.” During the worst of the pandemic, private employment in this sector declined by 59 percent compared to a statewide employment decrease over the same period of only 18 percent.

The state’s overall economic recovery will be boosted because small business enterprises constitute a significant share of total economic activity and job creation. But small business also addresses issues of equity for low-wage workers from the poorest households in which minority workers are overrepresented.  As Lt. Gov. Susan Bysiewicz and Fran Pastore, CEO of the Women’s Business Development Council, recently said in the Norwalk Hour, “Black and Hispanic women have been hardest hit due to the enormous loss of work in historically female-dominated industries: leisure, education, child care and hospitality industries, among others.”

This leads to a key question: is there a fiscally sustainable, politically pragmatic and economically responsible way available now to rescue small businesses from the grip of the pandemic?

The starting point for a new budget solution must begin with the severe budget restrictions imposed by the General Assembly in 2017 (and revised in 2018) to confront the state’s pressing financial difficulties. By its adoption of self-restricting budget controls in 2017, the legislature deemed that attracting purchasers of state bonds and paying down long-term pension debt were the state’s premier fiscal goals.

These were laudable purposes. But in the face of the pandemic, the state’s fiscal goals must change. The overriding priority now is to mobilize Connecticut’s limited resources to restore public health and rescue our small-business economy from existential destruction. The task that confronts state government this year is how to temporarily remove the budget constraints imposed in 2017 to confront the unprecedented challenges of 2021.

Here is one set of budget facts that illustrates the problem.

No one disputes that the state requires a healthy Rainy Day Fund to pay off any deficit at the end of a fiscal year. The state law adopted in 2017 prudently requires that all state budget surplus be deposited into the Rainy Day Fund until the fund equals 15 percent of the state’s net budget. This was accomplished for the budget that ended June 30, 2020. It is now being accomplished for the current fiscal year that ends on June 30. The fund’s balance of $3.1 billion on June 30 will be the largest in state history.

What of the surplus surplus?

Let’s adopt the assumption shared by Gov. Ned Lamont and many legislators that not a single dollar should be spent from the Rainy Day Fund except for its proper role of eliminating any end-of-year deficit. But what should happen to what I call the “surplus surplus” funds, that is, the amount of budget surplus funds that exceeds the 15 percent fund maximum? This “surplus surplus” equaled $61.6 million on June 30, 2020 and is projected to reach as much as $257.1 million by June 30.

The most important use now for these “surplus surplus” revenues is to provide one-time emergency funding to overcome the harsh new set of problems caused by the pandemic, including small-business rescue.

But under the strict budget controls adopted in 2017, the “surplus surplus” of $257.1 million expected on June 30 must be used only to reduce the state’s future pension liabilities for state employees and teachers or to reduce other outstanding debt. It cannot be deployed under the normal budgeting process to provide grants to neighborhood businesses, fund summer school tutors, pay for child care for essential workers or for any other one-time emergency needs.

By prioritizing extra debt repayment over current economic rescue needs, the 2017 budget controls are holding back our state’s economic recovery. The urgent need to stimulate our small business economy right now is much more important to the long-term fiscal success of Connecticut than paying down unscheduled future pension debt.

Yes, debt repayment is important, but the owners of the 600 Connecticut restaurants that have shut down and the hundreds of small businesses that have furloughed employees and the entrepreneurs who deferred investment all need the “surplus surplus” more than bondholders. Unlike debt service, economic relief creates jobs and injects dollars into the state economy.

Changing our budget priorities to meet these once-in-a-lifetime challenges by using the “surplus surplus” is reasonable and justified, so why can’t the General Assembly just pass a new law to make the change?

The answer is that the 2017 budget controls not only froze the state budget to reflect 2017 priorities but also, in effect, removed for the first time the state’s budget-setting powers from legislators and the governor and delegated them in large part to the purchasers of state bonds. The 2017-18 “Bond Lock” required the State Treasurer to pledge to bond purchasers that any future General Assembly for the next five years would be prohibited from revising the 2017-18 budget law that exclusively spends “surplus surplus” on debt service as long as those state bonds sold between 2018 and 2020 were still outstanding or unless the bondholders are otherwise protected.

Although no one could have foreseen the COVID pandemic, the 2017 chickens have come home to roost in 2021.

The fundamental flaw in the 2017-18 budget controls was the abdication of the governing flexibility that every legislature needs to respond to changing needs and conditions. That’s why a key principle of state government procedure is that a new legislature should always be able to revise or replace statutes passed by a previous legislature. But by freezing in statute a set of outdated fiscal solutions designed to mitigate problems in 2017 —and by delegating budget-altering approval powers to bondholders– the 2017 legislature undermined the ability of the 2021 legislature to confront the economic, social and educational crises arising from the pandemic.

The supermajority hurdle

The final hurdle to overcome is that the 2017-18 legislation also dealt away the democratic principle of “majority rule” by promising bondholders that a “supermajority” of  three-fifths of the members of both the House and Senate (following a gubernatorial declaration of “extraordinary circumstances”) would be required to approve opening the “Bond Lock” and then changing the “surplus surplus” rule.

Is it possible as a political matter to assemble a legislative supermajority? The answer is “yes”—in part because of a little-known feature of the Bond Lock and the other budget controls that could serve, ironically, as the fiscal “escape hatch” for a new budget rescue package.

The “escape hatch” is the feature in the Bond Lock that limits the ability even of a supermajority to suspend it beyond the fiscal year in progress, that is, beyond June 30. This limitation operates as a political escape hatch because the underlying  budget controls cannot be permanently dismantled. Thus, officeholders concerned about Wall Street credit ratings and investment issues can still employ  this “escape hatch” to “unlock” the budget controls for only a very limited duration and purpose without jeopardizing long-term fiscal predictability.

The limited timeframe also reflects the immediate needs of our economy. As the governor’s recent Economic Report explained, our state economy in December 2020 was 108,700 jobs below pre-pandemic levels and the projected peak of the post-pandemic economic recovery won’t be seen until the third quarter of 2022. “Unlocking” investment during the current fiscal year is needed to propel the jobs recovery.

State government should thread this “unlocking” procedural needle to gain access to the economic recovery payoff. The legislative path out of this procedural maze as required by statute must begin with Gov. Lamont issuing a declaration of “extraordinary circumstances” (as he has done three times previously for his pandemic “public health” declarations) that proposes to lift temporarily the 2017 budget controls in order to use all or part of the “surplus surplus” for Connecticut small businesses. If the current recovery is not an “extraordinary circumstance” even for Wall Street analysts, then what is? His declaration can confirm that he is keeping his pledge to preserve the Rainy Day Fund because unlocking the “surplus surplus” funds leaves the fund completely intact. These same procedural requirements will apply to any needed waiver of the state spending cap as well.

The minority party is empowered

If sufficient Democratic majorities in both Houses endorse the governor’s declaration of “extraordinary circumstances” to initiate the formation of the legislative supermajority, attention will then turn to the Republican caucuses. One of the ironies of a supermajority requirement is that it takes power away from the majority while empowering the legislative minority as a precondition for governmental action. Is there any evidentiary basis to expect Republicans to join the supermajority coalition?

Declaring that pandemic relief for restaurants and bars “is not a partisan issue,” House Republicans in December proposed establishing a $50 million fund for targeted pandemic relief grants for bars and restaurants, a low-interest loan program for food services administered by the Department of Economic and Community Development, and special grants of $5,000-$25,000 for restaurants that don’t have take-out windows.

The bars and restaurants on our main streets are critical to local economies, drawing people to our communities and nearby businesses while providing vital income for thousands of residents,” said House Republican Leader Vince Candelora. “They’re hanging on by a thread—taking action as early as possible in the legislative session could be critical to the survival of many of these businesses, most of them desperate for the state to take action that will show them that we’re partners in securing their future.”

But the House Republican statement did not identify any source of $50 million in new revenue to fund this new $50 million relief program.

For proponents of bipartisanship, Rep. Candelora’s final comments in December provide some hope: “The livelihoods and futures of thousands of individuals are on the line, and as other states continue to take action, we’re looking forward to our newly seated legislature not just reasserting itself as a governing body, but also moving quickly to fast-track issues tied to the recovery of our business community. The financial well-being of our state depends on it.”

The task for small-business advocates is to encourage Republican legislators either to identify the missing $50 million in new revenues or to make good on their pledges by casting enough votes for a bipartisan supermajority sufficient to direct at least $50 million in “surplus surplus” revenue in support of the lifeline to small businesses that they advocated doing in December 2020.

Many small businesses in the restaurant, food services and owner-operated hospitality sector will certainly benefit from the re-opening flexibility announced on March 4 by Gov. Lamont, but even businesses that plan to reopen will need state assistance to deal with immediate issues of back rent, shut-off utilities, furloughed employees, purchasing supplies, among others.

Let’s hope that new federal funds will diminish the need to use state funds for small-business economic recovery,  but the federal track record has been uneven. And even if federal funding necessitates using only a smaller part of the “surplus surplus” for small-business recovery programs, the remaining funds could be used for other educational and human service needs, or for the originally intended debt service.

I appreciate that my former colleagues in the General Assembly have many competing priorities and tough decisions to make. But as they tackle these issues, let’s not forget that nothing less than the rejuvenation of the Connecticut economy and the livelihoods of thousands of low-wage workers are at stake.

Extraordinary action” is both a statutory requirement and a moral imperative.  Gov. Lamont and a supermajority of legislators can restore a brighter small-business future by enacting a onetime waiver to use onetime “surplus surplus” revenue in this fiscal year to launch a recovery from a onetime pandemic without raising new taxes or raiding the Rainy Day Fund.

7 comments

DryAsABone March 20, 2021 at 12:45 pm

Dan Malloy “went big” and wasted countless millions of taxpayer debt bailing out the free market,that is actually not as free as we like to boast.
Pay down debt. Spend wisely. Run the state like you would run your own household. Have business friendly policies and let business succeed or fail without state assistance.
Look at Trump’s PPP give-away to see how well bailouts work.

Not so Non Partisan March 20, 2021 at 6:14 pm

Let’s not just go big- go huge

Cut the budget and spending 25%
Declare bankruptcy and renegotiate all public labor union contracts

See real estate values skyrocket, unemployment tumble, wages increase for lower and middle income. as business flock to ct

Bryan Meek March 21, 2021 at 10:34 pm

Here’s a stupid idea. Instead of creating new agencies full of bureaucrats with lifetime benefits to help small businesses, why don’t we stop creating dozens upon dozens of new laws and taxes every year that seem to serve no other purpose than to make doing business here impossible?

Mike O'Reilly March 22, 2021 at 2:28 pm

Cut the sales tax in half. Retailers will recover sooner. More people will dine out and spend more. People will occupy more hotel rooms . Employees will get their job back sooner and Hartford will likely have more revenue to squander down the road.

John Miller March 23, 2021 at 4:11 pm

Connecticut ranks number 47 in The Tax Foundation 2021 State Business Tax Climate Index. Only California (49) and New Jersey (50) are ranked lower than Connecticut, although we do hold the distinction of being 50 of 50 for property taxes

https://taxfoundation.org/2021-state-business-tax-climate-index/

While Mr. Knopp’s proposal is commendable in light of the damage to our small businesses caused by the pandemic, it does not change the fact that Connecticut was loosing population and businesses before the pandemic due to the high cost of living, high tax, and burdensome regulatory environment. Does anyone really think that entrepreneurs would be rushing to set up shop in Connecticut under the circumstances?

The first order of business is to kill Mr. Looney’s “mansion tax” proposal as well as the obscene and possibly unconstitutional blanket “eminent domain” land and power grab bill that is now before the legislature. It might also be a good idea to take a look at the states that are gaining population and new businesses to find out why they are being successful and Connecticut is not.

Michael McGuire March 24, 2021 at 10:44 pm

Good points Mayor Knopp. I’m eager to see our small businesses rebuild too. But I’m in the reduce the debt camp. In the end Connecticut wins. It already has everything it needs to bring businesses back – educated work force, amazing coastline, world renown universities, sweet historic towns, 3 hour drive to ski mountains and 1 hour train to Broadway. But big, fat taxes, gold level healthcare and pension debt keeps everyone down.

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