Lamont can’t dance despite $5B surplus, bright jobs picture

How are we doing in Connecticut? On one level, the 2022 picture looks solid.

New numbers show an astonishing $5.5 billion state budget surplus for the fiscal year that ended June 30. We saw six months of overall economic activity that was better than the nation’s. The year has brought a sharp drop in the jobless rate.

“I wouldn’t trade our economy for anybody’s,” Gov. Ned Lamont said to me in a conversation on Thursday, as we visited S&S Worldwide, a century-old company in Colchester with 270 employees that the state saved from near-certain demise last winter.

“I like the way we’re positioned now,” Lamont added. “I think we’ve got a diversified economy, I think we’ve got one of the best workforces in the world. We’ve got some work to do there, but I think the economy is growing. I think our population will continue to keep bringing in young people.”

In any other year since the Reagan era, the numbers would prod a governor seeking re-election to dance in a parade on the back of a flatbed truck

But Gov. Ned Lamont can’t celebrate. Not in a year with US inflation above 9 percent (by one key measure), not in a year when GOP leaders led by his November opponent, Bob Stefanowski, cajole for bigger tax cuts to help families strapped with higher costs.

Not in a year when many experts predict a recession by 2023 or sooner as the Federal reserve tightens the money spigot in hopes of slowing the price hikes.

And so instead of high-stepping through the summer of his re-election campaign, Lamont walks on economic eggshells. In our half-hour conversation about the state of the state’s prosperity, the governor crowed about where Connecticut stands and how we’re poised to withstand a downturn — even as he recognized, as Stefanowski keeps saying, that many families are struggling with prices.

“People feel more confident about the state, people are moving into the state, people are expanding in the state,” Lamont said, sitting in a conference room in the sprawling complex at S&S, a distributor of supplies and recreational goods for schools, summer camps and long-term care facilities that has turned its fortunes around.

“That has not yet necessarily resonated with tabletop issues but I think it will. In the meantime, I understand people are going through inflationary hell,” the governor added. “It doesn’t do me any good to say our fiscal house is in order, companies are coming back….First and foremost you’ve got to take care of people at their kitchen tables.”

He says he’s doing exactly that, with $640 million in tax breaks and one-time givebacks to parents, residents who own houses and cars, low-income workers and retired folks — and by using $4.1 billion of the state surplus to pay down underfunded employees pension.

That extra paydown totaling $5.7 billion last year and this year will save taxpayers an estimated $484 million a year for the next 25 years.

Stefanowski says Lamont is falling far short of what he needs to do. He’s calling for more tax breaks in place of some of the added pension payments as he peppers the state with ads about families and small businesses unhappy with the way things are. And Stefanowski disagrees with Lamont’s view that the state’s economy is well positioned.

“Governor Lamont talks out of both sides of his mouth. Last week he said he needed the rainy day fund for an imminent recession,” Stefanowski said in an emailed statement. “This week he is optimistic about our economy?”

Numbers vs. fears

While fear of recession and anger over inflation — wrongly aimed at Democrats — might favor Stefanowski and the Republicans, the numbers show Connecticut in pretty good position. “I think we’re in the strongest fiscal shape we’ve been in since I’ve been paying attention, over the last generation or so,” Lamont said, being careful to separate that from how families are faring.

The state unemployment rate fell from 5.3 percent in January to 4 percent in June as Connecticut closed the gap on the nation’s 3.6 percent rate.

Connecticut saw job gains of 2.4 percent over the last year (according to preliminary reports that could rise or fall dramatically with revisions). That’s slower than the nation’s 4.3 percent, but still a healthy clip.

More importantly, the percentage of adults working rose in Connecticut as it stagnated nationwide — meaning many of those missing 100,000 workers have reappeared on the scene. In fact, the total number of Connecticut residents who reported they’re working as of June was up by 3.7 percent in the last year, compared with just 1.4 percent nationwide.

Does that mean we’re winning the work-from-home sweep stakes? Too soon to say, but a glimpe at the market for house sales appears to show Connecticut is cooling off more slowly than most other states.

A separate report last week showed that Connecticut was one of three states along with Massachusetts and Pennsylvania that saw an increase in their number of job openings in May, reaching 120,000. That’s good for workers and could be a sign of a less painful slowdown.

Recession fears are real. Lamont talks about them openly, with interest rates rising, corporate earnings tamped down and New York seeing a slowdown in tax receipts from financial markets. “We’re prepared,” he told me. “We don’t have to raise anybody’s taxes, we don’t have to panic, we don’t have to cut child care — all the things we’ve gone through every seven years like clockwork in this state over the last 40 years .”

Friendly to truckers, really?

The state has no shortage of question marks, as always. We don’t know about the quality of Connecticut’s new jobs, since reliable pandemic-era income data remains elusive.

Lamont talked about the strong defense industry, a financial sector that’s holding its own with a nascent fintech cluster, and some triumphs in life sciences. On the other hand, the biggest reported gains over the last year came in leisure and hospitality, with a lot of low-paying jobs.

Lamont says he’s made the state more business-friendly with economic development incentives and other measures, not least the pension paydowns. That’s a matter of sharp debate. We’re more worker-friendly, absolutely, with paid family and medical leave and a minimum wage headed to $15 next year.

I spoke with a 15-year veteran logistics analyst at S&S, Patricio Hurtado, who told me he saw an economic revival. “Connecticut is getting more business friendly,” he said, “for truck companies.”

Say what? Lamont’s animosity toward truckers — in the form of a $90 million-a-year tax on heavy trucks and a very small diesel tax increase that took effect automatically July 1 — is a cornerstone of Stefanowski’s campaign, with ad after ad about how these taxes are killing the state by driving higher costs.

You can’t script this stuff. No one asked me to talk to Hurtado. His comment illustrates that when it comes to politics and economics, you can’t predict baseball.

The $5 billion football

That massive budget surplus is the source of the loudest volleys in this election and it keeps growing.

A report by the governor’s budget office on Wednesday showed a likely surplus of $1.3 million when the state closes the books on the fiscal year later this summer. That’s on top of an excess $3 billion in the quarterly taxes paid largely by wealthy people from dividends and capital gains.

And on top of that, the state diverted $1.2 billion in money from the fiscal year that just ended to the one that started July 1. The windfall included $560 million in federal stimulus money that we turned out not to need, and $350 million in surplus cash to pay for state employee raises and the child tax credits going out to parents in a few weeks.

The grand total: $5.5 billion in overage for the state’s $21 billion budget, or 26 percent.

After years of slamming Democrats for mismanaging the state into deficits, Stefanowski and the GOP leaders in the legislature can no longer play that card. Instead, they say Lamont should give more of that windfall back to taxpayers in the form of lasting tax cuts.

Making that happen would require a special session of the legislature, something no sane governor would allow in an election year, as liberals and conservatives alike would bring up all sorts of nutty ideas to make political hay.

I asked Lamont, if he could return more to taxpayers magically without a special session, now that the surplus is $600 million larger than it was two months ago, would he do it?

No, he said.

“I kind of like where we are….I think people are seeing the money coming into their pockets right now. Gas prices… are beginning to come down.”

We can always cut taxes further, and we might do that after the election, Lamont said. Worse would be to cut taxes only to have to raise them back up when revenues fall. “I don’t want to leave a cliff and I see the recessionary clouds out there.”

Those clouds, brought on by the need to quell rising prices, are the reason Lamont won’t celebrate.

“You’ve got two separate storylines,” the governor said. “The fact that we actually are balancing the budget and have a surplus is not relevant to the fact that the middle class is getting squeezed by severe inflation…When you’re paying more at the grocery store, at the pump, that hits you hard.”

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