Another fleeing corporate giant: Connecticut is facing a business migration crisis
- Connecticut's personal income taxes are among the highest in the nation.
- The heavy tax burden has caused corporate giants such as Aetna and GE to flee, resulting in a decline in tax revenues. Tax revenues in 2017–18 is projected to fall $2.2 billion.
- Connecticut's 4,000 manufacturers, which accounts for 160,000 jobs and 10.5 percent of its total output of $27.22 billion, are the one bright spot in its economy.
- Legislators are offering huge incentives, including financial aid and workforce training, to motivate manufacturers like Sikorsky Aircraft and Pratt & Whitney to stay in the Nutmeg State.
The economic news in Connecticut is downright lousy these days.
Gov. Dannel Malloy is waging a bare-knuckle budget battle with state legislators in Hartford, even as that capital city teeters on the brink of bankruptcy. Both sides are trying to staunch the projected $2.7 billion deficit for the new fiscal year beginning July 1 without raising personal income taxes, already among the highest in the nation.
And while still smarting after General Electric moved its corporate headquarters from Stamford to Boston last year, the Nutmeg State suffered another body slam in early June when insurance behemoth Aetna announced it's leaving its home office in Hartford after 164 years for new HQ digs in Manhattan (although about 5,000 employees will remain in Connecticut).
Connecticut is hardly alone among states that have seen corporate residents flee, but marquee names like GE and Aetna make for bad PR, not to mention a deleterious decline in tax revenues. Besides those two exits, several of the state's high-earning hedge funds have relocated to Florida, causing a steep drop in receipts.
Recent figures show that tax revenue from the state's top 100 highest-paying taxpayers declined 45 percent from 2015–16. More broadly, analysts for the Malloy administration and the state legislature's nonpartisan Office of Fiscal Analysis project that tax revenues in 2017–18 will fall $2.2 billion, or 11.3 percent, short of the funding needed to maintain current services. Ironically, though, Connecticut's top marginal income-tax rates are lower than those in New York and New Jersey, while its total effective business tax rate is the lowest in the country, according to EY.
'It's not that bad'
Fred Clark isn't ignoring Connecticut's fiscal firestorm, but with summer here, he's fixated on getting truckloads of automobile racks for bikes and kayaks, car-top luggage carriers and other finished products out the factory door to meet seasonal demands from hundreds of retail customers. Besides, as the U.S. president of Thule (pronounced TOO-lee), the Seymour, Connecticut-based subsidiary of Swedish parent Thule Group, Clark is pretty happy with the way the company's business is going — and growing — even in the state's financially challenged environment.
"It's not the cheapest place to do business," the native Connecticuter admitted, "but it's not that bad." Thule's 2016 U.S. sales of not just racks and carriers but also strollers, bike trailers, luggage and all sorts of backpacks and bags reached nearly $240 million in North and South America, just under 40 percent of the global company's $645 million in total revenues.
Thule is one of nearly 4,000 manufacturers in Connecticut, representing one of the bright spots in an economy that grew a paltry 1 percent last year. In 2015, manufacturers accounted for 10.5 percent of its total output of $27.22 billion, according to the National Association of Manufacturers. Connecticut currently employs almost 160,000 people in manufacturing, or 9.5 percent of the workforce, with an average annual compensation of about $95,000.
"The good news about manufacturing in Connecticut is that there really is a renaissance," said Peter Gioia, vice president and economist at the Connecticut Business and Industry Association (CBIA). He gauges that resurgence by looking back a half century, when factory production was thriving, and forward into the Reagan years as the Pentagon's budget soared, benefiting a state, Gioia said, "where 25 percent of manufacturing totally depended on defense and another 40 percent was significantly dependent.
"Then the Berlin Wall came down in 1989 and fell right on top of Connecticut manufacturing," he said, recalling the beginning of the end of the Cold War and the downsizing of the U.S. military buildup to confront it. "All of a sudden, defense went poof," Gioia added, and disappearing along with it were related contracts, jobs and companies throughout the state. That mimicked a trend throughout the Northeast and Midwest that began in the 1970s, as scores of manufacturers of every stripe relocated or expanded their operations to lower-cost states in the South, Mexico and overseas.
Connecticut, then under Gov. Lowell Weicker, responded by putting together incentive programs to lure manufacturers, and Thule was among those that took the bait in 1992. The state's Department of Economic and Community Development (DECD) gave the company a $200,000 grant and a $1 million low-interest loan to establish its U.S. manufacturing beachhead in Seymour.
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"We forecasted our job growth then and have tripled it since," said Clark, who was hired in 1993, when U.S. sales were around $16 million. Between Seymour and giant warehouses in Beacon Falls and Milford, Thule today employs 325 workers in the state, he said, about 200 during peak production at the 110,000-square-foot factory, tucked into a woodsy industrial park 12 miles northwest of New Haven. Besides manufacturing, the facility houses R&D, product testing, shipping, warehousing and executive offices. "We've had two different expansions here," Clark noted, plus a $1.6 million renovation a few years ago, offset by a tax abatement from Seymour.
Thule resides in the Naugatuck River valley, a region that perfectly reflects the state's manufacturing legacy. "When I was growing up in Woodbury, this area was booming," Clark said, referring to the hamlet west of Waterbury once renowned as the Brass City because of its plethora of brassware producers. "There were also close to 400 tool-and-die makers in Waterbury at one point," he claimed.
Clark witnessed firsthand the eventual manufacturing bust Connecticut suffered in the 1970s and '80s. Yet by the time he took the helm at Thule, he was the beneficiary of the workforce that remained in the valley. Although automation and robotic welders have supplanted some assembly workers — still the dominant occupation at Thule — access to educated and highly skilled design, manufacturing and project engineers is one reason the company has stayed put in Seymour.
Even so, Clark admitted there have been internal discussions about relocating to Mexico, where labor costs are about three-quarters lower than in Connecticut, he estimates. "But there are hidden savings by having our supply chain and customer base close by," he said, especially considering the consolidation of the sporting-goods market, resulting in inventory cutbacks by retailers and thus more flexible production runs. "We now have eight to 10 inventory turns of finished products a year instead of three," Clark said, "and we change our production schedule day to day."
Thule is a pipsqueak compared to the manufacturing giants that also call Connecticut home and are a focus of both the CBIA and DECD. "We're blessed to have OEMs [original equipment manufacturers] like Electric Boat, Pratt & Whitney and Sikorsky Aircraft based in Connecticut and driving a huge part of the supply chain and jobs," said DECD Commissioner Catherine Smith.
In 2012 Pratt & Whitney, a United Technologies aerospace company in East Hartford, introduced a new fuel-efficient regional jet engine. "It is a game changer," said Gioia. "They currently have more than 8,000 on order, and 80 percent of the content is produced by subcontractors mostly in Connecticut."
Around the same time, Groton-based Electric Boat, the nation's primary submarine builder, welcomed news that the Pentagon, in response to China's development of underwater vessels, was doubling production of attack subs from one to two a year. Meanwhile, Sikorsky, whose prospects dimmed when it split off from United Technologies in 2015, is instead expecting a huge boost in helicopter production at its Stratford factory in response to the Trump administration's pledge to increase defense spending by at least 10 percent. "If you put those three entities together, you have more than 1,000 subcontractors in Connecticut," Gioia said, "so everybody is scrambling for workers."
Getting the house in order
Things aren't all rosy, though, Smith conceded. "We're clearly not the low-cost state, so we have to continue to ensure that cost is made up in the productivity and value created here."
That translates to state-sponsored incentives, and the DECD offers manufacturers plenty. One of the most successful is the Small Business Express program, designed for companies with 100 or fewer employees. It provides access to capital and support in hiring and training people who don't have manufacturing experience. So far, it's benefited more than 1,500 companies and contributed to the creation or retention of about 22,500 jobs. The Manufacturing Innovation Fund is aimed at the advanced manufacturing sector, offering matching grants for purchasing equipment, R&D and job training. DECD reported that, to date, 425 companies have participated in the program, and they will create and retain 1,911 jobs and train 2,700 workers.
Manufacturing has an important role in the future of the state's economy, and we don't see that changing.Catherine Smithcommissioner, Connecticut's Department of Economic and Community Development
Workforce training is a major issue for manufacturers, who have thousands of jobs to fill but can't find the right people. "Every time we talk to a manufacturer," Gioia stated, "they say, 'We're doing great but can't find people." A recent CBIA survey found that producers need immediate help to fill 13,600 job openings by 2018. In response, the state has beefed up community college technical training programs and increased public school initiatives to educate students, guidance counselors and parents about careers in modern manufacturing, Smith said. "Manufacturing is still kind of a dirty word, and we're working hard to overcome that."
Beyond incentives, getting its fiscal house in order with a new budget that addresses the crippling debt and is sustainable without tax increases will give manufacturers confidence that investing in Connecticut makes good sense over the long term. "Manufacturing has an important role in the future of the state's economy," Smith concluded, "and we don't see that changing."
— By Bob Woods, special to CNBC.com