🔒After 8 years, $1B-plus in deals, Malloy’s economic record mixed

Upon seizing the reins as Connecticut governor in 2011, Dannel P. Malloy faced a monumental task.

The state was reeling from a nearly two-year recession when, under Republican Gov. M. Jodi Rell, it shed 119,100 jobs, many of them well-paying. The unemployment rate stood at 9.2 percent, while an aging population was creating further workforce challenges, particularly in manufacturing.

In addition, Malloy was staring down the barrel of a $3.2 billion budget deficit, gifted to him from the failures of prior administrations and legislatures to rein in spending, sock away savings, and contribute enough money to meet massive state employee pension and benefit promises.

Economists, state officials weigh in on fortifying CT’s economic-development blueprint

To help him forge the state's economic direction forward, the former Stamford mayor turned to a government and economic-development novice: Catherine Smith.

Appointed in April 2011, Smith, now 64, had spent the past three decades in high-level, private-sector jobs, including as a chief operating officer and then CEO of Windsor insurer ING U.S. Financial Services (now Voya Financial).

With Smith helping to steer, the administration set out on an aggressive jobs strategy.

Eight years later, Malloy & Co. have transformed the state's economic-development agency, adding several marquee programs that have jump-started business incentives — to the tune of more than $650 million in loans and grants and hundreds of millions more in tax credits — to entice private-sector companies to retain and add jobs in a state desperate for growth.

Despite those efforts, and others, Connecticut's economy has underperformed most other states and is still perceived as a place — at least by some — that is unfriendly to businesses, a lingering reputation in the wake of two large tax hikes in 2011 and 2015. The Democratic governor also leaves behind a budget deficit about the same size as the one he inherited, though the state's Rainy Day fund could reach $2 billion by June, thanks to savings reforms made during his tenure.

Indeed, Malloy's relationship with the business community has run hot and cold, and his economic legacy is a complicated one.

He endeared himself to some employers by gifting them incentives, while others — including General Electric and Alexion — spurned the state during his tenure by moving their headquarters elsewhere.

As of November, Connecticut regained just 90 percent of the jobs it shed during the Great Recession, making it one of the few states that hasn't fully recovered from the downturn. (Malloy often points out, with some frustration, that Connecticut has recovered 114 percent of the private-sector jobs lost during the recession and that government job cuts are the main drag.)

Meanwhile, since 2011, though its unemployment rate has fallen to a much healthier level (4.2 percent), Connecticut's total economic output — or gross state product (GSP) — has grown just two-tenths of 1 percent, while the U.S. economy grew nearly 18 percent. Through the end of 2017, Connecticut's economy was 9.2 percent smaller than it was in 2007, according to economist Don Klepper-Smith of New Haven-based DataCore Partners.

In a recent interview about the administration's economic-development record, Catherine Smith expressed frustration at the pace of growth, though she said there are many factors out of Connecticut's control.

She also contends the state would be in a far worse place today if the administration hadn't carried out an aggressive economic-development agenda, which some viewed as ineffective. She also points to several recent bright spots in Connecticut's economy, including the creation of 22,000 jobs in the past year, and said she thinks the fruits of their labor will be felt to a greater extent in the years to come.

“We put a few new tools in the toolbox and tried to make some strategic investments where we thought we needed to,” said Smith, who is unlikely to continue as DECD commissioner under Gov.-elect Ned Lamont.

Taking 'the hill'

Sitting in her Constitution Plaza office overlooking I-84 in downtown Hartford, Smith recounted how Malloy shared his aspirations with his agency appointees in the early days of the administration.

“He said 'economic development belongs to every commissioner in this room,' ” Smith said. “He said, 'this is the hill I want to take.' ”

The administration came out of the gate swinging, quickly convincing the legislature in 2011 to authorize a slate of new corporate incentive programs.

“In many ways, we were trying to send a message,” Malloy, a believer in Keynesian economics, said in an interview reflecting on his tenure as governor. “We needed a bit of a shock and a statement to the people of Connecticut and the people outside of Connecticut as well, that we were serious about competing for business.”

The administration's economic-development strategy was multifaceted and included growing key industry clusters that drive the state's economy, such as health care, bioscience, financial services and advanced manufacturing, and investing in workforce development.

Malloy also focused on investing in cities, particularly Hartford and Stamford, and transportation, unveiling a 30-year, $100 billion plan in 2015 to overhaul the state's infrastructure, though he wasn't able to fund it long term. The Hartford Line railway and CTfastrak busway also debuted under Malloy's watch.

Key incentive programs launched by his administration in 2011 included the now well-known — and sometimes controversial — First Five Plus program, which has pledged more than $500 million in loans, grants and tax credits to nearly 20 companies — including Cigna, Charter and Bridgewater Associates — that together have promised to retain and create approximately 30,000 jobs in Connecticut.

Meanwhile, the Small Business Express program aimed to provide capital to smaller firms at a time when bank lending was still tight. It has shelled out approximately $295 million in low-interest, potentially forgivable loans, according to DECD's database.

Early in Malloy's tenure, tens of millions of more dollars went to community colleges to establish advanced manufacturing training centers and to manufacturers, through the Smith-forged Manufacturing Innovation Fund, for training workers, taking on apprentices and prototyping new products.

Bioscience and aerospace

Later in his first year, Malloy announced the nearly $1 billion Bioscience Connecticut initiative, which helped fund buildout of Jackson Laboratory's genomics facility (which now employs 385 scientists and others) and construction of a new patient tower at state-owned John Dempsey Hospital — both located on the UConn Health campus in Farmington.

Despite that investment, the state's bioscience industry has suffered from setbacks during the Malloy years, including the closing of Bristol-Myers Squibb's Wallingford campus and Alexion's decision to move its headquarters to Boston, while still maintaining a large New Haven workforce.

Overall, the state's bioscience investments will take more time to develop, Smith said, as research and development on new drugs takes decades.

“That Jackson Labs deal we did specifically to try to put that stamp of approval on our ecosystem,” she said.

UConn, a major economic driver, has also continued its growth during the Malloy years. His “Next Generation Connecticut” initiative included a long-term, billion-dollar investment to boost science, technology, engineering and math education and facilities. The state's flagship university also debuted a new tech park and opened a satellite campus in downtown Hartford.

In his second term, Malloy forged several deals with the state's largest aerospace manufacturers, offering Farmington's United Technologies Corp., Stratford's Sikorsky Aircraft and Electric Boat in Groton nearly $700 million, mainly through tax credits and exemptions, to keep their respective headquarters in the state for the foreseeable future, and grow their workforces, capital investment and spending with local suppliers.

“When I became governor, everyone thought Sikorsky was leaving, UTC was leaving and Electric Boat was leaving,” Malloy said. “Now we have agreements for 20- to 30-plus years. I think that's a good thing.”

Incentive controversy

While Malloy had plenty of political support, even from Republicans, for his major defense industry incentive deals, his economic programs haven't always escaped criticism.

For example, labor unions derided Malloy for awarding $57 million in First Five Plus incentives to two major hedge funds in 2016.

Even some businesses were wary of First Five, said Joe Brennan, CEO of the Connecticut Business & Industry Association (CBIA).

“It was controversial,” Brennan said. “I'd get calls from our members asking about Connecticut helping to fund their competitor.”

However, Brennan said he understands Malloy's instinct to be aggressive, given the reality of fierce competition for jobs from other states.

Smith says incentives, now more than ever, are a necessity. That notion was cemented by the nationwide fight for Amazon's second headquarters.

“If you could draw the world in a different way, you wouldn't have these competitive situations between states or cities,” she said. “But that's not the world we live in.”

Lamont, who takes office Jan. 9, has said he doesn't intend to get rid of incentives, though his exact plans for the programs are not yet clear.

The best approach, Smith said, is to be disciplined and selective about deals.

She says DECD has done that to a greater extent during her tenure, and she insists most deals will ultimately pay for themselves and then some.

Some lawmakers have sought greater oversight of business-incentive deals, passing a law last year that required outside audits. The first audit found DECD had misstated job totals and had reported erroneous financial estimates in the tens of millions of dollars.

DECD said it's since corrected its data, and Smith says the agency has improved its internal processes.

Mixed messages, pushback

If Malloy's initial wave of employer incentives in 2011, accompanied by a “jobs tour” in which state officials visited over 500 companies, was intended to send a positive message to businesses, he and the legislature sent a conflicting one that year with a $1.8 billion tax increase — one of the largest in state history.

CBIA's Brennan said the initial messaging from Malloy in 2011 was promising. But the sentiment among CBIA membership was, he said, “how do you follow it up?' ”

“There was concern about the direction, beyond those initial meetings,” Brennan said.

Tensions with the private sector peaked in 2015, when several major employers — Aetna, Travelers and General Electric — publicly opposed a state budget that raised business taxes. That pressured lawmakers to roll back some of the increases.

Malloy said he still harbors resentment about how some large employers publicly portrayed the state.

“I wish I had been able to make allies in the business community understand that their constant bad-mouthing the state was hurting our desire, their desire, to make the state a stronger attraction to out-of-state employers,” Malloy said.

Asked if the tax increases hurt the state's economic aspirations, Smith downplayed their significance.

“The bigger problem that CEOs look at is the fiscal stability of the state as a whole,” she said. “To me, that is the much bigger issue that needs to be addressed.”

Persistent deficits, coupled with the state's poor showing in a number of business-climate rankings, massive debt load, and overall lack of economic growth have reinforced a perception the state is unfriendly to businesses.

For Smith, the sting of GE's headquarters move still lingers, and it's had what she views as an outsized impact on how people view Connecticut — with the focus on a few big companies that have left while ignoring the dozens that have moved to the state in recent years.

“It's hard to overcome that one announcement, and that's very frustrating,” she said.

Malloy, who said he doesn't get enough credit for restructuring the size and cost of state government, contends that some of the big investments the state has made in defense manufacturing will show up in GSP figures into the future.

The state recently had its highest quarterly GSP gains since 2014, posting 3.1 percent growth during the second quarter of this year.

While that's pretty good for Connecticut in recent years, it was still the eighth-lowest growth rate in the country.

Klepper-Smith, a former economic adviser to the Rell administration, said Connecticut has one of the worst fiscal burdens in the country, and while those problems have been long in the making, he said Malloy's economic-development initiatives haven't lived up to expectations and deserve some blame.

The fact that Connecticut's economy is smaller than it was in 2007 is “a clarion call for a complete review of the state's economic-development strategies, especially when domestic net out-migration data shows 428 people leaving Connecticut each week, moving to competing states,” Klepper-Smith said.

Smith said there are many factors out of state government's control, including the performance of the U.S. and international economies, and that ultimately, agencies like hers can only play a supporting role.

“I do wish things had gone better and faster,” she said. “It's frustrating to me that we were slower than some of our neighboring states, but we don't have the assets they do. If we had a Boston, Massachusetts or New York City, I think things would be a lot different in our economy.”

However, Smith contends the administration's policies have made a difference, one that may not be entirely felt right away.

”I'm a real believer that if we hadn't done a lot of the things we're doing, ... things could have been not as good as they are,” she said.

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