Thursday, December 01, 2011

The Sinkhole State

In any tousle between business and government, business usually has the last word, and more often than not the word is, “We’re outta here.”

Sikorsky Aircraft, a Connecticut company of long standing, has initiated two rounds of job cuts.

Early in 2010, Sikorsky President Jeff Pino, “under marching orders to raise the division's profits,” according to a news story, boasted to stock analysts, “We've nearly tripled the amount of direct production labor hours from 2006 to 2009. And for the first time in the history of our company, more than half of our hours are outside of Connecticut. We're very proud of that because outside of Connecticut, as I told you last year, by definition is low-cost sourcing."

Having met his goal of a 10 percent profit margin in 2010, Pino presently is aiming for 14 percent by 2014.

Playing its strategy close to its vests, company officials declined to share details of the cost saving cuts with Connecticut’s Democratic congressional delegation. Rep. Rosa DeLauro, for instance, was not apprised of the details of the earlier September cuts, which included the elimination of 567 positions, 419 of which were in Connecticut. In the first round, 384 hourly members of the Teamsters union were let go.

In the current round, the company hopes to reach its goal of about 525 workers. No details of the cuts were shared with Mrs. DeLauro.

The company may be suffering from post-Attorney General Richard Blumenthal syndrome. Before he hopped to the U.S. Senate from his suit stained position as attorney general, Mr. Blumenthal intervened on behalf of union workers at Pratt&Whitney, a company that like Sikorsky operates under the aegis of United Technology (UTC), successfully if temporarily averting layoffs. Unfortunately for Mr. Blumenthal and workers in the vast beehive of United Technology, cost savings lost in one UTC company is often recovered in another.

Of UTC’s 205,000 global employees, 26,000 work in Connecticut, the majority of them at Pratt & Whitney, Sikorsky and Hamilton Sundstrand. Employees at Pratt & Whitney have diminished over the past two decades from 15,000 to 3,700.

Mr. Pino is not alone in thinking that Connecticut is a forbidding place in which to do business. Last February, while speaking at a Middlesex County Chamber of Commerce breakfast, CEO of Aetna Mark Bertolini told the group, “We've done the analysis, and, quite frankly, Connecticut falls very, very low on the list as an environment to locate employees . . . in large part because of the tax structure, the cost of living, which is now approaching, all in, the cost of locating an employee in New York City.”

Rising above critics of his administration, Governor Dannel Malloy was last Thursday, according to a press release, “a featured panelist at the Bloomberg Hedge Funds Summit, where he will speak about his efforts to generate growth in the state’s financial services industry and attract new businesses and jobs to the state”– this barely week after the non-partisan Institute for Truth in Accounting (IFTA) tagged Connecticut as a “sinkhole state,” one of the five worst states in the nation:

“It is one of five states in the worst financial position in the country. According to research conducted by IFTA, while Connecticut has $29.4 billion worth of assets, only $10.1 billion are available to pay $63.4 billion of bills as they come due. IFTA's research also indicates each taxpayer's financial burden is $41,200.”

Mr. Malloy, the architect of the largest tax increase in Connecticut’s history, which included a painful income tax hike retroactive to January, has done very little to control spending, Connecticut’s most pressing problem. And even some of the governor’s putative “savings” have been costly. The state will realize virtually no savings from a budget item requiring state workers to accept a provision requiring medical exams. Workers who declined the states’ offer were to pay a penalty fee that appeared in the budget ledger as a savings. But -- big surprise! – fully 90 percent of the state workforce chose to participate in the plan, and the projected saving vanished. The Office of Fiscal Analysis continues to insist, ad infinitum, that it cannot assess savings components of the budget approved last May. The office has been advising the administration and the Democratic controlled legislature since May that lacks the requisite information to confirm that a union concession deal concocted between the Malloy administration and SEBAC officials will provide nearly $2 billion in savings over two years.

One needn’t wonder whether Mr. Malloy will make use of such data in any of his future reports to business leaders. It hardly matters. Real job producers and business entrepreneurs have already read the signs of the times. Expected cuts in defense contracts, the continuing temptation on the part of left of center legislators to increase taxes on entrepreneurial capital, the possible crack-up of the Eurozone, the increase in crippling regulations authored by former senator – now Hollywood mogul -- Chris Dodd and soon to be former U.S. House Rep. Barney Frank, the continuing housing market blow-out midwifed by the same two culprits, the never-ending bailouts of companies not permitted to go bankrupt … all this and more will punch massive holes in state and federal budgets, at which point some Greece-like states, "sinkhole states," will have no choice but to slash spending – because no one will be able to afford tax increases.

We’ve been there, done that. And we’re still broke.
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