State’s financial problems belie image as haven for wealthy
By Rebecca Spalding / BLOOMBERG
The Chinese delegation wanted to know how it could duplicate the success of hedge-fund mecca Greenwich, Connecticut.
The visitors asked: What is the wealthiest state in America doing to foster the industry that earned the region its “Gold Coast” nickname? “After we’re all done laughing, we tell them the truth,’’ said Bruce McGuire, founder of the Connecticut Hedge Fund Association. “They haven’t done anything. They’re actually thinking about how they can kick us all out of town.”
Connecticut finds itself in a bind. The state has long loomed large in the national imagination as a playground on the Long Island Sound where people play polo and sail.
The state is home to 400 private investment funds, according to McGuire’s group, including AQR Capital, run by Clifford Asness, and Raymond Dalio’s Bridgewater Associates Inc. Visions persist of horsey Martha Stewart suburbs. Less advertised are its impoverished cities and swelling budget deficits.
In the state that boasts America’s highest per-capita income, the cost of living is elevated, people and businesses are moving out and the state-employee pension system is underfunded by more than US$34 billion (RM143.66 billion), according to data compiled by Bloomberg. Its capital, Hartford, needed a state bailout last month to skirt bankruptcy.
In China, the government is building “fund towns” and offering tax breaks to attract money managers and boost the financial industry. In Connecticut, the legislature considered a 19% tax hike on investment gains as a way to close a federal loophole on so-called carried interest.
Proponents saw it as a way to narrow the second-widest wealth disparity in the country. Critics said it was a tacit invitation for tax-burdened hedge-fund firms to bolt.
The threat that one of the state’s most successful industries could leave isn’t an empty one. Paul Tudor Jones of Tudor Investment Corp left the state for Florida, a lower-tax state, in 2016, according to a residence filing in Palm Beach County.
Aetna Inc and General Electric Co (GE), once Connecticut stalwarts, have also fled. In a statement at the time of its announcement, the insurance giant said it needed to relocate headquarters to attract
So concerned was the state that Bridgewater would skip town that Dalio’s firm received a US$22 million state tax break in 2016 to stay in Connecticut.
It’s not only companies that are departing. Last year, 8,000 more people left than moved in, a percentage decrease topped only by Illinois, West Virginia and Puerto Rico.
The exodus and Wall Street’s fluctuations have translated into uneven revenue. Last year, Connecticut collected US$18.2 billion, more than the prior two years, but significantly less than the US$20.1 billion it took in during the 2013 fiscal year. Meanwhile, fixed costs, like pension payments, remain high.
Taxes haven’t closed the gap, leading to infighting about how much state aid could be cut. Disagreements over how to pay for a two-year budget deficit of US$3.5 billion erupted into a four-month-long political stalemate that threatened Hartford with bankruptcy. The city narrowly avoided that fate after lawmakers passed a state budget that provided a lifeline.
With the increasing fiscal problems, it’s not only masters of the universe threatened by the political turmoil and lagging economy. “Manufacturing in the state of Connecticut has always been difficult due to the high cost of living, but the recent budget discussions have only exacerbated the issue,” said Cyndi Zoldy, ED of the Smaller Manufacturers Association of Connecticut Inc.
Her group represents more than 160 companies, mainly in the Watertown area, that make small goods to be used in larger manufacturing processes, including in the state’s aerospace and defense industries. One of the biggest challenges these companies face, according to Zoldy, is the difficulty attracting young employees to replace ageing workers.
Cost of Living
It’s a familiar problem for many states, but Connecticut has to contend with one of the highest costs of living in the country, which makes it difficult to attract or keep millennials. The median price of homes sold in the state is almost US$250,000, according to Zillow, compared to US$170,000 in Texas, one of the country’s fastest- growing states.
For Sabrina Beck, that challenge has resulted in a five-year-long vacancy for a managerial position at Altek Electronics Inc, her family-run manufacturing company based in Torrington. The company employs 185 people and assembles smaller electronic parts for customers such as Otis Elevator Co and Hologic Inc, a medical- instrument manufacturer.
She said the company would never consider leaving the state because it’s a family-owned business, but she said she worries about the long-term viability of the firm due to competition with low-cost manufacturers abroad.
“Connecticut does need to do some creative things in order to bring in more technology and business, and retain the brain power we generate through our wonderful schools,” she said. “We do have a lot of assets that give us great potential for the future. We just need someone to harness them.”
While Greenwich exemplifies the tony Connecticut, cities such as New Haven, Hartford and Bridgeport are a different Connecticut as they grapple with failing neighbourhoods and a shortage of government investment.
Bridgeport Mayor Joseph Ganim said that part of his city’s financial trouble stems from having to finance services, like the courthouse and a large hospital, for all of Fairfield County, which has far wealthier towns like Greenwich. The city relies on the state’s help, he said, but it could do more.
“If we’re going to do better, we need to do better for our urban centres,” Ganim said. “Dollars are falling less on the big cities who have to service some of the most vulnerable and the most needy.”
As politicians contend with those issues, McGuire said he believes that the hedge-fund industry is a convenient scapegoat for economic decline.
“I was trying to understand the mindset of why they’ve decided that hedge funds are the enemy, that we’ve caused these problems,” he said. “We didn’t cause GE to move away. We didn’t cause the manufacturing sector to move out of Connecticut. We’re not whispering in the ears of the insurance industry telling them to move to Iowa. We’re actually still living and working here.”