OFFICE OF FISCAL ANALYSIS

Legislative Office Building, Room 5200

Hartford, CT 06106 (860) 240-0200

http: //www. cga. ct. gov/ofa

sHB-5435

AN ACT CONCERNING THE RECOMMENDATIONS OF THE MAJORITY LEADERS' JOB GROWTH ROUNDTABLE.

OFA Fiscal Note

State Impact:

Agency Affected

Fund-Effect

FY 11 $

FY 12 $

Education, Dept.

GF - Cost

Significant

Significant

Legislative Mgmt.

GF - Cost

Minimal

Minimal

Treasurer, Debt Serv.

GF - Cost

See Below

See Below

Department of Economic & Community Development

GF - Cost

243,147

243,302

CT Innovations Inc. (quasi-public)

Various - Cost

See Below

See Below

Department of Revenue Services

GF - Revenue Loss

See Below

See Below

Comptroller Misc. Accounts (Fringe Benefits)1

GF - Cost

45,061

115,788

Note: GF=General Fund

Municipal Impact: None

Explanation

Sections 1 and 2 establish a Preseed Funding Account, as a separate non-lapsing account, to provide funding to Connecticut businesses and requires the Connecticut Innovations Incorporated2 (CII) to enter into a contract with a nonprofit corporation to operate the program.

The bill authorizes $12. 0 million in General Obligation (GO) bonds in FY 11 for this Preseed Funding program. The total General Fund debt service cost for principal and interest payments to issue this amount over 20 years assuming a 5. 0% interest rate is $18. 3 million. The first year that the state will experience costs associated with the bonds depends on when they are allocated through the State Bond Commission and when the funds are expended.

Sections 3 and 4 could result in a General Fund revenue loss to the personal income tax of up to $6 million (the cap) in FY 11 and FY 12, and up to $3 million per year thereafter. The revenue loss is a result of the bill authorizing income tax credits for people who invest in qualified Connecticut start-up businesses. However, the initial revenue loss is likely to be less than $6 million because of the limited number of Angel Investors currently active in Connecticut.

CII must determine a company's eligibility as an Angel Investor, maintain a database of such approved businesses that is updated monthly, and review the credit's effectiveness, which is anticipated to result in personnel3 costs of $59,323, plus fringe benefits, and indirect overhead costs of $17,532. It is anticipated that any costs incurred by CII would come from its operating funds, which reduces funding available for current investments and programs.

Sections 5 and 7 require CII to make grants to recipients of Angel Investments out if its investment income, which will reduce the amount of support available for current investment programs. It is anticipated CII will incur personnel costs4 of $96,000, plus fringe benefits, indirect overhead of $28,080, and program development and marketing costs of $20,000 to implement this program.

Section 6 requires CII to develop a marketing campaign which may result in potentially significant costs. It is anticipated that any costs incurred by CII would come from its operating funds, which reduces funding available for current investments and programs.

Section 8 expands the duties for the Department of Economic and Community Development (DECD) regarding Connecticut exports, resulting in costs of $114,125, plus fringe benefits in FY 11 and $110,410, plus fringe benefits in FY 12.

The bill requires DECD to assign adequate staff to provide technical assistance to businesses regarding exports. The agency will need one Connecticut Careers Trainee with a starting salary of $40,000, plus fringe benefits to handle this new responsibility. The agency is required to provide guidance and advice on regulatory matters which will require funding for staff training and travel expenses to develop expertise in these areas. Funding is needed for: training at the State International Development Officers Association ($450 event registration plus $950 for staff travel= $1,500); attendance at three CT Business and Industry Association (CBIA) workshops ($75 per session x 3 sessions = $225); and to attend two specialized week long export training sessions (with registration and staff travel costs estimated at $4,000).

Additionally, DECD must support organizations and activities that provide assistance in exporting state products. This will require DECD to: join the State International Development Officers Association with annual dues of $2,200; participate in the quarterly Eastern Trade Council board meeting ($500 per meeting x 4 meetings = $2,000); sponsor the CBIA International Trade Survey ($10,000); and join the World Affairs Council ($15,000).

The bill requires DECD to promote export activities, including sponsorship of programs, assist companies in accessing federal Department of Commerce services and provide marketing materials and web site improvements for exporters. It is anticipated the department will need $30,000 to provide export assistance, $5,000 for marketing materials, and $5,000 for website improvements.

Section 9 expands the uses of the DECD's Manufacturing Assistance Act (MAA) funds to support exporting. As of April 5, 2010, the unallocated balance of MAA funds is $59 million.

Section 10 of the bill qualifies energy improvement projects for school construction grants, beginning October 1, 2010. This could result in a significant cost to the state, as these projects are not currently eligible for state reimbursement (unless a town is undergoing a comprehensive renovation). There are approximately 100 million square feet of public K-12 space that would be eligible for energy improvement projects. It is estimated that updating or upgrading schools with energy improvement projects, costs, on average, $35 per square foot. If all schools took advantage of the new eligibility for energy improvement projects, the total cost would be approximately $3. 5 billion, of which 70% (on average) is eligible for state reimbursement, resulting in an additional state cost of up to $2. 45 billion (it is unknown how many schools would actually apply for an energy improvement project, and when they would receive a grant commitment). A medium-sized school, with approximately 118,000 square feet, which recently made improvements to replace their electric heating system with a fossil-fuel system, incurred costs of $4. 4 million to complete the project.

Section 11 of the bill is estimated to result in a significant annual revenue loss to the General Fund beginning in FY 11 from the personal income tax, the corporation business tax, and the insurance premiums tax. The revenue loss will grow over time to as much as $22 million per year beginning in FY 13 because companies can claim the credit for up to three years after a job is created.

The revenue loss is a result of numerous changes to the job creation tax credit that is anticipated to result in a net increase in the amount of credits claimed. In order for the total amount of credits claimed to reach the annual cap of $25 million there would have to be approximately 6,250 new jobs that qualify for the credit. The revenue loss for each new job would be $4,000 per year for up to three years. The annual wages or salary of each new job would have to be approximately $54,9005 or more and the job would also have to include health benefits.

It is anticipated that DECD will require two economic and community development agents (AR-25) with a salary of $64,511 each, to administer the tax credits.

Section 12 establishes a task force and appoints a number of agency heads, or their designees, which results in no fiscal impact. The Office of Legislative Management (OLM) will incur costs associated with mileage reimbursement, of 50 cents per mile, for legislators participating on the task force.

Section 14 of the bill will result in a revenue gain of approximately $155,000 per year from eliminating corporation tax credits for donating computers to public and private schools (CGS 10-228b), research and development grants to colleges and universities (CGS 12-217l), financial institutions constructing new facilities (CGS 12-217u), and Small Business Administration guaranty fee (CGS 12-217cc).

The table below provides the history of the four credits from tax year 2005 to 2007.

Credit

2005

2006

2007

Average

Computer Donation

250

340

0

197

Financial Institutions

0

839

0

280

Research Grants to Higher Ed

229,755

0

21,657

83,804

SBA Guaranty Fee

178,791

893

33,324

71,003

Total

408,796

2,072

54,981

155,283

The Out Years

The annualized ongoing fiscal impact of the “Angel Investors” tax credits would be limited to the cap of $3 million per year.

The new Insurance Reinvestment Fund Program in Section 13 will result in a General Fund revenue loss to the Insurance Premium Tax between FY 13 and FY 19. The bill specifies that the maximum credit that can be claimed per fiscal year is $40 million, which would occur in the years when 20% of the credit could be claimed. The table below shows the revenue loss in each fiscal year assuming that sufficient capital is invested to qualify for the maximum amount of credit. The actual amount of the revenue loss in each fiscal year will depend on the amount of capital invested in eligible companies.

Maximum General Fund Revenue Loss from the Insurance Reinvestment Fund Program Tax Credit

Fiscal Year

Percent Credit claimed

Maximum Revenue Loss

($ millions)

FY 10

0%

0

FY 11

0%

0

FY 12

0%

0

FY 13

10%

20

FY 14

10%

20

FY 15

10%

20

FY 16

10%

20

FY 17

20%

40

FY 18

20%

40

FY 19

20%

40

Total

100%

200

It is anticipated that DECD will incur out year costs, beginning in FY 13, of $32,250 for a half time Community Development Agent (AR-25) to administer the credit.

Finally, the fiscal impact identified above for the General Fund would continue into the future for the term of issuance of the bonds.

1 The estimated non-pension fringe benefit rate as a percentage of payroll is 26. 66% which includes health insurance, social security, Medicare, life insurance, and unemployment compensation. Fringe benefit costs for new positions do not include pension costs as new positions will not impact the state's pension contribution until FY 12 after the next scheduled actuarial valuation.

2 CII is a quasi-public state agency that does not receive resources from the General Fund. It provides assistance for: (a) development of new business; (b) research and development of new businesses; and (c) financing.

3 Personnel include a 0. 5 FTE Investment Analyst and a 0. 2 FTE Investment Manager

4 Personnel costs include: 0. 25 FTE for an Investment Analyst, 0. 25 for an Associate Investment Analyst and 0. 5 for an Investment Manager.

5 The household median income in Connecticut was $68,595 in 2008 according to the Bureau of Labor Statistics. The bill specifies the credit only applies to jobs with salaries greater than or equal to 80% of CT median income but the bill is unclear how median income will be determined.