National Outlook 2022 Opening Keynote: Economic Outlook

Shawn Wooden, Treasurer of the State of Connecticut, State of CT

Transcription:

00:00:07:19 - 00:00:17:29
Shawn Wooden

Thank you. Thank you, Jay. I appreciate that introduction. And that is actually my short form video. So sorry.

00:00:20:13 - 00:00:52:10
Shawn Wooden

It is truly an honor to be with all of you today. I appreciate the Bond buyer's invitation to one, just show up someplace in-person and see people. So that's terrific. And to share some thoughts with you this morning. I know I'm only scheduled for 30 minutes, but if you'll bear with me, I've got like an hour and 10 minutes worth of things to share.

00:00:53:20 - 00:01:52:16
Shawn Wooden

So, but I'm excited to talk about our economy. And to brag about Connecticut a little bit. Nationally, the past two years have truly been unprecedented. A pandemic, an economic downturn, racial reckoning, a stolen presidential election. Okay. I'm just joking about that last one. But you get the point. It's been tough sledding for our nation and for the globe. The good news, though, and there is good news is that we seem to be turning around on the COVID 19 pandemic. As we cautiously try to reopen our economy and get back to whatever normal is going to look like, we are beyond the market freefall of the early days of the pandemic.

00:01:53:21 - 00:02:28:28
Shawn Wooden

But the recent Russian invasion of Ukraine presents us with a global threat that can definitely add to the significant ongoing challenges of our economic recovery. We continue to face rising inflation. Workforce shortages, supply chain challenges, and an ever growing racial wealth gap. Yet, even as we acknowledge the serious challenges at hand, the nation's real GDP is expected to grow by a strong 3.7% this year.

00:02:29:18 - 00:02:55:11
Shawn Wooden

In our unemployment, numbers are waning down consistently. So there is some positive signs on the horizon. Now, I know I'm in a room full of really smart people and everything I just said you pretty much already know. But I'd like to talk to you about my state of Connecticut and share some things which you may be less familiar with.

00:02:56:17 - 00:03:26:25
Shawn Wooden

We as a state, we have a highly diversified manufacturing industry, top tier finance, insurance real estate, and bioscience firms, and, of course, cutting edge defense plants. We have a highly skilled and educated workforce as well as world class academic institutions. I don't know if that last one is going to keep my son, who's applying to colleges actually in the state but I keep telling him that, too.

00:03:27:24 - 00:04:04:19
Shawn Wooden

In short, Connecticut has some amazing assets that I love to brag about as state treasurer. But as I'm sure you all know, we've also had our challenges as well. While it's been a tough few years for our nation, we are fortunate in Connecticut to have experienced transformative economic growth on many fronts. While it's clear that there continue to be significant challenges on the horizon for our state, I think it's fair to say we've made a considerable comeback by improving our fiscal health in recent years.

00:04:05:12 - 00:04:36:08
Shawn Wooden

Since coming into office, I prioritized restructuring the teachers pension fund to ensure long term sustainability. I prioritize protecting the growth of our rainy day fund, which has grown to historic highs, securing credit rating upgrades for the first time in over two decades, paying down the state's long term unfunded pension liabilities on an accelerated basis and significantly exceeding our retirement plans’

00:04:37:01 - 00:05:06:21
Shawn Wooden

performance benchmark with double digit investment returns. In fact, last year we exceeded our benchmarks in ten out of 11 asset classes. I think most would say that our state, one that struggled financially for quite some time, is now headed in the right direction. So today I'd like to share some of those experiences with you all. Talk about where we've been, where we are, and where we are headed.

00:05:07:14 - 00:05:39:07
Shawn Wooden

I hope that you'll find many of Connecticut's experiences beneficial to you and your work. I'll begin with the $47 billion state retirement fund that I manage. For some time now, our pension debt has been a mounting obstacle in an area that has received lots of attention in the past decades. Knowing this was a challenge that I wanted to overcome when I came into office, I prioritized restructuring the teachers pension fund, which there had been,

00:05:39:25 - 00:06:05:20
Shawn Wooden

those of you who've watched Connecticut, lots of discussion, debate challenges with doing anything with. I was concerned with an unaffordable spike in future required funding under the former plan to alleviate this problem, we developed a new strategy designed to essentially have the state stop digging. When you're in a hole, you need to know when and how to stop.

00:06:06:04 - 00:06:39:17
Shawn Wooden

And unfortunately, our state didn't for some time. But we came together and we utilized a special reserve fund, extended the funding horizon for the plan, reduced the investment return assumption from 8% to 6.9% and phased into a more conservative level funding method. And we didn't stop with the teachers pension system. We also reduced risk across our entire pension portfolio and took advantage of 

00:06:39:21 - 00:07:12:07
Shawn Wooden

investment opportunities across all asset classes. Each of these steps significantly reduced the future funding risk of our pension systems and contributed to our improved fiscal position. In other good news, the pension funds earned 24.3% for the 2021 fiscal year helping to further grow our pension fund assets. Furthermore, I have consistently advocated to protect our budget reserve fund from being used for unintended purposes.

00:07:13:07 - 00:07:42:29
Shawn Wooden

As the money grows, the attention grows and the desire to reach it and spend it grows. So occasionally I do have some sharp elbows that I certainly needed during this process. Instead, I prioritize growing it and giving us greater liquidity and financial flexibility, which has helped us maintain a strong cash position throughout the pandemic. And at the beginning of the pandemic.

00:07:42:29 - 00:08:09:13
Shawn Wooden

I had weekly calls with treasurers across the country just brainstorming, talking about how our respective states were doing their cash position. And I know that some states were struggling literally to meet payroll, literally to get credit facilities in place. And I'm proud to say that due to the work over a period of time, Connecticut did not have to do that

00:08:09:25 - 00:08:10:08
Shawn Wooden

at all.

00:08:12:17 - 00:08:44:29
Shawn Wooden

As a result, the budget reserve fund grew to an historic high in fiscal year 2020.  And again in fiscal year 2021 exceeding the 15% of general fund expenditures threshold that we've set. Now whenever the budget reserve fund exceeds that 15% threshold in a current fiscal year, Connecticut law requires the excess to be transferred to pay down liabilities of the state including pension debt. For the second year in a row

00:08:44:29 - 00:09:18:19
Shawn Wooden

and only the second time in Connecticut's history we had that opportunity to allocate the excess funds to responsibly pay down our long term unfunded pension liabilities. Making plan contributions over and above the state's full annual required paydown. In 2020 I contributed a 61.6 million additional contribution to the state's pension debt. Now, this was a big deal in 2020 because this is the first time that it ever happened.

00:09:18:19 - 00:09:42:03
Shawn Wooden

And so the Governor is very excited about it. And he calls me Sean. You know, let's have a press conference. Let's talk about this. Right. And it was press conference worthy. So we did And, you know, first 15 minutes we're in office and we're talking. And then he's doing the math and he says, okay, so our liabilities are how much in 61.6 million is it?

00:09:42:13 - 00:10:09:22
Shawn Wooden

I said, Governor, stop, stop. It's not about the numbers. This is about the direction. This is about a new direction for our state. If it was $1, it would be the first time ever in the state of Connecticut. And we should be talking about it. And so fast forward in 20, 21, it was $1.6 billion, the largest in the state's history.

00:10:10:12 - 00:10:48:11
Shawn Wooden

And that additional contribution was above our annual required attack. And that went towards our teacher and state pension funds liabilities. Now it's encouraging to know that at the close of the fiscal year 2021 Connecticut had the second largest budget reserve fund increase in the nation. Based on research by Pew Charitable Trusts to put this all in perspective by contrast 11 years ago there was no money in our budget reserve fund due to the impact of the great financial recession.

00:10:48:11 - 00:11:51:22
Shawn Wooden

Of 2008. I should also note that several significant fiscal controls were put in place legislatively a few years ago. That paved the way for these improvements. Those fiscal controls included establishing a volatility cap to set aside certain tax revenues in the budget, reserve fund, limits on budgeting revenues, and caps on authorizing and issuing bonds. Sorry, In addition, the Legislature's efforts to balance and pass two most recent biennial budgets on time, which also was a thing a few years ago actually Connecticut passing a budget on time, have also contributed to improving the state's fiscal position Now, in the area of debt management, I'm proud that we've consistently exercised for many years conservative debt management practices, including a

00:11:51:22 - 00:12:24:06
Shawn Wooden

relatively rapid repayment of our bonds once issued. And since I came into office, the state has achieved 190 million of refunding debt service savings that will be realized over the remaining life of the refunded bonds altogether. These achievements led Connecticut to receiving credit rating upgrades last spring for our g o bonds. Now, this was for the first time in over two decades as recently as 2017.

00:12:25:04 - 00:13:02:03
Shawn Wooden

Our credit was being downgraded. This was exceptional news for Connecticut. And a strong proof point that we are taking the right steps to get our fiscal house in order. As of May of last year, Connecticut's general obligation bonds receive credit rating upgrades by all four of the major rating agencies Fitch Ratings, Kroll bond ratings, Moody's Investor Services and S&P Global Ratings, and Connecticut Special Tax Obligation Bonds also achieved credit rating upgrades from Fitch, Moody's and S&P.

00:13:03:16 - 00:13:36:17
Shawn Wooden

Now, I know some of you are in the room today. And so to those of you from those agencies, on behalf of the people of Connecticut, I want to say thank you for recognizing the strides that we've made in our progress. Never in the state's history had we received three credit rating upgrades at one time. In fact, I believe prior to that, the last time in the country might have been 2007.

00:13:36:17 - 00:14:13:19
Shawn Wooden

The state of Louisiana maybe might have the year off. But it was a long time ago. It's impacted our bond sales naturally, quite positively as a state now generates greater investor demand when my office goes to market to sell bonds. As a result, Connecticut has been able to access funding for critical infrastructure investment and even more attractive interest rates, which continue to strengthen our economic recovery and save taxpayer dollars in the long run.

00:14:15:05 - 00:15:03:27
Shawn Wooden

Now transact transitioning back to budget results. Analysts are now projecting a 1.5 billion surplus for the current fiscal year. 2022. These projections, if they become a reality, we will be able to make an additional contribution to pay down our unfunded pension liabilities next year as well in fiscal year. 2023 is already looking good. Now, while these projections are good news for sure, we know that we must remain vigilant as our good fortunes are in part coming from the Federal American Rescue Plan funds that is being used to help with our budget over the current biennium.

00:15:04:25 - 00:15:37:06
Shawn Wooden

We must remain focused on our fiscal discipline so that when those funds are exhausted and they will be exhausted, the budget challenges can be met in a sustainable and enduring manner. Even though Connecticut's cash balance in the overall economy has remained well-positioned to continue to advance our economic recovery. I'm also well aware that there's been an uneven economic recovery in our state and in our nation.

00:15:38:09 - 00:16:38:25
Shawn Wooden

And I'm aware that higher inflation rates, whether it be reflected at the grocery store or at the gas pumps, are causing economic pain for millions of families in real economic uncertainty. Our work as state leaders and finance leaders in our respective fields remains to build an inclusive economy where everyone can thrive. This is an endeavor that is constantly on my mind, which is why I am proud that Connecticut is showing industry leadership in selling social bonds Now, as you know, social bonds raise funds for new and existing projects that aim to support issuers in funding socially sound and sustainable projects that achieve greater social benefits.

00:16:40:02 - 00:17:36:22
Shawn Wooden

And on that same note, I'd like to take a moment right now to recognize a highly valued member of my debt management team. Who also manages our work on social bonds. A number of you probably already know her, but Bettina Brown High's is our principal debt management specialist for our large General Obligation Bonding Program. Bettina, will you please stand Bettina was also recognized by the bond buyer a few months ago as one of the 2021 trailblazing women in public finance Her contributions and leadership in debt management have helped our office complete several successful social bond sales and make a lasting impact on our state.

00:17:37:06 - 00:18:14:07
Shawn Wooden

So, Bettina, thank you for the work you do for the people of Connecticut, and thank you for the work you do. To make me look good Now, when it comes to social bonds, we had our inaugural issuance last May, a sale of 520 million social bonds in two series. Then in December, we offered 300 million of social bonds. It was part of a successfully completed 800 million general obligation bond sale.

00:18:14:26 - 00:18:37:12
Shawn Wooden

This sell received strong retail demand, and the social bonds attracted new ESG investors. A growing and exciting segment of the municipal investor market Our social bonds are sold consistent with the International Capital Markets Association's social bond principles. That's always a mouthful for me.

00:18:41:10 - 00:19:22:20
Shawn Wooden

And the proceeds of those bonds are being used to finance the state school construction grant program. Which is a socially progressive program, as it provides significantly higher reimbursement rates to communities with more need I'm proud that our bonds meet the United Nations Sustainable Development Goals. Specifically, the goal for quality education. Now we know that the ESS in ESG is becoming increasingly more relevant in a Moody's Investors Services Service report in 2021.

00:19:23:10 - 00:20:05:22
Shawn Wooden

They noted that their assessment of social risks can adversely affect how they rate a state's economic, fiscal and institutional strength. In that report, it was also noted that income wealth and racial inequality in Connecticut is high relative to our peers. Which impacted one of their determinants of the state's credit position. Not only is it a moral imperative to make sure our communities are thriving, but it's also an economic imperative for our state and for our nation.

00:20:07:20 - 00:20:45:04
Shawn Wooden

As I often say, a rising tide can lift all boats if we do our best to make sure we plug the holes in our boats. People of different means and socio economic status need to have the tools at their disposal to move up the economic ladder, which will benefit everyone's participation in the economy overall. Unfortunately, income inequality in the racial wealth gap are the greatest they've been since the 1980s.

00:20:45:13 - 00:21:00:11
Shawn Wooden

In our growing across our nation, as I'm sure you're all well aware, the pandemic and economic downturn have only exacerbated economic inequality in our country.

00:21:03:27 - 00:21:38:24
Shawn Wooden

Disproportionately impacting communities of color everywhere. While many people often think of Connecticut as affluent and it is. Connecticut is in fact ground zero for wealth and income inequality, while Connecticut is home to the highest annual income per capita in the country. It also has one of the highest rates of income inequality, as well as stark racial wealth gap disparities.

00:21:40:05 - 00:22:09:14
Shawn Wooden

That's also why last year I was proud to champion a program called Connecticut Baby Bonds. During our legislative session, the program received bipartisan support in our legislature and secured a general bond authorization of 50 million a year for the next 12 years. For a total commitment of 600 million. I know you all can do the math, but throw that in there.

00:22:11:07 - 00:22:45:27
Shawn Wooden

Connecticut Baby Bonds is an anti generational poverty. Racial equity and economic growth program. And it became the first of its kind to be enacted in the nation in July of last year. It's designed to help narrow the racial wealth gap by investing directly into children born into poverty in our state. The program creates a trust for children whose births are covered by the state's Medicaid program.

00:22:46:18 - 00:23:09:16
Shawn Wooden

The year the baby is born. Funds will be set aside in a trust managed by my office when the beneficiaries between the ages of 18 and 30 and completes a financial education requirement. They will gain access to the funds and the funds will be used for targeted eligible purposes that have been shown to close the racial wealth gap.

00:23:11:06 - 00:23:41:14
Shawn Wooden

Assuming a 6.9% return assumption, which we model for our pension funds, the approximate amount of 30 $200 will be allocated at birth and would grow to approximately $11,000. After 18 years, obviously more if it's 30 years. The targeted eligible purposes the individuals will be able to use the funds for a higher education. Homeownership in Connecticut Investing in a business.

00:23:41:14 - 00:24:12:18
Shawn Wooden

Entrepreneurial pursuit in Connecticut or retirement savings or security. It's also important to note that I champion this bill taking inspiration from the federal Baby Bonds proposal, which still remains unfortunately just a proposal, and relying on the solid work of researchers and economists like Professor Derrick Hamilton of the New School Baby Bonds is one of the most effective ways to close the racial wealth gap.

00:24:13:02 - 00:24:27:06
Shawn Wooden

There was a 2019 Columbia University study which analyzed the federal proposal and said that it believed it was the most powerful tool to close the racial wealth gap among young adults.

00:24:29:13 - 00:25:05:20
Shawn Wooden

As a previous pension fund investment lawyer and now a state treasurer, I naturally think in ten and 20 years increments and without question, Connecticut Baby Bonds is a long term investment in Connecticut's future. It's an investment in families, communities and our overall economy. Connecticut Baby Bonds is an example of what's possible when we address the S in ESG by making a long term investment in Connecticut's future.

00:25:05:29 - 00:25:57:24
Shawn Wooden

We will change the trajectory of thousands of Connecticut residents lives while also improving the future economic path of our state. The District of Columbia also recently passed a baby bonds program, and I hope that other states, municipalities, and ultimately the federal government will follow our lead There's also powerful research that shows why programs like Baby Bonds in addressing the S in ESG is in our best economic interests I want to note that there's a 2019 McKinsey study that talked about essentially the cost of racial disparity economic disparities in our country.

00:25:58:21 - 00:26:38:05
Shawn Wooden

And what it said is that if we addressed it within the next ten years, we could actually increase our overall economic output by one to $1.5 trillion essentially representing Ford a 6% GDP growth. Now that stark if we do not address that in a meaningful way, we essentially hurt our economy presently and in the long term. Connecticut baby bonds is the type of bold forward thinking long term legislation that can make a real impact.

00:26:38:28 - 00:27:08:27
Shawn Wooden

And legislatures throughout the country. I say this more factually and not critically. They don't think long term. And I want to applaud my Connecticut state legislature for hearing the call for meeting the moment and not thinking in a two year election cycle. Most of these kids will never be able to vote for any of us. And that takes courage, that takes forward thinking, that takes commitment.

00:27:09:11 - 00:27:54:14
Shawn Wooden

And so I'm very proud of our state ground zero for racial wealth inequality being ground zero for launching Connecticut baby bonds. Now, aside from providing some clear examples on how Connecticut is making gains in terms of our fiscal policy and progress, I'd like to share with you some of my priorities as the new president of the National Association of State Treasurers known as NEST One of my key initiatives this year, and as you heard earlier, Nest is bipartisan.

00:27:55:15 - 00:28:20:11
Shawn Wooden

And so we had a conference last year, and David Axelrod came to speak to us in Chicago, and he was just stunned by the fact that there's, in fact, still an organization that's bipartisan in that we talk to each other, we work together. And it is a novelty, but it's not without its challenges. Given, you know, how polarized our country has become.

00:28:21:05 - 00:28:55:05
Shawn Wooden

And so with that in mind, I I applaud the fact that one of my priorities in key initiatives this year is to facilitate bipartisan solutions on how we can create a workforce that is inclusive. To that end, we have recently created a bipartisan special committee on diversity, equity and inclusion to discuss how we can plan for the future of the public finance workforce in an inclusive way.

00:28:56:05 - 00:29:39:14
Shawn Wooden

Now, much of this work will follow up on the recent NAF Public Finance Workforce study released last fall. Its findings confirm that the public finance sector, like many others in state and local government, will face significant workforce shortages. And don't get any ideas, Bettina. Okay. Its findings confirm this And with these findings in mind, state treasurers and public finance officers like me, we have to prepare for this silver tsunami as many public sector employees become eligible for retirement.

00:29:40:05 - 00:30:20:07
Shawn Wooden

It also presents a unique opportunity to diversify our workforces. Diversity of thought, perspective and lived experiences, as we all know, leads to an enhanced performance that benefits the work in the long run. And you invite me back another time. I can give you lots of data to support that Now, whether you're a government leader, an investment banker, an investor, a news publisher or other member of the public finance industry, I urge all of you to think about what else you and your team can do.

00:30:21:01 - 00:30:44:26
Shawn Wooden

It's important to always think critically and creatively to challenge policies of the past that may have worked at one point, but aren't working quite as well as they should be now. Or may only be working for some. There are a lot of smart people in this room that give me hope for the future. And it's an honor to have this opportunity to share my thoughts today.

00:30:45:21 - 00:31:12:14
Shawn Wooden

If we all work together in advancing equity and putting forth policies that positively affect our country, our states, our communities, our neighborhoods. I believe that our long term economic outlook is bright. And again, I want to thank the bond buyer for inviting me here today. And I thank all of you for listening to me. And my time is up.

00:31:13:00 - 00:31:17:18
Shawn Wooden

And remarkably, I did not take an hour in 10 minutes. Thank you.