For a newly retired CEO, James Smith has spent an awful lot of time thinking about balance sheets. It’s not Webster Financial’s books that he’s trying to balance, but Connecticut's.

Since retiring as the chief executive of the $26.5 billion-asset Webster, of Waterbury, Conn., Smith has devoted much of his time to co-chairing a blue-ribbon panel of mainly private sector executives tasked with solving Connecticut’s fiscal problems.

“It’s the greatest opportunity we’ve had in at least a generation to make good, solid proposals that could stabilize the fiscal situation and lead to economic growth,” Smith, who remains Webster's chairman, said in an interview with American Banker.

Still smarting from the loss of General Electric’s headquarters, which is moving to Boston, the state is now facing a budget deficit of around $240 million as it struggles to balance unfunded pension liabilities with a shrinking tax base.

James Smith, Chairman and CEO of Webster Bank.
"Maybe banks need to be willing to take a little more risk in order to stimulate investment that could lead to economic growth," said Webster Financial Chairman James Smith.

Its location, between Boston and New York, and its leafy suburbs were once strong selling points. Now, chronic underinvestment in its midsize cities is catching up with the Nutmeg State as millennials and retirees alike flee for cheaper or more prosperous locales.

Created as part of the state’s budget last fall, the Commission on Fiscal Stability and Economic Growth is charged with making serious, structural recommendations to help balance the state’s budget and ultimately improve its prospects. Smith co-chairs the 14-member commission, along with Robert Patricelli, who recently retired from Women’s Health USA.

The commission has held upward of 30 hours of hearings, pored over thousands of pages of written testimony, and talked with every agency head in the state, with the goal of presenting recommendations to the legislature on March 1.

Among other possibilities, Smith and the commission believe that, given the right conditions, fintechs could flourish in Hartford and Stamford. The state boasts a highly educated workforce and has received high marks for its technological know-how. Among its obvious selling points to upstart tech firms looking to support the financial sector are its thriving insurance industry and its proximity to the world’s financial capital, New York City.

This is not the first time such a commission has studied the state’s problems with the intent of shaping Connecticut’s future. Yet this time, Smith is hopeful, in part because the legislature has a mandate to vote on the panel's recommendations.

Recently, Smith talked to American Banker about his work on the commission, Connecticut’s fintech potential and how the state's banks can be a part of the solution.

In some of the materials you shared, you identified fintech as an industry that could flourish in Hartford and Stamford. Could fintech be a part of Connecticut’s comeback story?

JAMES SMITH: Fintech could be part of that. Certainly, the financial services business has been a driver of Connecticut’s economic well-being over many generations. It still has a very significant, perhaps the leading insurance business in the country.

For financial services, real estate, etc., there is a very strong core here. Hartford and Stamford would be areas where you would look to stimulate industry clusters in areas where there’s already the natural capability to do so. You can incentivize growth in financial services particularly through digitization, which is the way of the world and that’s what fintech is all about, so yes, there’s an opportunity.

Precision manufacturing is another opportunity. Connecticut still has among the most productive workforces in the country. We have the highest productivity per unit of almost any state. When you look at the fact that we have Sikorsky and Pratt & Whitney, [United Technologies] is located here, aerospace is big. Aerospace and precision manufacturing are another cluster to invest in.

Bioscience is an area of significant growth in Connecticut, as well. The idea is to find your natural strengths and invest in them and also to identify the areas for natural growth.

Toward that end, what kind of recommendations might the commission make to the legislature on March 1?
If you want to be more competitive, you’ve got to have a better transportation infrastructure and Connecticut ranks in the bottom in terms of the ability to get from place to place conveniently and swiftly and reliably. Connecticut needs to pay more attention over the long term to finding a revenue stream that can be dedicated to investing into transportation and not siphoned off into the general fund for other purposes.

As a result of Connecticut’s challenges and the fact that we haven’t had economic growth, these investments have been crowded out. What’s happened now is Connecticut has to fund these unfunded liabilities. Its fixed costs are growing at 5%, and fixed costs now comprise over 50% of the budget.

That’s the hole that we’re trying to dig out of by trying to understand what could Connecticut do on the spending side to lower its expenses and where revenue is not raised at the level it could be.

For example, Connecticut has a huge amount of exemptions from the sales tax. It also has a relatively low sales tax rate. On the other hand, Connecticut has a very high reliance on property taxes, particularly at the local level, so what is it that Connecticut could do there?

You have to look at everything through the lens of competitiveness and affordability and then decide, what could we do to better balance our revenue and our spending while investing in our future?

So do you think the commission will suggest the legislature do something with the sales tax?
The one thing that the legislature has to be careful about is, the idea of raising revenue without at least an equal reduction in spending is probably a nonstarter. There are levers to pull on both the revenue side and the spending side that could get Connecticut back to a sustainably balanced budget with also the ability to make investments in public infrastructure. That is what’s necessary to stimulate business confidence and therefore private investment.

You were selected for this commission because of your business experience, but of course, your business is banking. Can you talk a little bit about how Connecticut’s issues relate to the banking industry?
As we’ve grown, we’ve looked to diversify our geographic risk, which has been a good thing so that we’re not 100% concentrated in Connecticut. We’re as committed to Connecticut as ever, but in the end you have to look at what kind of return are you getting on the capital that you’re investing and therefore where should you invest, in what businesses, in what geographies. Those are the things we think about.

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'Nothing would please me more than being able to make good solid recommendations that could change the course of Connecticut’s future,' Smith said.

At the same time, we recognize that we’re part of the infrastructure and we are to some degree a reflection of the well-being of our customers and our communities. We bank about one in nine families in Connecticut and about 30,000 small businesses here, so...we’ve long appreciated our responsibility to be a catalyst for positive change. We’ve been active in policy discussions while remembering to always be apolitical and bipartisan along the way.

Knowing that I would be retiring as the chief executive, even as I would be continuing as the chairman, this created more time for me to be able to get involved in the commission. Nothing would please me more than being able to make good solid recommendations that could change the course of Connecticut’s future.

Beyond the recommendations to the legislature, how do you think Connecticut’s banks can be a part of the solution?
One thing banks can do is to take a little more risk in making sure that they’re funding customers who may have ideas for starting up businesses. Maybe banks need to be willing to take a little more risk in order to stimulate investment that could lead to economic growth. I don’t say that critically. That’s just one way that banks can make a difference. Banks can step up their community investment activities under [the Community Reinvestment Act], for example. They could spend more time in developing affordable housing, which is an issue for Connecticut. They could further fund their foundations to be able to invest in their communities.

All of us have the opportunity to do these things and I know how committed Connecticut banks have been to investing in their communities.

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