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Connecticut's Deficit Doldrums Continue

Estimates vary over the size of Connecticut's budget deficit. But agreement is widespread over the magnitude of the problem.

At 10 a.m. Wednesday, the General Assembly will meet in special session in Hartford to consider Gov. Dannel Malloy's deficit-mitigation plan aimed at eliminating a shortfall that ranges from $365 million to $415 million. In addition, the state faces a shortfall of $2.1 billion over the next two fiscal years.

The session will come after two weeks of meetings among top staffers of Malloy, a Democrat whose party controls the legislature, and Democratic and Republican caucuses. "There's no way to gauge how long the debate will go," said Malloy's communications director, Andrew Doba.

Comptroller Kevin Lembo has certified a deficit of $415 million, about $50 million larger than what Office of Policy and Management Director Benjamin Barnes told a legislative panel last month. Lembo and Barnes have blamed higher than expected Medicaid costs. The amount exceeds 1% of total general fund appropriations, requiring Malloy by law to submit the deficit-reduction plan.

OPM two weeks ago announced about $170 million in spending cuts, which Malloy ordered directly invoking his rescission authority. Malloy last week identified a further $245 million, which the legislature must approve.

On another front, Malloy recently authorized Treasurer Denise Nappier to tap a credit line of up to $550 million for operating expenses if necessary. Moody's Investors Service on Friday called such a need a credit negative "because it reflects the state's liquidity and budget challenges."

All this follows a year that has included a downgrade in January from Moody's and a scathing report in October by Hartford-based asset manager Conning Inc., which ranked Connecticut last among the 50 states in credit quality, citing a high debt and expenditure burden, weak employment growth and declining home values.

Moody's lowered the state's general obligation bond rating to Aa3 from Aa2, citing high combined fixed costs for debt and post-employment benefits relative to the state's budget; a low pension funding ratio "depleted reserves with slim prospects for near-term replenishment."

Fitch Ratings, Standard & Poor's and Kroll Bond Rating Agency - the latter began rating Connecticut earlier this year -- each rate the state AA.

"The rating agencies are watching Connecticut's fiscal mess like hawks," said state Sen. Scott Frantz, a Greenwich Republican.

The Moody's downgrade and the Conning report triggered back-and-forth political sniping. Malloy and Nappier railed at Moody's right after the downgrade, prompting Republicans to say state officials owed the rating agency an apology. Nappier also accused Conning of "simplistic methodology."

Nappier, in her request two weeks ago for the cash-flow credit line, told the governor the state's common cash pool had a negative balance, which forced the temporary transfer of $366 million from bond fund investment accounts.

Such transfers bother Republicans.

"The state's budgeting process is very loosey-goosey," said Frantz. "Bond money intended to repair bridges now goes to the general fund. We are facing a big budget deficit. The state is in a serious cash flow hole. It's a shame that two years ago we blew an opportunity to pass a rational budget that reflects the kind of economy we are in."

By law, the governor and General Assembly pass a two-year budget plan in odd-numbered years, while modifying it along the way.

Connecticut on Wednesday sold $627.4 million of special tax obligation bonds -- $125 million of it refunding - for transportation infrastructure.

"We like the special tax. It provides a separate revenue stream with ample amounts of coverage. It's a good alternative," said John Hallacy, the head of municipal research for Bank of America Merrill Lynch.

In addition to spending pressures, the state lacks available reserves. After the 2001 recession, Connecticut restored its rainy-day fund to $1.4 billion. But the state depleted that account after the recent recession and issued about $950 million in deficit bonds in 2009. A fiscal 2012 year-end deficit sidetracked a plan to retire the deficit bonds two years ahead of schedule and only $100 million now sits in the rainy-day fund, Moody's said on Friday.

Budget problems have also forced Connecticut to delay its conversion to generally accepted accounting principles, or GAAP budgeting, a Malloy talking point during the 2010 campaign. Conversion to GAAP, which Malloy said is necessary to reverse a pattern of what he called "accounting tricks," requires an outlay of about $1.8 billion, but the state so far has only deposited $75 million to a GAAP lockbox account, in May.

"The state's cash position has been diminished by not following generally accepted accounting principles in the past, which has resulted in a chronic general fund deficit of over $1 billion," said Nappier. "Moving to GAAP will help, not hurt the state's cash position."

Fitch senior director Douglas Offerman called GAAP "a different set of goalposts that the state has set for itself," adding: "The governor has established that he wants to address a long-standing fiscal management problem."

Connecticut's prosperous image can obscure its budget problems.

"Connecticut's a very wealthy state, as measured by personal per capita income. But the state has high liabilities that include both its bonded debt and its obligations to retirees, both pensions and other post-employment benefits. Its pension obligations, in particular, are on the high end among the states that Fitch rates," Offerman said.

Anthony Figliola said Connecticut is not alone.

"It's a big national issue," said Figliola, the vice president of Empire Government Strategies of Uniondale, N.Y., and former deputy supervisor of Brookhaven, N.Y., on Long Island. "States like Connecticut, Rhode Island, New York and Wisconsin have to learn how to handle these legacy costs of pensions and healthcare."


According to Washington think tank Pew Center on the States, Connecticut's pension plan was only 53% funded in 2010. Pew considers 80% an acceptable threshold. Malloy this year proposed a long-term pension funding plan calling for the state retirement system to reach 80% funding by 2025 and full funding by 2032.


Connecticut's budget crisis even has state transportation officials talking about reinstituting tolls along Interstate 95, and adding them along stretches of I-84 near capital city Hartford.

"We're actively looking at tolling, but we're going to do it in a careful way and take a look at it, collect all the facts, find out what the impacts would be and what it might play in terms of a role for funding," Department of Transportation Commissioner James Redeker said recently.

Connecticut abolished tolls after a gruesome 1983 crash at the Stratford toll plaza on I-95 killed seven people when a truck carrying sweet potatoes plowed into several cars and triggered an explosion. Six of the seven people were burned beyond recognition.

Even before the tragedy, safety-based objections to the tollgates had been mounting. The federal government at the time threatened to withhold transit money if Connecticut did not remove the gates.

Electronic tolling could enable the state to restore a toll system without the gates.

Redeker, speaking last Monday during a forum at the State Capitol, said the Department of Transportation might be unable to borrow money for new projects by 2014 because of overleveraging for current road and rail projects. The agency, he said, has insufficient funds for now to take on new debt service.

Connecticut cities and towns, meanwhile, fear a financial hammer coming down on them through the state cuts, which could affect their own credit quality.

Jim Finley, the executive director of the Connecticut Conference of Municipalities, hinted this past week at legal action over municipal aid cuts.

"It's hard for localities to backfill cuts these days," said Bank of America's Hallacy. "During the fiscal year, localities have set their budgets already. Assuming a midyear cut is a very difficult thing to do, especially when revenues are flat."

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