Connecticut Gov. Dannel Malloy has taken fire for the cost and scope of his 20-year, $100 billion infrastructure plan.

Connecticut Gov. Dannel Malloy is marching ahead with his plans to upgrade transportation infrastructure in the state.

Just how far he can go is an open question, given the state's budget strain, high debt level and unfunded pension liability problems.

Two weeks ago the Connecticut Bond Commission approved $174 million for a variety of transportation projects, including $12 million to overhaul four Metro-North Railroad diesel locomotives, $20 million for train station improvements and design of an extra main track between Hartford and New Haven, and $2 million to commence repair work on the Heroes Tunnel on the Wilbur Cross Parkway in New Haven.

Also in December, Malloy announced an agreement with Amtrak to complete upgrades to the Hartford line, receiving guaranteed agreements for cost ceilings and a clear timetable for completion of a project to connect New Haven, Hartford and Springfield, Mass., along the Interstate 91 corridor.

Malloy, a former Stamford mayor re-elected to a second term in 2014, has been trumpeting his $100 billion, 20-year infrastructure plan.

Skeptics question whether Connecticut can afford it.

Paul Mansour, a managing director at Hartford, Conn., asset management firm Conning, sees parallels between Malloy's transportation emphasis and the education funding push by Pennsylvania Gov. Tom Wolf. While Connecticut has a signed budget, Pennsylvania's stalemate over a fiscal 2016 spending plan is deep into its sixth month.

"Gov. Wolf has placed a high priority on education the way Gov. Malloy in Connecticut has placed a high priority on transportation. Although these are worthy goals, both states will need to tone down the pace and scope these aspirational policy goals," said Mansour. "From a credit perspective, the more urgent priorities are structurally sound budgets and private sector employment growth."

The Connecticut bond panel's Dec. 11 approvals put the state within just $5,822 of Malloy's self-imposed "soft-cap" limit on general obligation borrowing for the year, now $2.5 billion.

"When debt bumps up to just shy of $23 billion, then it becomes structural because it does become part of the cash-flow system for the state of Connecticut," said state Sen. Scott Frantz, R-Greenwich, the ranking member of the General Assembly's finance and commerce committees and part of the 10-member bond commission.

"As interest rates start going up again, instead of being 12% of our overall budget in terms of the debt-service level, it's going to go to 14%, 15%, even 15.5%, depending upon how interest rates go up."

According to Frantz, Connecticut could spend $42 billion to $44 billion and still satisfy its infrastructure needs. "I think $100 billion is too ambitious. Our bonding system is already strained," he said. "No state and only one other country [China] spend that much, and they have a few more people."

Conning, in its State of the States ratings in November, ranked Connecticut 48th by economic indicators that included housing price index, population growth and tax revenue growth. Iconic General Electric Co. of Fairfield delivered a gut punch in June when it said it might move out of state. GE, which objected to business taxes proposed during budget deliberations, cited the need for a more business-friendly climate. Company officials expect to decide in January whether to stay.

Connecticut, though, continues to fare well with bond rating agencies. Moody's Investors Service rates its general obligation bonds Aa3, its fourth-highest rating. Standard & Poor's, Fitch Ratings and Kroll Bond Rating Agency rate Connecticut AA. S&P's outlook is negative. The others assign stable outlooks.

That could change, said Frantz.

"At some point, unless we can get our act together and get the ship turned around and put it on the right course, the rating agencies are going to have to come clean and say wait a minute, there's some major liquidity problems with the state of Connecticut," he said.

Malloy convened a legislative special session in December to deal with a $350 million budget deficit. State budget director Benjamin Barnes, after lawmakers during the session cut $214 million and made about $136 million in revenue changes, now estimates a $200,000 surplus.

Upward revisions include a $109 million increase resulting from a delayed commencement of transfers from the sales tax to both the special transportation fund and the municipal revenue sharing account.

According to Barnes, Connecticut's December general obligation bond sale produced lower-than-expected net premiums, resulting in the need for a deficiency appropriation of $35 million. The next significant bond sale is scheduled for the spring, and "market factors and administrative decisions by [state Treasurer Denise Nappier's office] will be key determinants of any change to our projection at that time," he said.

State lawmakers and unions are expected to weigh a Malloy proposal to bifurcate Connecticut's main public pension fund, the State Employees Retirement System, into essentially a pay-as-you-go system for employees hired before 1984 and a separate fund for those hired after that year.

It's the primary recommendation of a 67-page report from the Center for Retirement Research at Boston College about Connecticut's chronic pension underfunding.

"While Connecticut does not attract as much attention as New Jersey or Illinois, it is facing a sizeable pension liability, which is weighing on the state's current budget as well as its long-term debt burden," Loop Capital Markets vice president Rachel Barkley said in a report.

 While the state is paying its full actuarially required contribution, or ARC, pension spending has strained the budget. According to Loop, it represented 13% of general fund spending in fiscal 2014, more than triple the 4% average for states.

Spreads on Connecticut GOs have remained relatively flat for the past six months, Loop added.

According to the Boston College report, Connecticut funded its pension liabilities on a pay-as-you-go basis until 1971 for SERS and 1979 for the Teachers' Retirement System, allowing an unfunded liability to spike rapidly.

"The essence of the report that they got from the Boston College folks is that they look back at how this all happened and – surprise -- it was underfunding in past years, not making their ARC payments and so on," Alan Schankel, a managing director at Janney Capital Markets, said in a Bond Buyer podcast. "Every year they've undershot that and it just puts them in a deeper hole. And then of course, we'll have to see if they take the advice."

Nappier, after analyzing the Malloy proposal, said Connecticut should phase in a reduction of its investment return assumption for pensions to 7% from 8% to conform "more realistically" to expectations for capital markets performance.

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