Connecticut Gov. M. Jodi Rell yesterday proposed slashing spending, cutting capital borrowing, and using budget reserves and deficit financing to close a projected $6 billion gap over the next two years.

"The harsh winds of economic turmoil have spread across the nation and now buffet nearly every aspect of our lives," Rell said in a speech before the legislature. "The economic challenges we are facing give us a rare opportunity to realign state government."

Her proposal also anticipates Connecticut will get $2.02 billion of federal stimulus money between now and the end of fiscal 2011, with $1.29 billion of that being directed toward the state's Medicaid costs.

The Republican governor kept a promise not to raise business or income taxes, though she does seek raising numerous fees in the budget proposal for the coming two-year period. The proposal calls for a $18.85 billion all funds operating budget in fiscal 2010 and $19.53 billion in fiscal 2011.

The national recession and collapse of Wall Street have drained Connecticut's coffers of tax revenue from the financial services and insurance sectors on which it is heavily reliant. The governor's office projected a $2.91 billion deficit in fiscal 2010, which begins July 1, and a $3.11 billion shortfall in fiscal 2011 before gap-closing measures.

Rell wants to cancel $389 million of GO bond authorizations that have already been enacted. "Long-term debt will crush our children," she said. "Earmarking is out of control and it's bankrupting us."

She also called for delaying by one year capital construction at the University of Connecticut and the state's other colleges and universities to save on debt service costs. The governor recommended a total of $1.8 billion of bonds, including $980 million of general obligation bonds to be authorized in fiscal 2010, and $1.64 billion - including $980.5 million of GOs - to be authorized in fiscal 2011.

Transportation projects, which the state finances with special tax-obligation bonds backed by a menu of transportation-related taxes and fees, would get an authorization for $861.3 million of bonds in fiscal 2010 and $243.4 million in fiscal 2011. Among those authorizations is $550 million for a new railroad maintenance facility in New Haven.

Future state funding for school construction would fall, under a new proposed reimbursement formula, but the impact would not be felt during fiscal 2010 or fiscal 2011. School construction is the largest single user of GO borrowing in Connecticut, with authorizations of $687.3 million and $641.6 million proposed for fiscal 2010 and fiscal 2011 respectively.

Unless the budget picture improves, Rell wants to securitize fees imposed on rate-payers' utility bills - currently used to pay for renewable energy and conservation projects - and use them to back $350 million of bonds in fiscal 2011 for general state operating expenses.

Rell proposed consolidating two debt issuing entities that deal with economic development - Connecticut Innovations Inc. and the Connecticut Development Authority - into a single issuer to be called the Connecticut Economic Innovations Authority.

The proposed budget also draws on the state's budget reserve fund, rebuilt since it was depleted in fiscal 2002 during the last recession. Rell proposed that the state draw down its $1.38 billion reserve over three years beginning in the current fiscal year.

The budget proposal, which now goes to the General Assembly, would also cut the state's payroll by 400 people, eliminate or consolidate 23 agencies and commissions, and require $295 million of concessions from unions to realize savings.

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