There’s nothing secure about securitization

Finding $1.3 billion in revenue for next year’s budget by selling future income for pennies on the dollar means weighing a series of unpalatable options.

Legislators don’t want to give up their revenue streams for too little, but they also don’t want to sell the blue-chip revenue-raisers, like the income tax, that would fetch the best price.

They could create a new tax and sell revenue from that. But many say they already face the prospect of raising taxes next year, and aren’t eager to get a head start now.

Some sources other than taxes are being examined, things like monthly electric bills, gambling, and tolls. But these would be tremendously unpopular, officials say, even if the state weren’t looking to sell them off at a discount.

securitization photo 3/22/10

No easy answers. Deputy state budget director Michael Cicchetti and Deputy Treasurer Howard Rifkin answer legislators’ questions

“Everything you’ve heard offends someone,” Sen. Eileen M. Daily, D-Westbrook, co-chairwoman of the Finance, Revenue and Bonding Committee said Monday. She made the comment after a 5 1/2-hour hearing during which the very idea of selling tomorrow’s revenue for a lump sum today, known as securitization, was decried.

Unfortunately, she added, few things outside of an enormous tax increase will fill the budget gap that exists without securitization.

And Daily repeated a warning given last week by fellow co-chair, Rep. Cameron C. Staples, D-New Haven: The finance panel might not recommend any particular securitization strategy and simply allow the full legislature to fight it out.

“It’s so complex,” Daily said. “I think everything has to be more fully explored.”

At issue is $1.3 billion revenue item in the preliminary, $18.93 billion budget for 2010-11 that the legislature adopted, and Gov. M. Jodi Rell allowed to become law without her signature, last September. That revenue is to come from securitization, according to the budget, but the legislature has yet to figure out just how.

Nonpartisan fiscal analysts estimated last fall that it would cost Connecticut at least $1.7 billion over the next 10 years to secure $1.3 billion in 2010-11.

In passing the budget last year, the legislature also directed the governor’s budget staff and state Treasurer Denise L. Nappier’s office to identify possible revenue sources to securitize, which led to a Feb. 3 report outlining six options.

Four of those six were discarded almost immediately:

  • Installing electronic tolls remains under consideration as a tool to finance transportation upgrades, but committee members said levying tolls and selling the receipts at a discount to balance the budget would be a political nightmare.
  • Selling discounted mainstream revenues like the income or sales taxes only would increase the mammoth, $3.88 billion deficit projected for 2011-12, since those levies already are state government’s two chief revenue sources.
  • Selling state buildings and other physical assets would not provide enough revenue to fill the $1.3 billion, according to committee members.
  • And securitizing annual payments from a settlement reached in 1998 with five major tobacco firms likely would produce the smallest payment per dollar sold.

Most of the committee’s focus has been on the remaining two options, one involving Keno and other expanded gaming options and the other tied to monthly electric bills and energy conservation funds.

Both of these choices were soundly rejected in a closed-door caucus of House Democrats, according to Staples. The legislature’s Public Safety Committee also rejected a bill to legalize Keno earlier this month.

And the utility option ran into hornet’s nest of public complaints at Monday’s committee hearing.

It would amount to “balancing the budget with a tax on electric bills paid by every family and business in Connecticut,” Christopher Phelps, executive director of Environment Connecticut, told the panel.

Currently, portions of most consumers’ monthly bills support clean energy and conservation investment programs, and also go to reimburse the state’s two major utility companies – United Illuminating and Northeast Utilities – for costs they incurred 12 years ago as part of a sweeping industry deregulation. NU is scheduled to be fully repaid by year’s end, and UI by 2013.

As these obligations end, most of the charges related to them could remain on consumers’ bills, and the revenue could be sold, along with about one-third of the receipts that had been directed to conservation programs, to bail out of the budget. This would effectively cost the average residential consumer about $4.55 per month, according to the report from the Rell administration and treasurer.

Michael Trahan, executive director of Solar Connecticut, said diverting the conservation revenue would decimate programs that have expanded the energy-efficiency industry in the state and reduced the cost of solar installations. If the funding is removed, “that reduction in price goes away. Those installers go away,” said Trahan, who represents about 70 contractors who install solar heating modifications.

Richard A. Soderman, a lobbyist for Northeast Utilities, said revenues from the deregulation charge currently support about 4,000 company jobs. If NU cannot seek to retain those charges through a rate hike after the repayment program ends, those jobs would be lost.

Soderman added that about 6 percent of the electricity customers in Connecticut, roughly 100,000 households and businesses, are served by municipal electric departments and don’t pay monthly to cover NU and UI’s deregulation expenses. Securitizing that revenue stream would effectively tax the remaining 94 percent of Connecticut while excluding those municipal customers, he said.

Rell’s deputy budget director, Michael Cicchetti, and Deputy Treasurer Howard Rifkin, both testified they believe securitizing utility revenues would provide state government with the largest return on its forfeited dollars.

But Cicchetti also warned lawmakers to stop looking for a securitization option free of negative consequences – because it doesn’t exist.

“I don’t think anyone could reasonably assume that a plan could be developed to securitize that amount of money without some pain,” he said, adding that the utility revenue “is probably the best option we have.”

Rifkin quickly dismissed one legislator’s suggestion that a decision about securitization might be delayed until the regular 2011 session, which starts in early January. The treasurer’s office needs time to negotiate the sale of those future revenues if $1.3 billion are to be available before the fiscal year ends the following June 30. “Whatever the legislature is going to do needs to get done this session,” he said.

The regular 2010 legislative session adjourns on May 5.