Running out of one-shot borrowing schemes

In these tight fiscal times, state legislatures across the nation are examining almost every imaginable creative financing scheme to avoid program cuts and broad based tax increases.

One of the more troubling is Connecticut’s plan to borrow to plug a $1.3 billion revenue hole intentionally left in the $18.9 billion state budget that begins July 1, 2010.

When that budget was initially adopted last September, it included a plan to securitize, or borrow against, a stream of $1.8 billion of future revenues in return for an upfront, lump-sum payment of $1.3 billion. The difference would go to borrowing costs and interest payments.

Majority Democratic legislators and Republican Governor M. Jodi Rell have floated several proposals for the source of this future revenue stream, since the idea was first adopted last year.

One of the more bizarre options was to borrow against an obscure charge added to electric bills to help utility companies recover stranded costs after the state deregulated the electric industry in 1998. The surcharge, which brings in about $319 million a year from business and residential electricity customers throughout the state, was set to expire.

The governor has countered with another proposal to sells bonds over seven years and use money from energy conservation funds as well as increased revenues from Bradley Airport to repay the debt.

Previous suggested sources of revenue to be securitized each met with objections. The governor had recommended using a portion of Connecticut’s $300 million in annual lottery revenue, along with starting a new Keno game in bars, restaurants and convenience stores.

The problem with giving up some lottery revenue is that doing so would create budget gaps in future years when that money would become unavailable for the state General Fund and would have to be replaced with other revenue.

The idea of creating a new Keno game met with resounding 70 percent voter disapproval in a Quinnipiac University public opinion poll.

Various legislators and interest groups have opposed diverting conservation and renewable energy funds collected from electricity users, especially at a time when the state is promoting green, alternative energy sources.

However, all the plans contain a fundamental flaw.

These are just one-time fixes for a state that is forecast to run structural deficits of about $3.8 billion a year, or nearly 20 percent of annual budgets, even as the economy recovers, at least through 2014.

Legislators in Connecticut and in other states are running out of one-shot financing schemes. They will have trouble finding new creative accounting devices for the coming years.

Continuing to borrow to cover annual operating expenses is a path that led New York City to the brink of bankruptcy in 1975.
Last year, Connecticut had to issue short term economic recovery notes of more than $900 million to close a deficit for the fiscal year that ended June 30, 2009.

Already the most heavily indebted state per capita, Connecticut cannot keep borrowing to cover a wide range of public services and hope future generations will somehow clean up the mess.

State Sen. Andrew Roraback, a Republican from rural Goshen, said during Finance Committee debate on the securitization plan, “I think we are in search of immediate gratification that is compromising the long-term economic viability of the state.”
Connecticut needs to find ways to deliver services at lower cost, just as businesses and non-profit organizations have done. Big problems await the next governor and new legislature after this November’s elections.

Joseph Santangelo is a former Connecticut House Republican staffer and a resident of Old Saybrook.

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