Republican legislative leaders say that Gov. Dannel P. Malloy’s plan to divert the state’s long-term debt payments to close the swelling current budget deficit won’t play on Wall Street.
Why? Because just two months ago the state cited its efforts to pay down its debt as evidence that it was getting its fiscal house in order.
“The governor owes them an explanation, and he owes us an explanation,” House Minority Leader Lawrence F. Cafero, R-Norwalk, told Capitol reporters Tuesday evening, about 24 hours after the governor unveiled a controversial plan to deal with a projected deficit stemming largely from shrinking revenue projections.
Planning to speed up payments on bonded debt “was a huge part of the argument … the evidence that this governor was doing things in a better way,” Senate Minority Leader John P. McKinney, R-Fairfield, said, adding he fears Wall Street won’t appreciate Connecticut abandoning that plan a few months later.
At issue is the March report — one of two Connecticut files annually — with each of three major credit rating agencies: Moody’s Investors Service, Standard & Poor’s and Fitch Ratings Service.
State government uses these comprehensive presentations to highlight efforts to maintain strong fiscal health, with the goal of securing favorable bond ratings and interest rates.
Though most bond sales raise funds for capital projects, state officials have used them to cover operating costs in tough fiscal times.
The last time that happened was in 2009 when the Democratic-controlled legislature and Gov. M. Jodi Rell, a Republican, borrowed to cover a $950 million deficit.
Hoping to avoid tougher decisions about taxes and spending, they arranged the debt so that the full $1.1 billion in principal and interest would be paid off between 2012 and 2016 — pushing the responsibility onto the next governor and legislature.
Malloy blasted that action as a gubernatorial candidate in 2010, pledging repeatedly he would not borrow to cover operating costs.
The 2009 legislature and Rell also stipulated that any future budget surpluses must be used to help pay off that debt ahead of schedule.
And when the state closed the 2010-11 fiscal year with $222 million left over, those funds were reserved so they could be added to the regular, $208 million payment state government owes this fiscal year.
“Please note that over the next several years, other legislation directs unappropriated surplus toward repayment of the 2009 debt financing,” the state wrote in its March presentation to bond rating agencies.
Meeting earlier Tuesday with Capitol reporters, Malloy, a Democrat, said his plan to redirect some of the credit card payment is not a fiscal gimmick. And he noted that he inherited one of the largest deficit projections in state history when he took over for Rell in January 2011.
“I didn’t run up a structural deficit of $3.6 billion,” he said.
The governor’s senior policy adviser, Roy Occhiogrosso, added that “it took more than 16 years for state government to get into this mess, but in 16 months the governor has made a lot of progress.”
The current, $20.1 billion state budget is projected to be about $200 million in deficit, a shortfall just over 1 percent of the general fund.
Malloy also secured a major concession deal with unionized state employees last summer, though portions of the projected savings in that package have fallen short of initial expectations.
The governor also pledged to convert state finances to Generally Accepted Accounting Principles, a budget reporting system that emphasizes transparency.
Unlike the modified cash basis system currently used, under GAAP, expenses must be promptly assigned to the year in which they were incurred. Similarly, revenues are counted in most situations in the year in which they were received.
Under GAAP standards, state finances are deep in the red. Fiscal analysts for the executive branch pegged that GAAP differential at $1.7 billion last November.
But the conversion to GAAP hasn’t progressed as swiftly as Malloy pledged it would while on the 2010 campaign trail. And the governor needs to close the budget June 30 with at least a $75 million surplus simply to stop the $1.7 billion GAAP margin from growing due to inflation.
Malloy’s budget director, Office of Policy and Management Secretary Benjamin Barnes, agreed that the administration’s budget fix doesn’t detract from the significant progress it has made improving state government’s fiscal health, and noted that GOP leaders haven’t proposed an alternate deficit reduction plan.
Barnes also said he thinks Wall Street agencies will appreciate that the administration is dealing with scaled-back revenue projections by “taking every action that we can to constrain spending.”
Still, Cafero and McKinney noted that Wall Street also served notice not long ago that it has tired of the fiscal gimmicks that have plagued state finances.
Moody’s downgraded Connecticut’s bond rating in mid-January, citing a heavily loaded state credit card, huge debts in pension and retiree health care programs and a depleted emergency reserve.
Those problems all existed before Malloy took office, and Moody’s still issued Connecticut an Aa2 bond rating — one of its highest.