The Senate adopted a bill late Tuesday that would ensure the state pays its bills promptly – while shifting the cost of one of Gov. Dannel P. Malloy’s biggest campaign promises onto Connecticut’s credit card.
The Democratic-controlled Senate voted 21-14 along party lines to approve a major bond package that includes $750 million in financing to assist the conversion of state finances to Generally Accepted Accounting Principles.
The governor’s fellow Democrats in the Senate insisted the borrowing would force state government to face a problem it has long ignored.
But Republican senators countered that the state is running up $218 million in interest charges to cover a debt it effectively owes itself.
Republicans also noted that the measure delays the start of repaying this debt until after the first budget after the 2014 gubernatorial election.
The bill now heads to the House of Representatives.
“This adds a significant amount (of debt) to the balance sheet of the state of Connecticut,” said Sen. L. Scott Frantz of Greenwich, ranking GOP senator on the Finance, Revenue and Bonding Committee.
Not only is the state borrowing to cover a debt it owes itself, but it is running up extra interest so it doesn’t have to begin repaying that bonding for two more years, added Sen. Robert Kane, R-Watertown, who called it “kicking that can down the road.”
During the 2010 gubernatorial campaign, Malloy used the “kicking the can” expression to describe how one-time revenues used by then-Gov. M. Jodi Rell and the legislature had helped create the mammoth-sized, $3.7 billion annual budget deficit he inherited in 2011.
Also during that campaign, Malloy pledged repeatedly to immediately begin converting state finances to GAAP, an accounting system that promotes accountability and transparency.
Unlike the modified cash basis system currently used, under GAAP, expenses must be promptly assigned to the year in which they were incurred. In the context of the state budget, that would end an array of accounting gimmicks that have pushed current expenses into future years.
If GAAP standards are used, state finances are deep in the red. State analysts recently pegged the GAAP differential at $1.2 billion.
Malloy originally planned to close that margin by setting aside $80 million annually for 15 years starting this July.
But the governor and legislature had to close a big projected deficit just to balance the next budget, and the idea of paying cash to build the entire GAAP reserve was scrapped.
By borrowing $750 million now, that leaves just $450 million additional that Malloy and lawmakers must reserve by 2028 to complete the GAAP conversion.
Sen. John Fonfara, D-Hartford, co-chairman of the Finance committee, said there is another advantage to borrowing to close the GAAP differential.
The state would pledge in its bond covenant – effectively a contract with the investors who buy its bonds – to use the proceeds only to address the GAAP problem, he said.
“We are locking it in because of the debt service obligation we are taking on,” he said. “We are addressing this in a serious way and not ignoring it.”
But financing the GAAP problem involves more than trying to fulfill the governor’s campaign promise.
Decades of budget gimmicks, coupled with a sluggish economic recovery, has left the state’s cash pool dangerously low at various times over the last three years, despite an unprecedented $1.5 billion tax hike in 2011.
Treasurer Denise L. Nappier has had to temporarily transfer dollars between operating and capital programs with increasing frequency in recent years to cover bills and other obligations promptly.
Nappier sought and received approval from Malloy in December 2012 to secure a line of credit worth up to $550 million to bolster the cash pool. By the middle of that same month, that pool held less than $27 million – equal to 1/20th of an average week’s worth of bill payments and other disbursements.