Gov. Dannel P. Malloy drew criticism when he warned Wall Street investors he would boost state government’s effective credit card limit by 40 percent this year.
But if the State Bond Commission approves all of the financing Malloy has proposed for next week’s meeting, the governor will have used up 95 percent of his self-imposed credit limit – with five months still to go in the calendar year. The bond commission meets infrequently in the summer.
And while the administration remained confident Wednesday that it would live within the $2.5 billion cap Malloy reported to Wall Street credit rating agencies in February, a Republican leader on the legislature’s Finance, Revenue and Bonding Committee said the Democratic governor’s track record in this area leaves little room for optimism.
“The rest of the world that understands finances and fiscal issues looks at Connecticut as borderline irresponsible,” said Sen. L. Scott Frantz of Greenwich, ranking Republican senator on the finance committee. “The debt levels that Connecticut has taken on, especially on a per capita basis, are enormous.”
“While we appreciate the senator’s concerns and value his support for projects to keep Connecticut moving forward, his comments are unnecessarily hyperbolic,” said Chris McClure, a spokesman for the governor’s budget office.
Since 2015 began, Connecticut has – or is about to – approve financing that includes: $650 million for municipal school construction; $312 million for the University of Connecticut, including its Next Generation Connecticut program to expand engineering and technology programs; $193 million for economic development; and $117 million for affordable and elderly housing construction.
“If Senator Frantz believes these types of projects are ‘irresponsible,’ we look forward to seeing him vote against them, or at least speak out against his colleagues from his side of the aisle who are hailing them,” McClure added.
At issue is what is commonly referred to at the Capitol as the “soft bond cap.”
The cap refers to general obligation bonding – loans repaid with receipts from income, sales and other taxes dedicated to the general fund. Those funds are used for municipal school construction, many capital projects at public colleges and universities, state building maintenance and renovations, open space and farmland preservation, and various smaller projects.
It does not involve bonding for most transportation projects. This financing generally is repaid with fuel tax receipts.
The Wall Street credit rating agencies – whose analyses help set the interest rates states pay when financing capital projects – ask state officials annually to estimate planned general obligation borrowing for the coming year.
Malloy raised eyebrows earlier this year when he set Connecticut’s soft cap at $2.5 billion, up 40 percent from the $1.8 billion cap he set in 2014. And the governor didn’t live within the 2014 cap, and the state ultimately approved close to $2 billion in general obligation bonding.
This year’s cap also is up almost 80 percent from 2012, when Malloy fixed it at $1.4 billion.
Malloy has tried to downplay the growth in borrowing – highlighting investments in education and economic development or focusing on the low interest rates Connecticut has enjoyed in recent years.
But Frantz said that doesn’t show the whole picture.
The governor and his fellow Democrats in the General Assembly’s majority increasingly have used the state’s credit card to prop up the operating budget.
For example, in the last two fiscal years before the 2014 state elections, Malloy and Democratic legislators saved almost $400 million in the budget by deferring payments owed on bonding used to close a 2009 budget deficit. Now that debt will remain on the state’s credit card until 2018, adding another $45 million to interest costs.
“What a lot of people are forgetting is that you still have to pay the principal back someday,” Frantz said, adding that the Federal Reserve has given many warnings interest rates could be rising as early as later this year.
“They can only keep rates artificially low for so long,” the Greenwich lawmaker said, adding that rates probably will go up before Connecticut’s growing dependence on borrowing declines. “There’s no question it’s going to be a problem at some point.”
The governor, who chairs the 10-member bond commission, has been butting heads with Senate Republicans over Connecticut’s credit card since shortly after he first took office in 2011.
Connecticut, which has more than $22 billion in bonded debt, already ranks as one of the most indebted states, per capita, in the nation.
About 11 percent of the state’s operating budget already is devoted to debt service.
And state Treasurer Denise L. Nappier, a Hartford Democrat, also raised concerns in this area this year.
Nappier objected last spring to a Malloy plan – which the legislature adopted – to use more than $300 million in borrowed funds over this fiscal year and next combined to make payments on other debt.
The treasurer warned this approach “may harm (Connecticut’s) reputation among bondholders and the investment community at large.”