State must cut its borrowing to avoid maxing out credit card

Connecticut is on pace to exceed its credit card limit by more than $320 million in two years — a projection that will tighten available funding to build or renovate local schools, public colleges and state buildings and to support various other projects in legislators’ districts.

The legislature’s nonpartisan Office of Fiscal Analysis recently projected that the state government will exceed its statutory bond cap by $320.5 million in the fiscal year that begins July 2017, unless adjustments are made.

The Office of Policy and Management, the Executive Branch’s fiscal arm, projects a similar overage at $325.6 million.

Gov. Malloy cuts the ribbon at JM Wright Technical High School, which the state spent millions to renovate.

Department of Administrative Services

Gov. Malloy cuts the ribbon last year to open JM Wright Technical High School in Stamford, which the state spent millions to renovate.

“We’re already working with the legislators, with the administration, to deal with this,” said Rep. Betty Boukus, D-Plainville, the House chairman of the bonding panel on the legislature’s Finance, Revenue and Bonding Committee.

“We will reduce existing authorizations and avoid new ones as necessary to be under the bond limit,” said OPM spokesman Gian-Carl Casa.

The first step, Boukus said, is to work with legislators to identify projects in their home districts that have been designated to receive borrowed funds — but haven’t yet — to see if they are still necessary.

“Some of these (bond) authorizations have been out there for years,” she said. “In some cases the town or city has moved in a different direction, and the project isn’t going forward any more.”

Boukus said she, legislative leaders and the governor’s budget office also are tightening the reins on new borrowing for projects in legislators’ districts.

But Boukus said this might not yield enough savings to keep Connecticut under its bonding cap two years from now.

That means legislators also must look at the big areas that receive hundreds of millions of dollars in borrowing each year — school construction, capital projects at public colleges and universities, and state building renovations — and see if modest reductions can be made.

“It’s part of the process and you have to look seriously at all of this,” Boukus said.

A large share of the new borrowing each year is authorized for building or renovating elementary, middle and high schools. Lawmakers over each of the last five fiscal years have authorized adding between $523 million and $677 million to the credit card to renovate or build new schools. The Department of Administrative Services, which oversees school construction project applications from local education officials, is not recommending slowing down school construction next year. That state agency recommended this week that $518.8 be authorized so 28 new or renovated school construction projects could move forward next year.

A large share of school construction funding has gone to open new magnet schools in recent years to comply with a state Supreme Court order that the state desegregate Hartford’s schools. However, state officials earlier this year said they will not be spending any more money to open new magnet schools to comply with that order.

UConn President Susan Herbst and Gov. Dannel Malloy (center) and other dignitaries break ground for a new building on the Storrs campus in September

UConn

UConn President Susan Herbst, Gov. Dannel P. Malloy, center, and other dignitaries break ground for a new science and engineering building on the Storrs campus in September.

Other big ticket items that the state regularly authorizes to put on its credit card include construction projects at the University of Connecticut and the regional Connecticut State Universities. The multi-year plan the legislature adopted to outfit UConn with new labs and classrooms and to expand enrollment would provide the public university with about $270 million in each of the next two fiscal years.

After getting less funding than envisioned from the state to cover the operating costs of that plan – dubbed Next Generation – UConn officials have said they plan to scale back plans to grow enrollment and faculty.

That will not, however, impact its $2.1 billion multi-year construction portfolio.

“UConn hasn’t talked with anyone at the state about delaying or canceling projects bonded under Next Gen, and aren’t anticipating that occurring. We’re moving forward in the way envisioned by the governor and legislature when they approved the initiative, and more than $550 million of it is already under construction,” said UConn spokeswoman Stephanie Reitz.

The regional universities – Central, Eastern, Southern and Western Connecticut state universities – and the dozen community colleges have typically been authorized to get about $125 million a year to tackle necessary renovations and replace outdated buildings.

The need at those schools is not expected to decrease any time soon.

At $125 million a year, the backlog of necessary renovation projects on campus is actually growing, a consultant for the college system concluded in November 2013. The consultant said the colleges need an infusion of $836 million on top of the typical amount the schools receive just to tackle the maintenance its deferred year after year.

The forecasts on the credit card limit apply to bonds issued on Wall Street that will need to be repaid with resources from the state budget’s general fund. This includes income, sales and corporation tax receipts, several other minor taxes, gaming proceeds, several categories of federal grants and revenues from various fees.

To regulate its bonded debt, the state employs a capping mechanism that hinges largely on general fund revenues, rising or falling as revenues do.

Connecticut specifically sets a debt ceiling equal to 90 percent of revenues. And when borrowing eclipses that ceiling, the governor and legislature must cancel planned borrowing to fall below that mark.

Connecticut has long ranked as one of the most indebted states in the nation. In 2013, Connecticut had the fourth-most state and local bonded debt on a per capita basis, owing $12,053 per person.

The state had two other major bond cancelations in recent years, pulling back $441.9 million in projects in 2011 and $206.9 million in 2008.

The state’s credit card has been the center of increasing controversy in recent years.

Malloy raised eyebrows earlier this year when he announced Connecticut would issue up to $2.5 billion in general obligation bonds, up 40 percent from the $1.8 billion limit he set in 2014. And the governor didn’t live within the 2014 limit, and the state ultimately approved close to $2 billion in general obligation bonding.

This year’s limit also is up almost 80 percent from 2012, when Malloy fixed it at $1.4 billion.

The governor and other advocates of the borrowing have said Connecticut has been able to take advantage of historically low interest rates in tough fiscal times. They also note that most bonding goes for capital projects, which can help stimulate the economy.

But Malloy and his fellow Democrats in the legislature’s majority also have relied more on bonding to cover operating costs.

For example, more than $160 million in payments on bonded debt this fiscal year are supposed to be made using borrowed funds — an approach that drew strong criticism from state Treasurer Denise L. Nappier.

Sen. L. Scott Frantz of Greenwich, ranking GOP senator on the Finance, Revenue and Bonding Committee, said Connecticut’s days of overusing its credit card are coming to an end.

The Federal Reserve Bank raised interest rates this week — albeit very modestly — for the first time in a decade. And there already has been speculation on Wall Street that another hike could come as soon as three months from now.

Borrowing in huge amounts, and borrowing to cover operating costs, represent “a very, very dangerous concept,” Frantz said. Because programs are on the credit card, and not within the budget, it disguises the fact that state government isn’t living within its means, he said.

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