Why would state government run up nearly $200 million in future interest charges — to cover a debt that it owes to itself?

Why, with three payments left on a loan from the last recession, would Connecticut extend the payments to 2018 and pay an extra $30 million later?

The questions about Gov. Dannel P. Malloy’s new budget come from legislators. The answers lie in the state’s checkbook, and in its political calendar. And the governor, who repeatedly accused his predecessor of pushing her fiscal problems — with interest — into the future, now faces similar charges.

Malloy ‘got dealt a bad hand’

The administration is quick to remind people it inherited the fiscal problems that increasingly trigger the cash shortage outbreaks that have plagued state finances in recent years. Had past governors followed Generally Accepted Accounting Principles — promptly assigning expenses and revenues to the books as they occur — Connecticut would have an extra $1.2 billion in the bank right now, and wouldn’t have to borrow or raid capital project accounts to pay its bills.

But Malloy’s critics counter that’s only half the story.

The governor and his fellow Democrats in the legislature raised taxes by $1.5 billion two years ago. Had they cut spending at the same time, the checkbook balance would be in much better shape, Republican legislators say.

malloy barnes

Gov. Dannel P. Malloy and his budget chief Ben Barnes.

Unless the economy accelerates and revenues flow more quickly, Malloy’s only long-term solutions are to raise more taxes, cut more spending — or most likely both.

But the governor is limited, legally and politically, from pursuing those solutions too aggressively. A concession deal with state employees requires raises to begin in July and blocks layoffs for two more years. And with the 2014 re-election year less than 11 months away, both Malloy and many other Democrats are trying to avoid going back to taxes.

The challenge now will be to persuade legislators to let him buy some time — at a future cost of more than $215 million.

“The governor got dealt a bad hand,” said Rep. Patricia Dillon, D-New Haven, a 28-year lawmaker and veteran of the Appropriations Committee. “Some of us who would criticize what he is doing were here as the can was kicked down the road. Still, I would not be leery about talking about some other options” to borrowing. Dillon has proposed reinstating tolls on state highways.

“I have heard some members of our caucus say we need more revenue,” said Patricia Widlitz, D-Guilford, co-chairwoman of the tax-writing Finance, Revenue and Bonding Committee, who said any tax talk just two years after the 2011 increase “is a discussion we should have only as a last resort.”

Cash pool fell dangerously low in December

The problem for Malloy, though, is that Connecticut’s cash flow situation has worsened, not improved, since taxes last were raised.

Treasurer Denise L. Nappier has said that in an average week, the state disburses about $540 million to pay bills and meet other obligations.

The treasurer’s office is allowed to transfer dollars — temporarily — between operating and capital programs. Though it usually is done infrequently, it has been employed during tough fiscal times when seasonal lulls mean bills due exceed tax receipts.

But it has happened with increasing frequency.

After transferring from capital programs in January, March and April of last year, Nappier warned lawmakers in June that “the common cash pool is trending downward over time and the need for temporary transfers or other resources is growing.”

By December 2012, Nappier sought and received approval from Malloy to secure a line of credit worth up to $550 million to bolster the cash pool. By the middle of that same month, the pool held less than $27 million — equal to 1/20th of an average week’s worth of bill payments and other disbursements.

But Republican legislators charge Malloy’s borrowing proposals prove what many fear — that the line of credit was a mere stopgap against a much larger problem.

Greenwich Republican L. Scott Frantz, ranking GOP senator on the finance panel, said the cash pool is suffering from more than seasonal lulls in tax receipts.

“This is not just a timing issue,” he said. “It’s a structural fiscal problem that we have. Revenue projections were rosier than they should have been and we aren’t cutting spending. There’s not a lot of transparency here. We’re not dealing with the problem. It’s scary.”

Malloy pushes borrowing costs into next term

The governor wants to borrow $750 million in his new budget, which would serve two purposes:

  • It would give the state’s checkbook a dramatic infusion of new cash;
  • It would postpone most of the cost of doing so until after Election Day 2014.

Malloy originally planned to close the $1.2 billion GAAP differential by setting aside $80 million annually for 15 years.
But borrowing $750 million now leaves just $450 million to be reserved over the next 15 years, knocking the annual payment down to a more manageable $30 million. And in the meantime, the state can raid that $750 million to pay bills when the cash pool is low and replenish it later when times are better and more taxes come in.

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Former Republican Gov. M. Jodi Rell, who ”kicked the (budget) can down the road.”

Connecticut still would have to pay back the $750 million principal and $186 million projected interest on that borrowing over 15 years — but Malloy’s plan doesn’t call for those payments to begin until the first budget of the next gubernatorial term. In the 2015-16 fiscal year, the first payment would be $72 million.

Critics note that is eerily similar to the $1 billion Rell and legislators borrowed in June 2009 to cover operating debt. Besides borrowing, Rell also used state budget reserves and emergency federal stimulus aid to push even more fiscal pain onto the next administration. She and legislators scheduled payments on that debt to begin in the 2011-12 fiscal year — what ultimately was the first budget of Malloy’s term.

The current governor also wants to refinance that $1 billion debt Rell left behind.

Under Malloy’s plan, the payments on that debt would shrink by $300 million in the next two fiscal years. But in the next term, whoever is governor then must find $331 million to pay off what’s left.

That $31 million, coupled with $186 million in interest on the GAAP bonding, equals a $217 million increase in the operating costs to be paid off in the future.

So is Malloy — who repeatedly accused Rell during the 2010 gubernatorial campaign of “kicking the can down the road” and vowed not to do so himself — stealing a page or two from her own playbook?

“I think it (the budget) is very much in keeping with those (campaign) promises” he told Capitol reporters Thursday, adding that he made hard choices given the problems he inherited, and that his plan spends $1.8 billion less over two years than the level needed to maintain current services. “To compare this budget, in any way, with the budget that came out of my predecessor, is quite frankly to ignore reality.”

But House Minority Leader Lawrence F. Cafero, R-Norwalk, who is weighing a 2014 gubernatorial bid, said Malloy is trying to disguise a costly bailout of the state’s checkbook — and a transfer of those costs into the next gubernatorial term — as a move toward fiscal responsibility.

“We’ve got a new scheme,” Cafero said. “He is killing two birds with one stone.”

Follow Keith M. Phaneuf on Twitter.

Keith has spent most of his 31 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut’s transportation and social services networks. He has been the state finances reporter at CT Mirror since it launched in 2010. Prior to joining CT Mirror Keith was State Capitol bureau chief for The Journal Inquirer of Manchester, a reporter for the Day of New London, and a former contributing writer to The New York Times. Keith is a graduate of and a former journalism instructor at the University of Connecticut.

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