Gov. Dannel P. Malloy recently warned Wall Street the state plans to increase borrowing dramatically over the next year.
But while Connecticut uses borrowing primarily to finance capital projects, Republican legislative leaders fear the planned spike also signifies that a disturbing trend of borrowing to cover day-to-day expenses will get worse.
Malloy notified the State Bond Commission on Tuesday that he increased what is commonly referred to as the “soft bond cap” from $1.8 billion to $2.5 billion for the 2015 calendar year.
That’s up almost 40 percent from last year, and almost 80 percent from 2012, when Malloy had set the cap at $1.4 billion.
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, capital projects at public colleges and universities, state building maintenance, open space and farmland preservation, and various smaller projects.
It does not involve bonding for transportation projects, which 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.
The Democratic governor tried to downplay the big leap in this year’s estimate, citing a need to catch up on capital projects and relatively low interest rates.
“We have substantial capital needs that were under-represented previously,” the governor said, adding that, “We have a very substantial round of school improvements” coming up.
Just before Malloy took office in January 2011, the bond commission had approved $824 million in general obligation financing that still hadn’t been borrowed. According to the latest report from the treasurer’s office, as of January of this year, this borrowing backlog topped $3.1 billion.
The governor also said that “money continues to be relatively cheap and that can’t be guaranteed to last forever,” referring to the low interest rates that have been available since the last recession. “…Let’s try to capitalize on getting the cheapest possible money that we can when we have that opportunity.”
State Treasurer Denise L. Nappier, also a Democrat, warned Malloy in writing last month that she expects interest rates to rise this fall. “It is not a matter of if, but when,” she wrote.
The ranking Republicans on the legislature’s Finance, Revenue and Bonding Committee, said this week they are worried about more than Connecticut’s loading up a credit card already carrying $21 billion in bonded debt.
Though Connecticut already ranks as one of the most indebted states — per capita — in the nation, Sen. L. Scott Frantz of Greenwich and Rep. Chris Davis of Ellington said they’re worried the governor’s plans indicate more borrowing to help balance the budget — and not just to catch up on capital programs.
“During these tough fiscal times we should be reining in borrowing,” Davis said. “I think a lot of people will be looking to see if we’re moving more operating costs to bonding.”
Malloy already sparked bipartisan criticism last month when his new budget proposal recommended using more than $320 million in borrowed funds to make payments on other debt over the next two years combined.
In the last two years leading up to the 2014 gubernatorial election — which Malloy won by defeating Greenwich Republican Tom Foley — the governor and the legislature’s Democratic majority also moved hundreds of millions of dollars of operating expenses onto the credit card to avoid pre-election tax hikes.
These steps included:
- Refinancing debt to push $392 million in payments owed then until after the election.
- Bonding $173 million in new municipal aid.
- Bonding $57 million for pollution abatement and stem cell research grants that previously were paid for out of the operating budget.
- Borrowing an extra $39 million so that debt payments tied to converting state finances to Generally Accepted Accounting Principles could be deferred until after the election.
“I’d be very surprised if the (credit) rating agencies don’t raise an eyebrow to this,” Frantz said, adding that lower interest rates “do not give you good cause to go out and borrow excessive amounts of money.”
Connecticut needs to go on a debt diet,” Frantz said.
Malloy spokesman Devon Puglia countered Wednesday that Republican lawmakers are not critical of state borrowing whenever the funds support projects in their home districts.
“I’ve never seen such hypocrisy out of the GOP,” Puglia said. “It’s unbelievable.”
Both Frantz and Davis serve on the bond commission and have voted to approve financing for various projects in their communities, or in those of their colleagues, Puglia said, adding that “I would expect, going forward, they would vote no on these bonded projects.”