Nappier pitches dedicating share of income tax to control borrowing costs
After watching its standing fall on Wall Street in recent years, Connecticut may have to pledge a portion of its income tax receipts when borrowing for future capital projects.
State Treasurer Denise L. Nappier unveiled a “tax-secured bonding program” Monday she says will help control borrowing costs and enable state government to rebuild its depleted reserves.
And while both Gov. Dannel P. Malloy’s administration and key Republican legislators expressed willingness to explore the concept, the latter called it a sad commentary on state borrowing policies that have grown to excess.
“With the recent downgrades of the state’s general obligation credit ratings leading to increased borrowing costs — on a relative basis — over the last few years, it is time to counter that trend,” Nappier said. “Under my proposal, we expect higher credit ratings would be achieved by dedicating a portion of the state’s stable and strong personal income tax revenue stream to repayment.”
The sale of general obligation bonds to investors is one of the principal means state government uses to finance municipal school construction, building programs at public colleges and universities, maintenance of state facilities and other capital projects.
The bonds are termed “general obligation” because the state pledges to repay them using resources from the General Fund within the state budget.
In turn, the General Fund draws resources from most state taxes — including its largest ones, like the income, sales and corporation levies — fees and fines, lottery and casino proceeds, and federal grants.
But despite its vast resources and high rank in per capita wealth, Connecticut’s image has taken a beating in investor circles in recent years as it has struggled with a host of long- and short-term budgetary issues.
Three of the four major Wall Street credit-rating agencies ordered downgrades within the past year, and two of the four continue to have Connecticut on a “negative outlook” — potentially a harbinger of future downgrades.
The ratings agencies’ chief criticisms, Nappier says, are not new:
- A failure to rebuild the emergency reserve;
- Recurring budget difficulties. State government finished its last two fiscal years with deficits — although both were less than 1 percent of the General Fund.
- And mounting pension and other fixed costs.
Instead of issuing general obligation bonds in the future, Nappier is asking lawmakers to consider “new credit bonds.”
Under this system, Connecticut would have to commit a specific portion of its income-tax stream to repay its bonds.
The state also would generally repay these bonds over a slightly longer period of time, typically adding about one year to the process.
But in return, Connecticut could earn two or three credit ratings above its current ones, Nappier said. The treasurer is recommending that Connecticut pledge in its bond covenant — its contract with investors — that savings from this borrowing approach would be used to rebuild the emergency reserve, further strengthening Connecticut’s reputation on Wall Street.
The Rainy Day Fund, which stood at nearly $1.4 billion or 8 percent of annual operating costs before the last recession, now holds about $236 million, or 1.3 percent. And if preliminary estimates for April state income tax collections hold, that reserve would be depleted entirely this fiscal year.
Nappier estimates her proposal, coupled with other borrowing reforms, could reduce by $757 million the debt Connecticut would incur over the next five years.
“The new credit bonds would be especially attractive to investors who may have … concerns about the state’s budgetary and pension challenges,” Nappier’s office wrote in a report to legislators.
Giving investors ‘the key to the cookie jar’
The treasurer’s proposal drew a cautious response from the Malloy administration.
“We are working with the treasurer’s office to clarify questions and assuage our concerns with this nascent bonding initiative,” Chris McClure, spokesman for the governor’s budget office, said. “We are certainly supportive of new ideas; particularly when there is evidence of real, tangible benefit to the state finances and investor appetite. We look forward to working with the treasurer and other stakeholders on this, as well as myriad other proposals, to put the state on the best path moving forward.”
And while Republican leaders on the legislature’s Finance, Revenue and Bonding Committee also left the door open, they said it’s unfortunate that Connecticut’s fiscal track record has reached this point.
“Connecticut may not have a choice here,” said Sen. L. Scott Frantz of Greenwich, the Senate Republican chair on finance. “But what does it do for the fiscal reputation of the state? I worry that it diminishes it because it shows we are getting very desperate.”
Rep. Chris Davis of Ellington, ranking House Republican on the finance panel, said the treasurer’s approach is “unconventional” and not employed by most states, but may be necessary.
“It’s something I’m willing to consider and take a look at,” he said. “Obviously it’s a sad day for the state of Connecticut when, in order to borrow money, Wall Street says ‘give us the keys to the cookie jar and a trustee who can sweep the revenue out’.”
Frantz and Davis have been two of the biggest critics of Malloy administration bonding policies in recent years.
For the past two years, the governor has set a $2.7 billion “soft bonding cap” — nearly double the $1.4 billion cap Malloy set in 2012.
This cap refers to a tentative limit the state places voluntarily on its annual sale of general obligation bonds. It is not a fixed cap, but the state does inform credit rating agencies of its intentions, and failure to abide by that cap can viewed as a poor fiscal decision.
Rep. Jason Rojas of East Hartford, House Democratic chair of the finance committee, declined to comment on Nappier’s proposal. The Senate Democratic chair, John Fonfara of Hartford, could not be reached for comment.
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