Connecticut retires $1B debt that eased legislative campaigns
Connecticut has finished paying off more than $1 billion in operating debt and other charges left behind by former Gov. M. Jodi Rell and the 2009 General Assembly, closing the books on one of the strangest fiscal chapters in modern state history.
The retirement of debt from the last administration comes as the state hovers at the brink of again exhausting its own reserves and the legislature is debating whether to close a deficit with election-year spending cuts or tax increases. Or they can do what Rell, a Republican, and the Democratic legislature did in 2009 — borrow.
Rell and the legislature not only borrowed to close a deficit with “economic recovery notes,” they borrowed the money to make the initial payments on those notes, helping to avoid major tax increases going into the 2010 election cycle.
“Completing payment on the economic recovery notes closes a regrettable chapter in Connecticut’s financial history,” Gov. Dannel P. Malloy said Tuesday.
“It is always good news when we are able to retire state debt, but we must remember why we incurred this debt in the first place,” said state Treasurer Denise L. Nappier.
A huge cost shift to the future
As The Great Recession began to weaken state finances in early June 2009, Rell and the General Assembly moved to close a $926 million deficit with the fiscal year just a few weeks from closure.
But rather than tap the $1.37 billion within the Rainy Day Fund, Rell and lawmakers instead agreed to borrow the money and leave the problem for the next governor, who turned out to be Malloy. Rell did not seek re-election in 2010.
Not only did Rell and the lawmakers finance the $926 million debt, they also borrowed $93 million more. This covered the bond issuance costs as well as the first two years of payments on the $926 million — effectively ensuring that Rell’s successor would be responsible for paying off the entire seven-year loan and about $166 million in interest.
Compounding matters, Rell and the 2009 legislature then emptied the Rainy Day Fund, using it and federal stimulus grants to avoid ordering major tax hikes or deep spending cuts in her final two-year budget, which covered the fiscal year that began in July 2009 and the one in 2010, when every seat in the General Assembly was up for election.
Malloy, who took office in January 2011, made payments on that debt during his first two years. But he then took a break for two years to ease pressure on the state budget as he successfully campaigned for re-election in 2014.
This refinancing added two more years to the repayment schedule.
New deficit exceeds budget reserve
Meanwhile, Malloy has seen a string of small budget deficits whittle down the modest emergency reserve he built in his first term.
Since winning re-election in November 2014, the governor has closed the 2015, 2016 and 2017 fiscal years with respective shortfalls of $113 million, $170 million and $23 million.
A reserve that had approached $520 million now stands just below $213 million, or 1.2 percent of last fiscal year’s General Fund. The comptroller’s office recommends a 15 percent reserve.
Malloy and Comptroller Kevin P. Lembo each say the current budget is projected to finish the fiscal year on June 30 about $224 million in the red.
Legislative leaders from both parties excluded Malloy, a Democrat, from the bipartisan negotiations that produced the latest two-year budget in late October.
The governor, who signed the deal saying Connecticut’s budget stalemate had to end, nonetheless warned that he feared the plan wasn’t balanced.
Malloy has been pressing lawmakers over the last month to come into special session to close the shortfall. Leaders say they first want to reverse cuts to a popular social services program — which is scheduled to be done in special session on Thursday — and then will talk about ways to mitigate the deficit.
The governor also has said he’s fearful lawmakers will find the $54 million needed to reverse cuts to the Medicare Savings Program by identifying unrealistic savings that cannot be achieved in agency accounts for overtime and “other expenses.”
“Surely, reasonable minds agree that we must avoid repeating this costly decision,” Malloy said Tuesday, contrasting the latest challenge with the choices made in 2009. “It is my sincere hope that present and future state leaders learn from this experience and take the necessary steps to keep the budget in balance during the course of the fiscal year.”
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