Spending state budget reserves to bolster transportation could undermine Connecticut’s readiness for the next recession, weaken investor confidence and increase borrowing costs, state Treasurer Shawn T. Wooden warned in a letter released Wednesday.
In a letter hand delivered Tuesday to Gov. Ned Lamont and legislative leaders, Wooden also said the rainy day fund’s growth over the past two years has bolstered Connecticut’s standing with Wall Street credit rating agencies.
“After years of difficult budgets and fiscal crisis, the state is on a better course,” Wooden wrote. “The Budget Reserve Fund has reached historic levels because of fiscal discipline and smart policy.”
The warning from the treasurer overlapped with an almost identical message from the Office of Fiscal Analysis Wednesday. In its annual report, OFA said Connecticut needs to keep its rainy day fund intact as protection for the next recession.
Over the past two years, the state has amassed a reserve of $2.5 billion, which is equal to about 13% of annual operating costs.
Prior to that, the largest fiscal cushion Connecticut ever had was the nearly $1.4 billion it banked just prior to the start of last recession in mid-2009.
That reserve, which represented 8% of annual operating costs, quickly was exhausted in the last recession and Connecticut still borrowed nearly $1 billion to cover operating debt.
As an alternative to Lamont’s proposal to impose tolls on cars and trucks at 14 bridges across the state to finance a major transportation rebuild, Senate Republicans have proposed spending 60% of the current $2.5 billion reserve, which amounts to about $1.5 billion.
Those dollars would immediately be deposited into the cash-starved pension fund for state employees. In turn, this would trigger lower contribution rates. And Senate Republicans say this annual savings could be funneled into the transportation program over the next decade.
“Paying down long-term liabilities — including unfunded pension systems — is generally a fiscally prudent step,” Wooden wrote. “However, to do so at the expense of reducing short-term flexibility to meet today’s current cash obligations, especially in the event of a possible future recession, creates serious liquidity, market and credit risks for the state.”
The Senate Republican plan still would leave $1 billion in the rainy day fund. Assuming current economic trends continue, nonpartisan analysts say that reserve could grow to $1.3 billion by the end of next summer and above $1.7 billion by mid-2021.
But there is historical evidence to support Wooden’s caution.
During the last recession, General Fund tax receipts fell from $12.5 billion in 2008 to $10.9 billion in 2010 — a drop of $1.6 billion.
The treasurer said his office is preparing two significant bond offerings in the coming weeks. Connecticut issues bonds on Wall Street to finance a wide array of capital programs including municipal school construction; projects at public colleges and universities; highway, bridge and rail upgrades; improvements to wastewater treatment facilities; state building maintenance; and various, smaller projects in legislators’ home districts.
“Our investment bankers have advised us that such drawdown” as proposed by the Senate Republicans “is likely to have a negative impact on investors’ confidence resulting in potentially higher interest rates for Connecticut taxpayers,” Wooden added.
Senate Minority Leader Len Fasano responded Wednesday, saying: “It’s extremely disappointing that the treasurer would rather play politics than work together on policy. The treasurer has already made up his mind before he’s had any conversations regarding the details of the plan or reviewed the numbers.”
Fasano said he contacted Wooden on Monday and asked for a meeting to discuss the Senate Republicans’ proposed investment in transportation.
“When investors look at the state’s actions, they must look at the whole picture.,” Fasano added, questioning the substance of Wooden’s discussions with investment bankers. “I have no idea what the treasurer presented and to whom because he has not even met with me yet to review the Senate Republican plan. What numbers did he show? Who did he talk to? What analysis did he provide?”
Lamont told reporters Wednesday morning that he shared some of Wooden’s concerns.
“I think taking two thirds of the rainy day fund here in the 10th year without a recession is financially very risky,” Lamont said.
But the governor said he appreciated Fasano’s efforts and would consider a less aggressive use of the budget reserves, perhaps in concert with other sources, such as the trucks-only tolling plan proposed Tuesday by House Democrats.
“The Senate Republicans have a credible plan out there. I’ve got to look at it. The House Democrats, they have a credible plan out there,” Lamont said. “We have a plan, which I think is really good.”
The governor’s first year in office has been dominated by his efforts to restore solvency to the Special Transportation Fund and speed commutes by making improvements to Metro-North and eliminating highway bottlenecks.
Lamont’s original proposal for raising nearly $800 million through a comprehensive system of tolls on automobiles and trucks on Route 15 and Interstates 84, 91 and 95 never came to a vote.
His second effort was more modest: the 14 tolls he proposed would have produced a dedicated revenue stream of $320 million to leverage low-cost federal financing for a portion of a 10-year, $21 billion plan called CT2030. It quickly was rejected by the Senate Democratic majority.
“My job is to get people to yes. My job is to reach a solution,” the governor said.
Lamont said he believes legislative leadership is engaged and ready to find a way to finance a significant portion of CT2030.
“I’m encouraged in this sense — all the different groups know we have to increase our investment in transportation,” he said. “We don’t all agree on how to pay for it, but I think we’re going to find some common ground.”