Paying for GAAP with the State Credit Card is Risky Business

Hartford, CT – State Senator Toni Boucher (R-Wilton) member of the Finance Revenue and Bonding Committee released this statement today regarding the state’s sale of $875 million in general obligation bonds. The sale includes 2 separate transactions:

• $560.4 million in General Obligation GAAP Conversion Bonds towards paying the $1.2 billion pledge to convert to state to GAAP accounting using the state's credit card at 3.1% interest

• $314.3 million of general obligation bonds for the refunding of Economic Recovery Notes, which were used to pay for a deficit that occurred in 2009.

The Refunding notes include the issuance of new Variable Rate Remarketed Obligations.  “This is an irresponsible financial plan and the idea of getting into ‘variable- rate remarketed obligations’ poses a big risk. Connecticut would become the first state to assume this new variable rate that could balloon upwards. We would not know as the payments do not come due for two years. It is like getting a variable rate mortgage that does not require a payment for two years. Who knows where interest rates will take your monthly payments to by then. This risk also comes at a price that could potentially cost state taxpayers millions in unknown interest expense.

“The issuance of up to $750 million worth of GAAP bonds was approved by the democratically controlled legislature in the 2013 legislative session.  When the Governor came into office he committed to paying down the GAAP deficit with direct appropriations, not borrowed at 3.1% interest for 15 years.  What’s even worse is that the utilization of gimmicks does not stop there, as the interest due on these bonds was even borrowed and the state will not be paying anything towards the amortization of the outstanding deficit in this biennium, further kicking the can down the road.  According to the Treasurer’s Office these GAAP bonds will cost state taxpayers over $237 million in unnecessary interest costs.  Why couldn’t the Governor keep the promise he made just two years ago?  Once again, the administration is taking the easiest and least fiscally prudent road.

Another concern is that the State Bond Commission chaired by the Governor had approved over $6 billion dollars in projects that has now grown to over $6.6 billion and yet the Treasurer has not moved forward to issue these funds to mostly transportation projects.  At the same time, bonding for the “First Five” incentive packages continues to be doled out.  This raises expectations and then changes direction "without an explanation or transparency.”

The Governor Budget office is emphatic that the, “capital markets’ confidence in Connecticut continues to grow”.  Yet Conning’s State of the State's Credit Rating for Connecticut is now 50 out of 50 as of October 2013.  Moody’s assigned Connecticut an "Aa3 ratings to its $575 million General Obligation Bonds (GAAP Conversion Bonds 2013 Series A) and $325 million General Obligation Refunding Notes (Economic Recovery Notes, 2013 Series A) Variable-Rate Remarketed Obligation."  Rationale- "The Aa3 state rating incorporates Connecticut's high combined fixed costs for debt service, pension, and post-employment benefits relative to the state's budget; pension funded ratios that are among the lowest in the country and likely to remain well below average; and minimal reserve levels. The slow pace of the state's economic recovery has led to revenue underperformance and persistent budget gaps at a time when many states faced little or no budget shortfalls for the fiscal year 2014. "

“As a member of the Finance Revenue and Bonding Committee, I am extremely concerned that efforts to balance the state’s growing budget deficit while holding the line on taxes, reducing government spending, saving businesses and growing jobs is being impeded by unsound financial practices. Using bonding in this fashion is not a wise financial maneuver and I cannot support it.”