GAAP Goes On The State Credit Card At 3.1%
It’s official. The state has shifted Gov. Dannel P. Malloy’s signature 2010 campaign pledge to the state credit card.
State Treasurer Denise Nappier announced Thursday that her office received a 3.1 percent interest rate on $560.4 million in Generally Accepted Accounting Principle Conversion Bonds.
Those bonds will be used to pay down the $1.2 billion differential between how the state currently does its accounting and how it will do its accounting under Generally Accepted Accounting Principles.
The bonds will be issued over a 15 year period and come with a pledge that they will be used to pay down the $1.2 billion GAAP differential unless there’s an emergency. In order to use the money for another purpose the General Assembly would need to agree with a three-fifths vote of both chambers.
“With the closing of this sale, a long-term structural problem with the state’s General Fund has finally been addressed head-on, and we are on a disciplined path to resolve the GAAP deficit once and for all,” Nappier said Thursday in a press release.
Transitioning to GAAP was one of Malloy’s 2010 campaign pledges. It was delayed when he was saddled with a $3.67 billion budget deficit the day he was sworn in.
A state bonding package passed in the waning hours of this year’s legislative session included orders for Nappier to borrow $750 million to convert to GAAP. The decision to borrow, instead of save the money to pay down the differential, will cost the state more than $200 million in interest over the life of the bonds.
Republican lawmakers said the announcement was no cause for celebration.
“Appropriating real dollars to reduce the state’s GAAP deficit would have been an honest and direct way of dealing with the problem, and I would have supported those efforts,” Sen. John McKinney, who is also running for governor, said. “But that’s not what the governor is doing. Instead, he is borrowing in order to kick that commitment down the road another two years.”
The announcement also gave Rep. Vincent Candelora, R-North Branford, cause for concern.
“I was critical when the Democrat-controlled General Assembly approved this $750 million loan for debts that we owe to ourselves and was concerned that this borrowing would merely be used to replenish our coffers with cash,” Candelora said Thursday.
Candelora has watched the state’s cash position closely and has sounded the alarm when it looked like bond proceeds were being transferred inside the common cash pool to cover operating expenses. The last time that happened was in April 2013, but Candelora remains vigilant.
“Connecticut entered this budget year with approximately $19.7 billion dollars in debt and, according to the State Treasurer’s office, will be ending the budget year with $20.8 billion in debt,” Candelora said. “It does not seem to me that the administration is being honest with the public or truly dealing with our liabilities at all. The smoke and mirrors have to stop.”
Office of Policy and Management Secretary Ben Barnes praised Nappier for the completion of the transaction.
“The great results of the state’s recent financing demonstrates that the capital markets’ confidence in Connecticut continues to grow,” Barnes said Thursday. “Our actions over the last three years to balance our budget, address our long-term liabilities, control our pension costs, and re-establish a rainy day fund have been well-received by bond buyers, as reflected in the low interest costs of these latest transactions.”
The administration, according to Barnes has done such a good job of budgeting that “we are able to cancel the line-of-credit arranged earlier this year because our cash position is so significantly strengthened.”
Last year, Nappier asked Malloy’s office for permission to seek a line of credit because the state’s cash pool, which is used to pay the bills, was running a negative balance. Earlier this month she said it didn’t look like the state would need the line of credit and she would cancel it in December.
In addition to the GAAP bonds, Nappier announced that a second sale of $314.3 million in general obligation refunding notes closed on Oct. 24. The borrowing allows the state to push back part of the repayment of the 2009 Economic Recovery Notes from 2016 to 2018. Those were the notes the state borrowed to close the budget deficit more than four years ago.
McKinney also expressed concern about the new method used for refunding those notes.
The $314.3 million refunding notes mark the “inaugural issuance of Variable-Rate Remarketed Obligations.” The initial rate the state received was 0.5 percent, but as the name of the bond implies, that rate will vary.
“We are excited to be the inaugural issuer of VROs in the country,” Nappier said. “We have been surveying the market for innovative variable-rate structures that can provide the state with optimal debt structures. I am delighted with the potential this product delivers.”
But McKinney said he wants to know more about this particular financial instrument, which he described as “risky.”
“While the use of variable interest rates will provide the state with low interest costs in the short-term, the long-term cost of these bonds is anyone’s guess,” McKinney said. “Moreover, since Connecticut is going to be the first state in the nation to engage in this type of borrowing, I would like the treasurer to come before the legislature to explain its pros and cons, answer questions, and tell us why she believes this is in the best option for our state and taxpayers.”
He said he’s not willing to agree that “variable-interest borrowing is a fiscally responsible way to manage the people’s money.”