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Malloy Administration Claims Debt Reduction, But Not Everyone Buys It

by Christine Stuart | Jan 9, 2014 2:42pm
(13) Comments | Commenting has expired

(Updated 5:30 p.m.) Gov. Dannel P. Malloy, who has yet to say whether he will seek re-election, touted a report by his budget office that shows the state’s long-term liabilities have been reduced over the past three years by about $11.6 billion. That’s at the same time as state is contributing more money to state employee pensions, which are underfunded, and bonded debt is increasing.

One Republican lawmaker, who is running for governor, called it a work of “fiction” and the head of the Republican Party accused Malloy of using his taxpayer-funded office to campaign.

The Office of Policy and Management report released Thursday prior to the first Bond Commission meeting of 2014 shows that state’s overall debt since 2011 has been reduced about 15 percent from $76.2 billion to $64.4 billion under Malloy’s administration. All of those savings come from the restructuring of retiree health benefits as part of the labor agreement the governor reached with state employee unions back in 2011.

However, Sen. John McKinney, R-Fairfield, is quick to point out that the state doesn’t have to contribute to those retiree benefits until 2017.

“The valuation assumes an annual payment of $130 million by the state beginning in 2017, but the Malloy administration has yet to budget for that payment,” McKinney pointed out in a press release.

Bonded debt, which Republicans have criticized, has increased from $19.8 billion to $20.9 billion since 2011.

“I watch what gets reported and what gets said and I wanted to make sure everyone understands how much progress has been made in the state of Connecticut,” Malloy said after Thursday’s Bond Commission meeting.

Malloy said bonded debt is a portion of what the state is doing to address its long-term liabilities, but it’s not all of it. He said he understands that Republicans are happy to point out how big the state’s long-term liabilities are, but “I’m more than happy to point out how much it shrunk during the three years I’ve been governor.”

Sen. Scott Frantz, R-Greenwich, told Malloy during the Bond Commission meeting that he felt the governor’s co-mingling “bonded debt” and “long-term obligations” was confusing. Bonded debt is used for infrastructure and other capital projects, while the state’s unfunded pension liability is a different type of long-term liability.

Christine Stuart photo He said the state needs to be cognizant of how much additional debt it’s putting on the books and by confusing the two issues the state may lose focus.

Malloy said he sees that the state gets something for its bonded debt, such as schools and roads.
“These are concrete investments that we make, not in an individual or the success of an individual, but in a state and the success of the state,” Malloy said unapologetically.

He said Republican lawmakers for years failed to criticize Republican administrations for agreeing to delaying payments to the state employee retirement fund.

“We need to put what’s happening in context,” Malloy said. “When it is frequently pointed to that one type of debt is increasing, while overall debt has decreased by 15 percent, I think it’s important to put in context. Otherwise, what will happen in our state is the bad decision making that’s happened before which leads to underinvestment in our infrastructure.”

But not everyone agreed.

“The Malloy administration’s latest report on state debt is a complete work of fiction,” Sen. Minority Leader John McKinney, R-Fairfield, said Thursday. “While I’m happy to see that my criticism of the governor’s reckless use of state borrowing has finally gotten his attention, I’m frustrated by his reaction.”

McKinney and other Republican lawmakers have criticized the amount of money the Malloy administration has put on the state’s credit card. While the governor didn’t exceed his self-imposed $1.8 billion bonding cap in 2013, Republicans were quick to point out that $1.79 billion is the most money the state has ever bonded in a single year.

The report shows that bonded debt is expected to rise over the next couple years. By 2018, bonded debt for capital projects will account for about 11 percent of the general fund.

The biggest piece of that debt or about 27 percent helps fund school construction projects. That’s followed by transportation projects, which are funded with special tax obligation bonds, and the debt associated with the Teachers’ Retirement Fund, which accounts for about 13 percent of the state’s total outstanding bonded debt.

School construction combined with the teachers’ retirement debt make up a combined 40 percent of total state debt.

Christine Stuart photo

Gov. Dannel P. Malloy

But the administration makes no apologies for borrowing to fund capital projects. The decision to borrow to make the teachers’ retirement fund solvent was done years before Malloy was elected governor.

“We are tackling our long-term debt in a responsible way, while still making the bold, necessary investments needed to help create jobs and grow our economy,” Malloy said in a press release.

The report states that spending 11 percent of the budget in 2018 on bonded debt “remains affordable to the state, given the importance to our economy and quality of life that our bonding investments support.”

The report also takes credit for ending past practices of past administrations and the legislature, such as delaying payments to the state employee retirement fund and refinancing the 2009 Economic Recovery Notes, which now won’t expire until 2018. The delay in repayment of the Economic Recovery Notes is expected to add $45 million in interest to the payments, according to Connecticut Voices for Children.

At the same time as the report points out the reduction in retirement benefits, it admits that the story of Connecticut’s long-term liabilities is complicated.

The report points out that in 2012 the state made the largest ever annual contribution to the State Employee Retirement System. Despite this payment the fund still shows an unfunded liability of $1.2 billion, an increase of 11 percent. That’s because the state changed some of the underlying funding assumptions. Instead of estimating the pension fund would receive an 8.25 percent return of investment from the market, it lowered it to 8 percent.

“Based on actuarial projections, the fund should be fully funded by 2033, at which point the annual costs should drop from the $1.2 billion we must pay this year down to the normal cost alone, or about $300 million,” the report states.

Republican Party Chairman Jerry Labriola said this is just another moment where Malloy is not being honest with Connecticut taxpayers. The longer Malloy waits to announce whether he’s seeking another term, the more it makes things like this look political.

“Dan Malloy refuses to be straightforward with Connecticut voters about his plan to seek a second term so that he can continue to circumvent election law and use his taxpayer-funded office to launch his campaign,” Labriola said.

Malloy said he requested the report because of questions about the state’s long-term debt by Republicans like Frantz.

“It very much related to the first comment by a Republican at the meeting today,” Malloy said referring to Frantz. “How much additional bonded debt do we take on?”

Malloy said he needed the report first to make that determination. He said he hasn’t decided how much money the state should bond yet in 2014, but he canceled the Bond Commission meeting scheduled for later in the month.

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(13) Comments

posted by: Not that Michael Brown | January 9, 2014  3:13pm

Who you going to believe, McKinney or your lying eyes.

posted by: Noteworthy | January 9, 2014  3:31pm

This should be animated. Then we can be reading a comic book.

posted by: art vandelay | January 9, 2014  3:37pm

art vandelay

Only in Malloy’s “Wonderland” can anyone build a Busway,  Jackson Labs,  First Five, Employee Suggestion Box, and reduce the deficit at the same time.  Who’s kidding who folks.  Malloy has run this state into the ground economically and he owns it pure and simple.  It’s Malloy’s problem, not Rowland Not Rell, but MALLOY!

posted by: jim black | January 9, 2014  4:46pm

Put me down as not buying it.

posted by: robn | January 9, 2014  5:00pm

I actually didn’t know that we’re using borrowed money to make the pension funds solvent. Nor did I know that the state is using an utterly fantastic profit projection of 8% for the pension funds. Wouldn’t the “responsible” thing be to acknowledge that the whole system is based upon falsely predicting the future, delaying capital projects in favor of leveling off past pension fund obligations and then switching to a defined contribution pension for all state employees?

posted by: Lawrence | January 9, 2014  10:49pm

Sen. McKinney has received nearly $100 million in state bonding for projects in his Senate district over the years.

He voted to approve $710 million in state bonding in the 2011 jobs bill (over $1 billion in repayments with interest.)

His district has received over $1 million more in the past few years in small-town STEAP grants, which he welcomes with glowing press releases.

And this year, Sen. McKinney welcomed $50 million in bonding for a new Sandy Hook Elementary School (he didn’t VOTE to borrow the money—that’s for Democrats to do—McKinney just welcomed the spending.)

So tell me again how much Sen. McKinney detests state borrowing?

He doesn’t. He’s part of the reason why CT has so much debt.

posted by: JamesBronsdon | January 9, 2014  11:57pm

I must be in Bizarro World. Lawrence’s comment actually resonates with me.

posted by: Commuter | January 10, 2014  5:35am

This graph is as clear and understandable presentation of a very complex picture as you could ask for.

The condition we’re in is due to many years of failing to fund infrastructure investment and pension contributions. Now we need to make infrastructure investments, before roads crumble and bridges fall down, much less to support growth and development.

The other important point the author makes is that more than a quarter of the debt load is funding for school construction. The only alternative to that would be to shift that burden to the towns, which would make it at a minimum far more expensive, and in many communities, it would be cost-prohibitive if not impossible to fund school construction. Needless to say, dramatically higher local taxes and falling property values would be the result, producing a much less competitive state.

By the way, the 8% projected return on investment is well below actual experience last year, and the decision to borrow to fund the pension was made back in 2007 or so.

posted by: justsayin | January 10, 2014  6:43am

This looks good now because of the change in how they account for some LTD. The fundamentals are still very bad for any future “reductions”. Everything else is going the wrong way. Time will bear this out, again.

posted by: dano860 | January 10, 2014  9:56am

JamesBronson,
I have to agree with you on that too. We should take a good look at some others and their pet projects. How about we start with the esteemed leader Don Williams.
There is far to much of the buying votes going on from both sides and it should be stopped. Every town in the State has needs but relying on the State to back fill them says to me that we are being over taxed at the State level when it should go into the local coffers.
When the State over taxes us it only sets them up to go out and bond (borrow) more money, via a good credit rating. Towns do bonding on their own projects too and a bigger resource of cash may help them. 
Don’t forget, everything that Dannel is doing, including GAAP, is on borrowed money.
Our children, that decide to stay in CT, will be on the hook for these bills plus their own.
We can continue to beat up McKinney though, there is a slim to no chance that he will be the R’s choice for Gov.

posted by: robn | January 10, 2014  10:01am

COMMUTER

An excerpt from Warren Buffet in the Berkshire Hathaway 2007 annual report (just moments before March 2008 when Bear Stearns failed and the irresponsible shenanigans of financial markets was revealed to the public.

“For the 363 companies in the S&P that have pension plans, this assumption in 2006 averaged 8%. Let’s look at the chances of that being achieved. The average holdings of bonds and cash for all pension funds is about 28%, and on these assets returns can be expected to be no more than 5%. Higher yields, of course, are obtainable but they carry with them a risk of commensurate (or greater) loss. This means that the remaining 72% of assets – which are mostly in equities, either held directly or through vehicles such as hedge funds or private-equity investments – must earn 9.2% in order for the fund overall to achieve the postulated 8%. And that return must be delivered after all fees, which are now far higher than they have ever been. How realistic is this expectation?”

He goes on to explain that its NOT very realistic and concludes

” Whatever pension-cost surprises are in store for shareholders down the road, these jolts will be surpassed many times over by those experienced by taxpayers. Public pension promises are huge and, in many cases, funding is woefully inadequate. Because the fuse on this time bomb is long, politicians flinch from inflicting tax pain, given that problems will only become apparent long after these officials have departed.”

posted by: robn | January 10, 2014  12:32pm

To play devil’s advocate, there is a missing puzzle piece in this argument. Republican dominance of federal government since the late 80s has led us from a historically even distribution of federal tax dollars to a distribution weighted heavily in favor of Republican voting states. The average state got $1.29 back from the federal government for every dollar paid. The states that generally got back less than they padi in taxes were Democratic voting states. This has to stop and the only way to do it is for our congressional coalition to grow a pair, partner with other donor states,  and declare nuclear war in Congress to rebalance our losses. (CT gets 91 cents back for every dollar paid…Mississippi gets $2.47)

see here
http://www.motherjones.com/politics/2011/11/states-federal-taxes-spending-charts-maps

posted by: JamesBronsdon | January 10, 2014  12:50pm

Dano, agree with all you say. I’d be much more impressed with the legislator whose press releases tout the efforts he/she has made to cut wasteful gov’t spending, to reduce state gov’t's footprint, to advance personal liberty and responsibility. Singing the praises of pork is just piggish.