Malloy's High-Stakes Bet On Borrowing


HARTFORD

— One of the many parlor games at the Capitol Wednesday was arguing over whether the governor's budget contains more tricks or fewer tricks than spending plans of years gone by.

The heart of the issue is borrowing, and Gov. Dannel P. Malloy seems to answer every need with a plan to "go to the markets" for money. That may or may not be trickery, but at least, as he and his two top deputies said repeatedly, they're doing it right out in the open.

Pay back the $625 million we borrowed in 2009 to make ends meet? We can refinance that. Find more than $1 billion to convert to "generally accepted accounting principles?" We can borrow $750 million for that.

Boost the University of Connecticut's science, technology and math programs with $1.5 billion over the next decade? Make schools safer? Compensate towns after taking away $56 million in casino funding? Kick $200 million more into bioscience, on top of $1 billion already promised?

Borrow, borrow, borrow, borrow.

Set aside $300 million to help companies create jobs, or bribe them to stay in Connecticut? Add $221 million to support low- and moderate-income housing, on top of $300 million already carved out?

Borrow, borrow.

Here's the real beauty of it: For the coming two years, debt payments as a percent of the budget are actually down to about 9 percent, from nearly 10 percent over the Past couple of years. Yes, long-term borrowing is up, but the amount we're borrowing in each of the next two years is more or less in line with what we've borrowed these last couple of years.

How can this be? The miracle of all-time low interest rates is the main reason, as any home mortgage-holder can attest. The state pays less than 3 percent for its money, so it makes sense to borrow — if and only if we're adding jobs or putting Connecticut in a better position to compete.

The other chief reason why borrowing costs aren't skyrocketing is that a few of these projects, such as UConn, will be stretched out over the next decade or more. So we aren't borrowing all the money now — we'll borrow it as we need it.

Uh-oh.

What if interest rates shoot up? And even if that doesn't happen, the debt might start to pile up. After all, we have a long list of dull, non-sexy capital projects year in and year out, like school construction, water treatment projects and roads.

And one other problem: Borrowing to pay for regular operations is always a bad idea because the state then has to come up with the same money over and over. Malloy is doing some of this dangerous practice — less than $100 million in the coming year — but far less of it than the state has done in the past.

Republicans have been talking about these pitfalls since long before Malloy took to the podium at noon Wednesday in the impeccably decorated Hall of the House. Malloy's plan only heightened the pitch.

"He's been critical of kicking the can down the road, and yet he does exactly that," said Sen. John P. McKinney, the GOP leader in the Senate, who just might face Malloy in the 2014 governor's race.

"I don't know whether they're being overly optimistic or naïve," McKinney said, "to think that we can continue to increase borrowing and it won't come back to haunt us."

Details matter here, and as with all financial decisions, each piece of the puzzle comes with its own debate. Republicans don't like Malloy's plan to refinance the $625 million in debt from 2009, but the fact is, the move saves $150 million a year over the next two years, when we need it most.

Likewise, the plan to borrow $750 million to convert to generally accepted accounting principles financing saves $50 million a year, though it does stretch out the payments for many years and ends up costing the state more than $100 million in interest.

McKinney unearthed a minor ploy in the budget, in which Malloy's administration has received $91 million in "premium payments" from bond buyers over the last two years, perhaps in exchange for slightly higher interest rates. These payments are used to lower the state's debt payments, which is fine, but follow the money: They allow the state to borrow in order to pay for operations, in this case, bond debt.

"It's not fiscally responsible," McKinney said, adding that the same tactic is included in the budget Malloy rolled out Wednesday.

Budget chief Ben Barnes and Malloy's chief of staff, Mark Ojakian, insisted that all this special borrowing is prudent and will not create a future hardship.

"As we proceed, we're going to have to take a look at what the priorities are but the commitment to school construction is intact," Ojakian said, giving just one example of future projects that will require borrowing.

If interest rates rise, increasing the cost of keeping these promises, that will happen because the economy has improved, "which would be a welcome treat," Barnes said.

Looking at the big picture, spending opponents say Connecticut is already the state with the highest debt per resident. Barnes makes the point that Connecticut, unlike most states, borrows on behalf of towns. Measuring total state and local debt as a percent of income, we're right in the middle of the pack.

We cannot now know whether the Malloy borrowing is more akin to a family with a good income buying a house with a low mortgage, thereby securing its future — or a family on shaky ground taking out a loan that will leave it in foreclosure five years down the road.

But we know this: Two giant assumptions underlie the logic behind all this borrowing. First, we can't do any more to control regular spending, so we really need to borrow in order to ignite jobs and economic strength. And second, the economy will get better, raising incomes and allowing us to reap the rewards of investment.

The first assumption is the ultimate debate of our era. The second is the only hope we have. On Wednesday, Malloy raised the stakes of both — with a plan we'll be talking about for years, for better or worse.

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