Senator Frantz Questions State’s Increase in Long-Term Debt [Connecticut Post]

January 28, 2013

Article as it appeared in the Connecticut Post on January 25, 2013

Malloy, Bond Commission talk debt, bond rating

By Ken Dixon

HARTFORD — In his first meeting as a member of the State Bond Commission, Sen. L. Scott Frantz, of Greenwich, interrupted the usually placid monthly gathering Friday by questioning Gov. Dannel P. Malloy on the state’s long-term debt.

In response, Malloy admitted to Frantz, now the ranking Republican on the tax-writing legislative Finance, Revenue and Bonding Committee, that the state’s capital budget may increase by $1.8 billion this year.

It could be a record for state projects, including highway repairs, school construction projects and other long-term expenses not related to operating budgets.

The cost of debt service in the current $20 billion state budget is nearly $2.2 billion — more than 10 percent — in one of the nation’s most indebted states per capita.

“We may be substantially less than that,” Malloy told Frantz. “But for planning purposes, I have no plans to exceed $1.8 (billion) as a maximum. A lot of it will depend on whether certain transportation projects that are greatly needed are ready to go.

“We’re now predicting a step-up in school construction, up in the last two years, which were relatively low. There are a bunch of projects that could push that number up to $525 (million), $535 million.”

Malloy reinforced his position when reporters asked him after the meeting about Frantz’s concerns.

“We’ve been pushing projects at a faster pace,” Malloy said. “Some of those projects are going to come on more rapidly than they would have in the past, so we plan to account for that to move the state forward.

“If the timing is not right and those projects are not ready to move, then obviously that number could come down substantially,” Malloy said. “There are a couple of drivers, transportation being one of those, as well as the school construction up-tick that we’re predicting for the current fiscal year.”

During the meeting of the Bond Commission — made up of 10 officials, including Attorney General George Jepsen, Comptroller Kevin Lembo, four top lawmakers, the governor’s budget chief and the public works commissioner — Malloy said that officials met with bond-rating agencies earlier this month.

State Treasurer Denise Nappier said the state’s bond rating is not in jeopardy. Last January, Moody’s Investors Service downgraded Connecticut from Aa3 to Aa2.

“We have every hope that it will continue to remain stable as we go through the budget process,” Nappier said to the commission, with a smile. “And that’s up to you guys.”

But Republicans warn that running up the state’s credit cards is another sign of a fiscal landscape that is scaring away business from the state.

Frantz said the $1.8 billion figure is eye-popping.

“It’s a significant increase from what I was expecting to hear in that answer and I find it a little bit curious that the rating agencies would not have a problem with that,” Frantz said after the commission meeting. “So, we’ll have to see how this evolves over the next month, month-and-a-half or so to see if, in fact, that is the case and was the case when they met two weeks ago with the rating agencies.

“You would think that much of a significant increase would be a big red flag.”

Frantz, a private investor, said that between the rising capital debt and the recent $550 million line of credit to handle short-term state expenses, there are growing concerns for the state’s already fragile fiscal landscape.

“You raise taxes, people find a way not to pay them,” Frantz said. “They delay transactions. They move out of state. They do whatever they can to avoid taxes.”

He said that at least one major hedge fund — ESL run by Edward Lampert, founder of ESL Investments — has decamped Greenwich for Florida, taking $1 billion in annual revenue.

“When you lose that revenue, multiply that by the 250 pretty-solid hedge fund managers in that area of the state, plus the people who work for them, that’s a significant amount of revenue to the state of Connecticut that we lose out on,” Frantz said.

“At the end of the day, if we start getting in an even worse fiscal situation, I think people will see the writing on the wall and say `I’m not going to be liable for picking up the tab on a runaway situation like this.’

“We have to keep tax rates at a reasonable level. Otherwise, what’s going to happen is we’re going to exhaust the tax base.”