McKinney: “Malloy’s Report on State Debt a Work of Fiction”

January 9, 2014

Hartford, CT – State Senate Minority Leader John McKinney (R-Fairfield) released the following statement and information today in response to an impromptu report by the Malloy administration titled, “Reducing State Debt.”

Senator McKinney said, “The Malloy administration’s latest report on state debt is a complete work of fiction. As Governor Malloy once said in describing budget gimmicks when he was a candidate, ‘it fools only those who want to be fooled.’ 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. He should be using the resources of the governor’s office to address the problem, not to distort facts and figures in a disingenuous attempt to explain it away.

“Fact: as reported by the Treasurer’s Office, bonded indebtedness has increased by $1.1 billion under Governor Malloy and is scheduled to continue to rise dramatically for the remainder of his term and beyond because of decisions he has made.

“Fact: Governor Malloy has used state bonding to cover $1.5 billion of expenses that used to be covered by the general fund. This is the equivalent of a family using its credit card to pay its utility bills.

“Fact: Governor Malloy allocated $1.7 billion in general obligation bonds in 2013 alone – $398 million more than he allocated the previous year and the most any administration had ever allocated in a single calendar year.”

Senator McKinney outlined some of the most glaring omissions and mischaracterizations from the governor’s report:

1. Other Post Employment Benefit (OPEB) Liabilities –

1. 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. If this payment is not made, the 2. OPEB liability will be significantly greater.
2. None of Governor Malloy’s budgets have contributed to the OPEB Trust Fund.
3. The governor’s report also fails to mention that SEBAC 2011 extended the state employees’ healthcare deal another five years to 2022 potentially costing the state billions of dollars.

2. State Employee Retirement System – The governor promised $4.8 billion in pension savings under SEBAC 2011. SEBAC 2011 only achieved $1.7 billion in pension savings as reported by the non-partisan Office of Fiscal Analysis (OFA).

3. Teachers’ Retirement OPEB – The governor fails to mention that he has twice recommended that the state not fund a portion of its cost attributed to teachers’ retiree healthcare. This recommendation would have depleted the reserves of the teachers’ retirement health fund and would have significantly increased the long-term liability of that fund had it been enacted.

4. State Bonded Debt –

1. The graphic on page three of the governor’s report shows debt as of July 31, 2013 at $19.8 billion. However, the latest report from the treasurer is dated October 31, 2013, which shows bonded debt totaling $20.9 billion.
2. The use of general obligation allocations by the state bond commission has grown by $398 million in just one calendar year – a record. At the same time, spending on K-12 education, which used to consume as much as 50 percent of total allocations, has significantly diminished. Rather than seeing any increase of any kind in general obligation allocations, the state should have seen a reduction from the traditional $1.4 billion annual level.
3. Debt service is projected to rise to 12.5 percent in next biennium. The governor chooses to adjust for Medicaid in order to make this expenditure appear smaller. It is smoke and mirrors. When you do the math and compare debt service appropriations to total net appropriations, the figure will be in the 12.5-percent range.
4. It is not fair to compare our tax payer’s debt burden on a state and local basis. While Connecticut has a very generous local school construction program, these bonds are a liability of the state and the state only. The state’s full faith and credit backs these bonds and taxpayers are on the hook to pay them off. If you look at the state’s tax burden, we remain among the highest in the country.

5. GAAP Deficit –

1. The only thing this governor has done to move us toward more responsible GAAP accounting, is to bond $560.4 million, at an additional cost to taxpayers of $237.1 million in interest. In fact, this governor has delayed making a payment toward the accumulated GAAP deficit every year since he has been in office and has pushed off his first payment until FY2016.
2. The reduction in the GAAP deficit from $1.7 billion to $1.2 billion was not because of any action by Governor Malloy, but rather due to internal changes to accounting made by the Comptroller’s Office, including how state treats unclaimed property, income tax receivables and accounts payables.
3. When the governor talks about “many years of papering over unbalanced budgets by delaying the payment of bills into the following year, or counting income earned after the year is done,” and says, “We have revised our budget practices to avoid these gimmicks,” questions must be asked: Why did the governor rely on $1.1 billion of one-time budget items and fund sweeps (by the administration’s own accounting) to balance this budget? Why has he moved $1.5 billion in operating expenses to the state’s credit card?

Senator McKinney said, “Despite all of the glaring misrepresentations in this report, it is fair to credit some progress in reducing the state’s long-term liabilities to actions taken under SEBAC 2011. Increasing the retirement age by three years, increasing the early retirement penalty and requiring all state employees to contribute toward their retiree health benefit are positive steps. I also support the elimination of the SEBAC 4 and 5 provisions. However, the governor has failed to enact basic reforms that would put our long-term fiscal security on better footing, and sadly the governor has locked the state into this package until 2022.”