On Friday, the Wall Street bond rating company, Moody’s Investment Services, lowered their rating of the bonds issued by the State of Connecticut from aa2 to aa3. This is the second drop in the past year and Connecticut’s bonds are now rated with a “negative outlook”.
The Malloy Administration’s response was to try to turn it into a partisan issue.
However, it is not a partisan issue. People may try to take partisan advantage of this development, but the underlying truth is the same truth that Connecticut faced the day before Moody’s lowered its rating. This state is in deep financial trouble. How to deal with it certainly has partisan overtones but whether we face the truth or continue to run from it has nothing to do with political partisanship.
Moody’s explanation for their action was that;
“The rating downgrade is based on Connecticut’s high combined fixed costs for debt service and post employment benefits relative to the state’s budget; pension funded ratios that are among the lowest in the country and likely to remain well below average; and depleted reserves with slim prospects for near-term replenishment.“
Ben Barnes, Malloy’s budget chief and Secretary of the Office of Policy and Management shot back saying;
“Today, we have a structurally balance budget, have converted to GAAP, have fully funded our current pension obligations and seen their funding ratio rise, have negotiated significant pension benefit concessions from organized labor, have negotiated significant employee contributions to retiree health benefits…”
And the Governor’s chief advisor, Roy Occhiogrosso said that;
“This governor has played no gimmicks whatsoever with the state’s finances. None…Thanks to Governor Malloy, the state is keeping its books honestly, for the first time ever, and meeting its obligations completely”
This is what happens when politics is deemed more important than policy and government officials believe spin is more valuable than facing facts.
The Administration’s response is what one would expect in the midst of a political campaign but from the group that is trying to lead Connecticut out of its fiscal wastelands.
Governor Malloy and his Administration have taken impressive steps to begin to correct Connecticut’s finances. But as hard as it is for them to hear it, Moody’s is right and Barnes and Occhiogrosso are wrong.
(1) Connecticut’s State Employee Pension Fund is underfunded by $11 billion dollars. Last year the Pension Fund had enough money to cover 44 percent of its future obligations. While it is true that the Pension Fund now has enough money to meet 48 percent of its future obligations, despite what Barnes and Occhiogrosso are saying, the improvement WAS NOT primarily due to the Malloy/SEBAC agreement but the Fund balance went up because the return on investment was incredibly high for one year. Pension Funds are supposed to cover 80 percent of their future obligations and even after the state employee agreement that state still owes its Pension Fund about $11 billion.
(2) While the Connecticut’s Teacher Pension Fund has 61 percent of the money it needs to meet its obligations, that is because four years ago the state borrowed $2 billion to put into the Teacher Pension Fund meaning Connecticut must now re-pay that loan with interest and it still owes $9 billion.
(3) Although retired state employees have earned the right to receive health benefits, the state has put nothing aside to meet those costs. Instead, the state pays what is needed each year. The projection is that the state will need to pay more than $26 billion over the next three decades. The Malloy/SEBAC agreement requires that all state employees put 3 percent of their pay into a new fund to cover retire healthcare but the contribution program does not begin until does not retired health care, and state government July 1, 2017 and with fewer state employees the amount contributed will be relatively small compared to the amount that is needed. Connecticut owes another $3 billion to pay for health benefits for retired teachers.
(4) Connecticut owes about $20 billion for the money it has borrowed to build schools, state buildings, preserve open space, fix roads, bridges, dams, rebuild the state’s universities and pay for other generally important capital improvements. If measured by the amount of debt Connecticut has per capita (per person), it ranks as the 4th most indebted state in the country. If measured by income, Connecticut ranks as the 6th most indebted state in the nation.
(5) As to OPM Secretary Barnes’ claim that the Connecticut state budget is balanced is the reality that even after $1.5 billion in new taxes and significant budget cuts, as a result of lower than expected income tax revenue, this year’s budget has gone from a surplus to a deficit and next year’s is headed toward down. And that doesn’t even count any decline in federal dollars or – even more importantly – the fact that this year’s budget is “balanced” with a number of impossible to achieve “hold-backs”
(6) As to the notion that Connecticut has converted to GAAP accounting. While it is true that Governor Malloy promised to immediately convert the state to GAAP, this year the state was scheduled to put in $75 million toward GAAP conversion and another $50 million next year. (The initial money was to be paid out of any budget surplus Connecticut has, but the budget is now in deficit). Then, even if the state did make the $125 million payment, the actual transfer to GAAP would begin in 2014 and go for 15 years until the $1.5 billion GAAP deficit was paid for.
(7) And in response to Occhiogrosso’s claim that “This governor has played no gimmicks whatsoever with the state’s finances. None…Thanks to Governor Malloy, the state is keeping its books honestly, for the first time ever…” is the truth that this year’s budget was balanced by moving more than $440 million surplus revenue from last year into this year’s budget and counting on another $400 million or more in unachievable “hold-backs” or budget cuts. The fact is that this budget, like previous ones, contains a number of “gimmicks”.
More about these issues can be found on the various Connecticut news websites including Keith Phaneuf’s article in CTMirror: http://www.ctmirror.org/story/15129/wall-street-credit-agency-downgrades-connecticuts-bond-rating and Christine Stuart’s article in CTNewsjunkie http://www.ctnewsjunkie.com/ctnj.php/archives/entry/moodys_downgrades_cts_bonds_from_aa2_to_aa3/
Finally, the proof that this administration seems to have no interest in getting out of campaign mode and into governance mode can be found in the actual language of OPM Secretary Barnes’ statement and the quotes from Malloy’s chief advisory.
Barnes’ statement includes the following language; “Moody’s has responded with a downgrade intended to satisfy their internal corporate need to deflect attention from their historic lack of credibility.” Barnes goes on to conclude “this reflects their continued reaction to their central involvement in the financial scandals that led to the deepest recession since the Great Depression…”
Meanwhile Occhiogrosso blasted the Republicans claiming that they were “defending an organization that gave subprime mortgages AAA ratings, right before those mortgages caused the financial meltdown of 2008…”
While it may be true that Moody’s Investment Services and the other Wall Street rating agencies, along with the major Wall Street Banks, created the Great Recession – not only are Barnes and Occhiogrosso responding with political rhetoric – I’d wager that the same person was the source of both statements. In the political world it is called “staying on message”.