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To Fill Budget Gap, Malloy Might Need To Resort To Borrowing

By Dan Haar

January 09, 2013

No one expected Gov. Dannel P. Malloy to offer solutions to the state's $1.1 billion budget shortfall for the coming year on Wednesday, and he didn't do so. We'll hear the unpalatable options soon enough.

One of them could be borrowing hundreds of millions of dollars to make ends meet — something the state hasn't done in memory, at least not the way it would have to happen this time around. Even when I asked him squarely about it Wednesday, Malloy said the option isn't off the table.

Restating the obvious, he said borrowing is not something he wants to do. In fact, we still owe $748 million on the $900 that we borrowed in 2009 to erase a deficit from the year that had just ended.

But by now we are all painfully familiar with the fact that the usual ways of filling a budget gap are not very doable this time around. Cutting that much spending in a $21 billion spending plan is neither good policy nor feasible.

There will be hundreds of millions of dollars in cuts, as already happened over the past few weeks to fill a $400 million hole in the 2012-13 spending plan. If you're in the camp that thinks the state needs to take another 5 percent haircut and live within its means like a family in hard times, go back to metaphor school.

A family can forsake a steak dinner at Morton's and save money. But if the state cuts in 3 percent in state spending, let alone 5 percent, the move would directly and indirectly cause job losses in the thousands, creating a vicious cycle of more shortfalls.

Malloy may have cut a sweet, no-layoff deal with state employee unions, but he's also guiding the payroll downward through attrition.

"We trimmed executive branch employees by more than 1,200 over the past two years, including more than a 10 percent reduction in the number of state managers," he said Wednesday.

Tax increases are in the same category. Higher business taxes would be dumb for obvious reasons. And despite what many on the left believe, the willingness of Connecticut's wealthy residents to pay more than the 6.7 percent top rate for personal income tax has its limits.

That leaves trickery, the tried-and-true haven of governors in trouble. The old standby, shorting the pension funds, can't happen this year because the state issued bonds at a low rate in order to manage the teachers' pension fund payments, so we're bound by Wall Street conditions to pay the full nut every year.

The state employee pension payments are also off the table because of the aforementioned agreement with the unions — so we could short the pension payments for state managers only, but that's not enough money to be worth the trouble.

Borrowing to fill a budget gap has not happened, in recent years at least, as part of the budgeting process. The $900 billion in late 2009 under Gov. M. Jodi Rell happened after the fiscal year was over and there was no other real option.

This time around, would Malloy and budget czar Ben Barnes actually propose borrowing as an up-front measure? Unlike in 2009, the bonds would be taxable, not tax-free, so the cost would be higher. Also unlike in 2009, we would not necessarily have an improved economy to look forward to; remember, June 2009 was the depth of the recession.

It's a double-whammy bad idea, because borrowing for regular operations not only costs money, but it creates a gap for the following year when you have to find the money again.

There is also the option of securitizing flows of money, which is a fancy way of borrowing. Instead of selling debt, securitization is borrowing from an investment bank, which would be repaid through a clearly defined source of future money such as the state sales tax or lottery revenues. This was seriously considered a few years ago — bankers from Goldman Sachs even made a presentation — but it clearly has all the negatives of up-front borrowing, and then some.

Malloy's most important budget statement on Wednesday was not about the budget at all, it was his transition remark after Newtown.

"My friends, as we begin this legislative session let us be guided by devotion to the common good, by faith in one another, and by a determination to work together to make our community as strong as it can be in every way," he said.

In other words, after all we've been through, let's not fight over a budget that we know will be painful for everyone.

In fact, the post-Newtown spirit of cooperation could pave the way for some creative problem-solving on the budget. Maybe even some tricks. Said one Capitol veteran familiar with the budget: "I'm sure there will be one or two things in there that no one has ever thought about or seen, that will help the situation."