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Trading  | August 23, 2017

Connecticut Governor Daniel Malloy is among the country’s least popular governors after forcing through two tax hikes that sent individuals and corporations fleeing from the state. Luckily for the state and its people, Malloy apparently has no interest in sticking around to take the heat when it comes time for the next hike: He has announced that he will not seek a third term.

Connecticut has gone without a budget for two months, and is facing devastating cutbacks in municipal services if one isn’t passed soon. But Malloy took time off this week from grappling with legislators to speak with a reporter from Reuters, he offers little insight into what lead to the state’s precarious fiscal situation. Instead, he blames it on overspending on prisons.

“The state invested in the wrong things for a period of time. It allowed its higher educational institutions to suffer while it sought to placate communities with respect to other forms of local reimbursement,” Malloy told Reuters during an interview in his office on Thursday.


“We built too many prisons, which we’re still paying off even while we’re closing them,” he said. The Democrat took office in 2011 and is not seeking a third term.”

Prisons are only a small part of the state’s problem. Choked by outmigration and a debt-service burden that’s the highest in the nation compared with revenues, Connecticut’s fiscal situation is deteriorating rapidly. And after two months without a budget, Reuters reports that, unless lawmakers act soon, the government of one of the wealthiest states in the country will begin cutbacks in education spending and municipal aid as Malloy tries to close an expected $3.5 billion budget shortfall over the coming two years.

Connecticut is one of a handful of US states on the verge of a Greece-style debt-crisis, as it struggles to service some $23 billion in municipal debt, all while lawmakers keep one eye on the state’s unfunded pension liabilities, which have climbed to a terrifying $50 billion, thanks to the generous retirement packages enjoyed by Connecticut state employees.

Back in May, all three of the main rating agencies downgraded the credit rating on the state’s general-obligation bonds, sending the state’s credit risk soaring. Meanwhile, municipal debt for the city of Hartford, Connecticut’s once-proud capital, has been downgraded to junk status. Health-insurance giant Aetna, which was founded in Hartford nearly 200 years ago, recently dealt the city a major blow when it announced plans to relocate its headquarters to New York City, though most of the company’s 6,000 employees will remain in the state.

About a year earlier, General Electric, which had been headquartered in Fairfield, CT for decades, announced it would re-locate to Boston, where it would face a lower tax bill AND access to top-flight talent, who typically prefer to work and live in trendy urban hubs.

After meeting with Millstein & Co, the same firm that tried to help Puerto Rico reorganize its massive debt burden, State Comptroller Denise Nappier proposed a new tax-secured revenue bond program, which she says will lower borrowing costs and boost reserves. The bonds would be issued in lieu of general-obligation bonds, according to Reuters.

But that’s a long-term solution. Right now, the state still desperately needs a budget, or its municipalities will be faced with devastating cuts.

“…until lawmakers craft a budget, the state’s fiscal uncertainty is causing havoc among municipalities. Some are considering whether to delay the start of school or dip into reserves.


 And for Hartford, the longer the state goes without a budget, the closer the city comes  to a possible bankruptcy filing, said Hartford Mayor Luke Bronin, a 38-year-old former U.S.  Treasury official.


“The lack of a state budget… makes a liquidity challenge come that much faster,” he said.”

By some measures, Connecticut has the worst debt problem in the country.

“It has the most net tax-supported state debt per capita in the nation at $6,505, versus a median of $1,006, according to Moody’s Investors Service.


It has the highest debt service costs as a portion of state revenues, as well as debt relative to gross domestic product, Moody’s said.”

During fiscal 2017, CT spent $2.85 billion servicing debt – the most in seven years.

“The $2.85 billion of principal and interest the state paid on its bonds in fiscal 2017 was the highest in six years, according to preliminary unaudited information from State Treasurer Denise Nappier’s office that has not yet been published.”

A crisis at the state level promises to ripple across the state, destabilizing municipalities that have taken state aid for granted for too long.

“Further, the state’s budget crunch is threatening its cities including the state capital of Hartford, which is considering bankruptcy due, in part, to its dependence on state aid.


Connecticut has borrowed for decades to fund school construction, whereas nearly all other states typically borrow at the local level for those projects.


Lack of county governments means some other local costs are picked up by the state, including for all of its detention facilities.”

As with many of its troubled peers, Connecticut’s financial struggles began with the crisis.

“Connecticut has piled on debt to bolster its public pensions, selling $2.3 billion of bonds in April 2008.


And again in December 2009, the state sold $916 million of economic recovery notes to close a budget deficit after depleting its rainy day fund during the Great Recession.”

Beyond that, its decline has been hastened by a combination of forces. A deteriorating local economy, coupled with a plunge in hedge fund profits, have strained the state’s already narrow tax base. Meanwhile, high taxes have inspired wealthy hedge fund types to move to states that are more tax-friendly, like Florida.

Despite its desperate financial situation, the state still leads the country in one important metric…

…college basketball championships.

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