No financial advisor would ever recommend that a financially fragile business owner or homeowner take on more debt.
The Office of Policy and Management and state Treasurer Denise Nappier looked at various scenarios on how the state could cover its projected deficits of $535 million in fiscal year 2010 and $726 million in fiscal year 2011, according to the state Office of Fiscal Analysis.
One proposal is to borrow $1.3 billion by securitizing the surcharge — a fancy name for borrowing against future revenues — paid by the state’s electric ratepayers, and by enhancing lottery sales and legalizing Keno.
The bonds would cost taxpayers between 4 percent and 4.75 percent in interest.
Borrowing money defies common sense when there isn’t enough money to pay the existing bills, never mind the new loan payments.
It’s a certain recipe for financial failure.
According to the Office of Fiscal Analysis, borrowing will set up the state for an even bigger budget deficit.
The deficit is projected to skyrocket in fiscal year 2012 to nearly $3.9 billion. It would remain near that figure — at about $3.8 billion — through fiscal year 2014.
According to the OFA, it would happen for three reasons:
(1) “One-time measures utilized in fiscal 2011;”
(2) “Increased debt service payments due to the issuance of Economic Recovery Notes (ERNs);”
(3) “Revenue intercepts due to securitization that will impact the out-years beginning in fiscal 12.”
So two of the reasons — debt-service payments and securitization — illustrate a buy-now, pay-later mentality.
It’s somewhat like the consumer who can’t afford his rent yet goes down to the electronics store and buys the biggest, flat-screen TV his credit card will accept.
And then, that person borrows against a future income tax return — sort of a layman’s way of securitizing future revenue — to buy a fancy recliner to better enjoy that flat screen TV.
While this scenario simplifies what the state might do, the only way to get out of the state’s fiscal mess is to change how it operates and spends.
Connecticut is on its way to buying that flat screen TV and recliner without enough money to pay for essential services.
Consider that the state is now cash poor, having spent its $1.4 billion rainy day fund in the past year.
Also consider that Connecticut is considered one of the most indebted states in the nation, according to Moody’s Investor rating service.
Gov. M. Jodi Rell, in her final state of the state address last week, challenged Connecticut lawmakers to study state government’s structure and delivery systems, including overlapping missions of state agencies, merging others, lowering overhead, and boosting the overall efficiency of state government. And she said they must to deliver a report in September.
Her reasoning is sound.
“Every action that we take this year, to finally get state spending under control will ease the budget pain that all will be feeling for the next few years,’’ Rell said in her address.
Also laudable is the governor’s proposal for a separate, four-person review board “so as to take the politics out of the equation, all branches and both sides of the political aisle are again equally represented.’’
As state leaders study reforming Connecticut government, they need to realize that borrowing will only exacerbate the fiscal quagmire.
