Debt Delusions – The Connecticut Examiner

What happened to Governor Lamont’s “debt regime,” if there ever was one?

Lamont is running for re-election claiming credit for the budget cuts.

Yet since Ned Lamont took office, Connecticut’s long-term borrowing has gone from about $25 billion to $27 billion. Additionally, by the end of 2022, the state is expected to officially issue an additional $1.3 billion in new bonds, and Lamont and his team have also committed to issuing $175 million in Community Investment Fund bonds.

What kind of diet is this?

Lamont’s claim to engineer a state fiscal reversal could not be further from the truth. This does not necessarily mean that he mismanaged affairs, but rather that he had virtually nothing to do with the factors that improved the state’s position…temporarily.

Three factors came into play. The feds flooded the state with Covid aid money; the roaring bull market in stocks and bonds through December 2021 produced a source of tax revenue from the state’s large population of wealthy investors; and, finally, automatic budget restraints enacted in 2017 before Lamont took office limited spending.

Lamont was just lucky to be there as governor because the three trends coincided.

No one should blame him for his luck.

Yet those trends have now reversed, as everyone knew they would eventually.

Perhaps Lamont embellished his good luck story with his “debt diet” fable as a hedge against his run of luck ending. However, if he had truly embraced the reality that Connecticut’s good fortune would eventually run out, he would have imposed a veritable regime of debt.

Instead of actually acting, Lamont perpetuated his fable and, in fact, fleshed it out in the details of the budget he and his fellow Democrats passed last May. Of course, the debt has to be repaid, with interest payments and principal repayments when due. Despite the growth in government debt, debt service has hardly increased due to abnormally low interest rates in recent years. Over the past five years, total interest paid has been between $1.1 billion and $1.2 billion, or essentially flat.

The outlook for interest rates has changed in 2022, as was evident in May of this year when the budget was passed. Yet the Governor and the Legislative Assembly agreed, as stated in the State Treasurer’s Budget, that “future growth in debt service should be limited due to three factors: 1.) improving market borrowing rate…” Really?

In December 2021, the state issued $800 million of general bonds (GO) at a borrowing cost of 1.98%. Last March, the state issued about $200 million of GO at a cost of 3.23%, and in May another $1.0 billion at a rate of 3.68%.

In less than six months, the government borrowing rate has almost doubled. It’s “improvement in market borrowing rates?”

And that’s not counting the 0.75% hike in interest rates by the Federal Reserve in June and before the inevitable 0.75% hike by the Fed at the end of July, after the announcement this week that the inflation reached 9.1% in June.

Adopting a budget based on “improved tariffs” is not just painting a rosy picture; it promotes a misleading and misleading narrative.

In fact, Democrats underplayed the overall cost of servicing debt for fiscal 2023, even compared to the original 2023 credit made in 2021 in an entirely different interest rate environment. The original 2021 appropriation for 2023 was $3.44 billion. The new credit set in May 2022 was $28 million lower, despite the much higher interest rate environment.

This borders on poor budgetary practice.

This is not just a misrepresentation in terms of low interest costs. Undoubtedly, the state will lose hundreds of millions in income tax revenue from its wealthy investors who are now suffering big losses in the markets.

Federal Covid aid money is certain to run out. Indeed, the $2.8 billion of the US bailout should be spent by the end of the current fiscal year. By federal law, it must be spent by the end of calendar 2024.

If, as seems very likely, the economy sinks into short-term recession, other income will dry up.

Yes, the state has a robust “rainy day fund,” or budget reserve, of about $3.6 billion. But that money can quickly disappear with the reversal of the three powerful trends that generated it in the first place, especially if even more money is needed to meet much higher debt service requirements than Lamont expects. and the Democrats.

So what? Spending cuts triggered by the automatic 2017 budget cuts. Or, more likely, tax increases, so Democrats can escape the 2017 cuts and keep spending.