Moody's Downgrade of Connecticut's Bond Outlook a Cautionary Tale for Rhode Island?
Monique Chartier
We are now broaching a topic about which I know almost nothing. But certain aspects of this situation sound familiar.
The bond rating agency Moody’s Investors Service announced on Monday it has lowered its outlook for Connecticut’s general obligation bonds from stable to negative. At the same time, the agency said it held its rating for the state’s outstanding GO bonds — amounting to approximately $12 billion — at Aa3.
The agency released a report describing the factors it used to come up with its negative rating, which included the state’s need to issue deficit bonds to resolve this year’s budget shortfall, and the non-recurring solutions and deficit financing used to close revenue gaps in the state’s 2010 – 2011 biennial budget.
“Connecticut used one-time solutions to close slightly over half of the (biennial budget’s) shortfall,” the report says, and “these solutions create future structural budget gaps and leave the state with significantly reduced flexibility to address additional fiscal pressures that may arise due to a delayed and/or weaker than expected recovery from the worst economic recession since the depression.”
Rhode Island has tapped one time fixes - tobacco revenue in at least two years and, most recently, federal stimulus money - to close state budget gaps. This is clearly not something that makes bond raters comfortable.
Rhode Island has not, however, gone to the length of issuing bonds to cover the prior year's annual operating shortfall. (If we have, I don't think I want to know.)
Moody’s specifically mentioned the [Connecticut] General Assembly's issuing of $947 million in bonds to help cover last fiscal year’s shortfall.
Break out the champagne! Another state has done worse than us in the budgeting department!
Unfortunately, Rhode Island has, in fact, been covering prior year deficits with long-term borrowing, to the tune of $200 million plus, in the form of financing the shortfalls caused by the redemption of historic tax credits. It works this way: developers built such structures as the rehap of the Masonic Hall and received negotiable tax credits that they sold to oil companies. Years later, the oil companies cash in on the tax credits causing deficits. Instead of taking it on the chin, the state borrows long-term to cover the deficits. In the case of the Masonic Hall, EDC borrowed tens of millions from banks to cover that exposure. Another trick is to borrow against future federal highway grants. About 40% of the highway program is spent on debt service to cover these programs.
Hey, just put Tom Sgouros in touch with Moody's.
He'll be able to construct some analyses that conclusively show that RI should have a credit line that extends into infinity.
This, of course, assumes that Mr. Sgouros will be available to enlighten the misinformed analysts from Moody's, as his schedule will be rather crowded preparing his acceptance speech for the Nobel Prize in Fiction.
Actually Monique there is currently 41 to 46 states that could file Chapter 9 bankruptcy as of October 22, 2009.
Obama hasn’t even been in office for a year yet. Things of this nature don’t happen over night so one must look back at the previous years and policies to see what brought us to this point.
Hawaii does a FY budget for two years and that is why the budget deficit for Hawaii is so large. Currently there is almost a balanced budget (little more tweaking by Gov. Linda Lingle (R)) out to 2011.
So yes! Break out the champagne as the whole USA sinks into bankruptcy!
http://tommytoy.vox.com/library/post/41-states-in-danger-of-declaring-bankruptcy.html
Richard Langseth,
It was proven and documented to Smith Hill by independent out of state auditors that the State of Rhode Island Historic Commercial Tax Credit was generating $5 to the local economy (taxes, employment, material supplies, jobs, high end, housing and affordable housing plus added commercial space) for every $1 in tax credit returned by the state of RI.
The historical tax credit was lauded by Washington, DC and hailed as a model for the rest of the nation after a FIVE YEAR STUDY. Rhode Island was on the cutting edge and a leader to the other states in the nation.
Then the recession took hold and Smith Hill lumped the historic tax credit with the film tax credit.
At a time when RI needed business, taxes, jobs and putting buildings back on the tax rolls; HYSTERIA AND MISINFORMATION caused the historic tax credit program to be shut down (Note: it’s running fine in other states based on the RI model!). Don’t forget, for every $1 in tax credit $5 was generated in the State of RI (that’s better than the lottery!)
I can’t tell you how many jobs and projects were put on hold, canceled or shut down like most notably the recent pull out of Struever Bros of NY citing the rescinding of the RI commercial historic tax credit.
RI has lost close to $1B in historical restoration projects and income since it rescinded the historic tax credit last year.
There are probably far less jobs Justin could be involved in because of this stupidy!
Way to go RI and Richard Langseth for your information; cut your nose off in spite of your face!
Ken, it's not clear why you are criticizing Richard. He did not comment on the historic tax credit program itself or deny that historic tax credits are a boost to public revenue overall. He simply pointed out that the state did, indeed, bond to cover shortfalls from prior years (which was my question) in order to finance "the shortfalls caused by the redemption of historic tax credits".
Are you contending that the state did not issue such bonds?
By the tone, it sounds like Ken is contending that Richard put RI into bankruptcy.
Monique,
The way the Commercial Historic Tax Credit program worked was the developer paid a percentage up front to the State of RI for the future tax credits which the developer would receive at the end of the project.
The Commercial Historic Tax Credit program as designed and implemented was self sustaining in that multiple independent outside audits of the program proved the program for every $1 in tax credit generated $5 in economic State of RI activity was created.
The State of RI could invest the up front credit funds gaining interest but what I expect happen with the funds was they were not placed in a restricted-receipts account but went into the big RI black hole known as the General Fund.
That is the only reason a bond would be need to be floated to cover the cost of Commercial Historic Tax Credits.
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Unfortunately, Rhode Island has, in fact, been covering prior year deficits with long-term borrowing, to the tune of $200 million plus, in the form of financing the shortfalls caused by the redemption of historic tax credits. It works this way: developers built such structures as the rehap of the Masonic Hall and received negotiable tax credits that they sold to oil companies. Years later, the oil companies cash in on the tax credits causing deficits. Instead of taking it on the chin, the state borrows long-term to cover the deficits. In the case of the Masonic Hall, EDC borrowed tens of millions from banks to cover that exposure. Another trick is to borrow against future federal highway grants. About 40% of the highway program is spent on debt service to cover these programs.
Posted by: Richard Langseth at November 1, 2009 11:27 PMHey, just put Tom Sgouros in touch with Moody's.
He'll be able to construct some analyses that conclusively show that RI should have a credit line that extends into infinity.
This, of course, assumes that Mr. Sgouros will be available to enlighten the misinformed analysts from Moody's, as his schedule will be rather crowded preparing his acceptance speech for the Nobel Prize in Fiction.
Posted by: Ragin' Rhode Islander at November 1, 2009 11:31 PMActually Monique there is currently 41 to 46 states that could file Chapter 9 bankruptcy as of October 22, 2009.
Obama hasn’t even been in office for a year yet. Things of this nature don’t happen over night so one must look back at the previous years and policies to see what brought us to this point.
Hawaii does a FY budget for two years and that is why the budget deficit for Hawaii is so large. Currently there is almost a balanced budget (little more tweaking by Gov. Linda Lingle (R)) out to 2011.
So yes! Break out the champagne as the whole USA sinks into bankruptcy!
http://tommytoy.vox.com/library/post/41-states-in-danger-of-declaring-bankruptcy.html
Posted by: Ken at November 2, 2009 12:26 AMRichard Langseth,
It was proven and documented to Smith Hill by independent out of state auditors that the State of Rhode Island Historic Commercial Tax Credit was generating $5 to the local economy (taxes, employment, material supplies, jobs, high end, housing and affordable housing plus added commercial space) for every $1 in tax credit returned by the state of RI.
The historical tax credit was lauded by Washington, DC and hailed as a model for the rest of the nation after a FIVE YEAR STUDY. Rhode Island was on the cutting edge and a leader to the other states in the nation.
Then the recession took hold and Smith Hill lumped the historic tax credit with the film tax credit.
At a time when RI needed business, taxes, jobs and putting buildings back on the tax rolls; HYSTERIA AND MISINFORMATION caused the historic tax credit program to be shut down (Note: it’s running fine in other states based on the RI model!). Don’t forget, for every $1 in tax credit $5 was generated in the State of RI (that’s better than the lottery!)
I can’t tell you how many jobs and projects were put on hold, canceled or shut down like most notably the recent pull out of Struever Bros of NY citing the rescinding of the RI commercial historic tax credit.
RI has lost close to $1B in historical restoration projects and income since it rescinded the historic tax credit last year.
There are probably far less jobs Justin could be involved in because of this stupidy!
Way to go RI and Richard Langseth for your information; cut your nose off in spite of your face!
Posted by: Ken at November 2, 2009 1:19 AMKen, it's not clear why you are criticizing Richard. He did not comment on the historic tax credit program itself or deny that historic tax credits are a boost to public revenue overall. He simply pointed out that the state did, indeed, bond to cover shortfalls from prior years (which was my question) in order to finance "the shortfalls caused by the redemption of historic tax credits".
Are you contending that the state did not issue such bonds?
Posted by: Monique at November 2, 2009 8:18 AMBy the tone, it sounds like Ken is contending that Richard put RI into bankruptcy.
Posted by: Patrick at November 2, 2009 9:40 AMMonique,
The way the Commercial Historic Tax Credit program worked was the developer paid a percentage up front to the State of RI for the future tax credits which the developer would receive at the end of the project.
The Commercial Historic Tax Credit program as designed and implemented was self sustaining in that multiple independent outside audits of the program proved the program for every $1 in tax credit generated $5 in economic State of RI activity was created.
The State of RI could invest the up front credit funds gaining interest but what I expect happen with the funds was they were not placed in a restricted-receipts account but went into the big RI black hole known as the General Fund.
That is the only reason a bond would be need to be floated to cover the cost of Commercial Historic Tax Credits.
Posted by: Ken at November 2, 2009 5:10 PM