Finance Committee Moves To Delay Bond Covenant
HARTFORD, CT — The Finance, Revenue, and Bonding Committee approved a bill Thursday that will delay implementation of what many are referring to as the “bond lock.”
The 26-25 party line vote, which involved some Democratic members switching their votes before the voting closed, would delay the bond covenant that was scheduled to begin on May 15, 2018.
The bill delays, from May 15, 2018, to July 1, 2019, the application of the bond covenant to the state spending cap and the caps on general obligation and credit revenue bond authorizations, allocations, issuances, and expenditures. However, it does not eliminate those caps, which were put in place by the two-year budget signed on Oct. 31, 2017.
Sen. John Fonfara, D-Hartford, who was the main proponent of the bond covenant, said he was the most concerned about the volatility cap and that won’t be delayed.
“This was all for me about the volatility cap,” Fonfara said following Thursday’s vote.
He said the legislation leaves the volatility cap in place and at the moment that’s more important than having the bond covenant for all of the caps.
Rep. Chris Davis, R-Ellington, said he hasn’t had enough conversations about the bond covenant to figure out if it would harm or benefit the state’s bond rating and its ability to borrow in the future.
The bill also requires the Office of Policy and Management (OPM) secretary, attorney general, comptroller, and treasurer to study the use of bond covenants as a mechanism to control state spending and bonding. By January 1, 2019, they must report their findings to the Finance Committee.
The legislation would essentially give a new administration time to decide whether it’s a mechanism they want to keep as part of Connecticut’s budgeting policy or eliminate.
Organizations like Connecticut Voices for Children said the bond covenant was a “novel, untested method of restraining state government.” They testified that it’s an approach to budgeting that has never been tested by any other state.
“To our knowledge and that of our national partners, no other state has attempted this restraint before,” Ellen Shemitz, executive director of Connecticut Voices for Children, testified earlier this month. “As a result, no one knows the full consequences of this provision, even though after it goes into effect, there is little we can do to stop it.”
She said because bonds are considered contracts, Connecticut would be legally bound to maintain these spending and revenue restraints— the spending cap, volatility cap, and bond cap—despite what future governors or legislatures might find to be in the best interests of the state.
“Any effort to break the covenant would invite litigation and risk significant penalties,” Shemitz said.
Connecticut Voices for Children lobbied to delay implementation of the bond covenant. But they weren’t alone.
Office of Policy and Management Secretary Ben Barnes also asked the committee to delay its implementation.
Barnes recommended the legislature consider delaying the effective date to provide time to analyze all the consequences of the language. He said it would also provide the next administration the opportunity to weigh in on the issues.
Alex Knopp, a former legislator and mayor, also lobbied against what he termed the “doomsday” bond covenant.
He worried that if the General Assembly were to take the unlikely step of violating this pledge by amending these budget caps and laws at any time over the next 10 years, the purchasers of the bonds would be able to enforce the covenant in court to demand immediate payment of their principal, interest and penalties, whether or not the state would be in a fiscal position to afford to fulfill its obligations.
Not many lawmakers or even lobbyists were even aware the provision was part of the two-year budget signed by Gov. Dannel P. Malloy last year.
Republicans on the committee voted against delaying it, while Democrats, including Fonfara, voted in favor of the delay.