Nappier Says Drafting Error Will Constrain Bonding Capacity; Malloy Administration Calls Attorney
HARTFORD, CT — State Treasurer Denise Nappier informed legislative leaders Wednesday that they inadvertently reduced the state’s bonding capacity by failing to include certain exemptions in the budget adjustment it passed in the final hours of the legislative session.
The proposed language adopted by the legislature on May 9 should have exempted refunding bonds and short-term revenue anticipation notes from the $1.9 billion annual cap. The language repeated and adopted as part of the bipartisan budget in October 2017 also exempted $250 million per year in bonds for a transportation initiative.
However, the words “upon passage” were changed to “July 1, 2018” in the recent bipartisan budget bill passed on May 9.
The effective date, according to Nappier, is important because the bond covenant pledges that no changes can be made to the underlying bond cap. And Nappier’s office has already sold bonds twice pledging to adhere to the bond cap, which effectively locks the state into a more restrictive bond cap than initially intended.
That means Connecticut will have less borrowing capacity than initially intended and possibly a cash flow issues into the future since bond funds and operating funds are co-mingled in a common cash pool.
Legislative leaders are taking the news in stride and having their staff review the language before commenting.
Office of Policy and Management Secretary Ben Barnes said in a reply letter to Nappier that he’s “extremely distressed” by her letter and if bond counsel failed to correctly read and interpret legislation then it’s at best “contrary to the will of the legislature, and at worst may harm the ability of future governors and legislatures to finance our capital program in a cost effective manner.”
In the meantime, Barnes said he is going to ask the Attorney General to evaluate the June 20 bond issue and determine “what culpability there may be on the part of bond counsel retained by your office for this transaction, and, if there is culpability, to pursue any appropriate legal action that he may determine to be in the best interests of the state.”
In her letter to lawmakers, Nappier said her “focus is on complying with the initially adopted and more constrained bond cap. If the legislature or administration wishes to effectively restore the enacted exclusions, there appear to be at least three possible options for consideration,” Nappier wrote in the letter.
Legislators, according to Nappier, could pursue legislative or judicial remedies “to what clearly appears to have been an unintended legislative action,” or they could use the emergency clause in the bond covenant, which would require a declaration by the governor and passage by 3/5 majority in each chamber. The state could also seek to refinance the taxable bonds currently in the covenant.
Nappier said they have already issued $889 million in new money general obligation bonds and $1.01 billion remains in the 2019 bond capacity.
The state Bond Commission is expected to bond $497 million in general obligation bonds Thursday and Gov. Dannel P. Malloy isn’t expected to make any changes to the agenda.
There are two more Bond Commission meetings scheduled before the end of the calendar year, which is also effectively the end of Malloy’s term.