When Connecticut issued bonds in June of 2018, the bond covenant said Connecticut would strictly adhere to its new $1.9 billion bonding cap until 2023 -- with no changes to underlying statutes and no exceptions.
However, language contradicts the legislature's loosening of the bond cap in May of 2018, allowing Connecticut to exceed the cap to refinance existing debt and bond $250 million to help the state's ailing Special Transportation Fund.
The result is a case of accidental fiscal restraint for a state which has relied heavily on bonding over the past eight years.
According to a letter from State Treasurer Denise Nappier, a change to the date when the cap became effective and a “drafting error” strictly ties Connecticut to the cap as part of the June bond covenant, regardless of whether or not the bond issuance is to refinance debt.
The legislation allowing Connecticut to exceed the cap for purposes of refinancing and supporting transportation was originally drafted to be effective upon passage.
A last minute change pushed the effective date to July 2018, but the change was not accounted for in the June bond covenant, nullifying the changes made by the legislature for the next five years.
"Legislation enacted during the General Assembly's 2018 session to amend the State's General Obligation bond issuance cap contained a drafting error that may reduce the State's bonding capacity beyond what the legislature intended and, in turn, may result in future cash imbalance," Nappier wrote in a September 18 letter to Gov. Dannel Malloy
Nappier went on to write, “The failure to effectively exclude refunding bonds from the cap on bond issuance may require the State to forego opportunities to refund outstanding bonds to achieve debt service savings in order to reserve the capacity for new bonds to cover expenditures."
Connecticut could be left in a situation where it will have to choose between funding further projects and refinancing debt to save money.
More likely, the state will just have to borrow money more selectively and limit projects to ensure it remains under the cap.
Violating the $1.9 billion bond cap – even for the purpose of refinancing to save money – between now and 2023 could result in a technical default at a time when Connecticut faces serious budgetary shortfalls over the next two biennium, something Nappier says she will not allow.
Rep. Chris Davis, R-Ellington, who serves on the Connecticut Bond Commission and was a strong proponent of the bonding cap, says the covenant language "makes it a much stronger cap," even if it the stronger restriction was due to a mistake.
"It would put further restrictions on the next administration," Davis said. "The bond cap is intended to be a limit, not a goal to reach for any administration."
Davis says he believes the state was issuing "around $500 million per year" in debt refinancing, so the bond covenant language could take bite out of the state's ability to issue bonds or refinance.
The state has already issued $889 million in new bonds during fiscal year 2019, including $239 million in bond refinancing, according to State Treasurer’s Office Spokesman David Barrett.
“Thus, only $1.01 billion remains in FY 2019 bonding capacity for additional GO purposes, other refunding opportunities, and the $250 million GO transportation initiative,” Nappier wrote.
In an effort to shore up the state’s Special Transportation Fund, the legislature agreed to finance $250 million in transportation funding through General Obligation bonds for the next two years.
The State Treasurer’s Office says that while Connecticut is constrained to the cap, it is not worried.
Deputy Treasurer Lawrence A. Wilson says the state’s available bond capacity is expected to be sufficient for this year and Connecticut has alternative borrowing options if it gets into trouble.
"When necessary, the State of Connecticut undertakes short-term cash flow borrowing, most recently through a line of credit in 2009, pursuant to a separate section of the general statutes that is not covered by the state’s General Obligation bond issuance cap. Thus, the cap would not constrain the state’s ability to meet its short-term obligations,” Wilson said. “Furthermore, cash balances are at historic levels."
According to an October 1 letter from Nappier to both the Appropriations Committee and the Joint Committee on Finance, Revenue and Bonding, Connecticut has $3.9 billion in total available cash, due to "higher than anticipated receipts" during the month of August.
However, that cash is already earmarked to pay the state's bills and cover bonded projects. Connecticut's emergency reserve fund is projected to reach $2 billion by June of 2019, but the state faces large deficits for the foreseeable future.
The bonding cap was put in place to limit Connecticut’s borrowing, which has grown significantly over the past eight years. Debt service payments are projected to be $2.8 billion in 2019.
At 13 percent of General Fund expenditures, debt service constitutes one of the fast-growing “fixed costs” in state government.
For now, the bond covenant will ensure that Connecticut strictly adheres to the bonding cap, regardless of what the bonds are issued for, until 2023.
Davis believes the governor's office and Attorney General's Office are investigating whether the situation can be fixed.
The governor’s budget chief and member of the state Bond Commission, Benjamin Barnes, did not appear pleased with the development.
In a September 19 letter, Barnes wrote the bond covenant is “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.”