Connecticut Attorney General George Jepsen on Wednesday issued a formal opinion saying a mistake in a June bond sale covenant will not impact the state’s ability to borrow over the $1.9 billion bond cap.
State Treasurer Denise Nappier informed lawmakers in September that due to a “drafting error” in the June bond issuance, certain exceptions to the bond cap were not included in the bond covenant language, possibly hurting Connecticut’s credit rating if lawmakers borrowed more than $1.9 billion per year for the next five years.
Lawmakers voted to allow two exceptions to the bond cap for the purpose of refinancing old debt and supporting transportation spending, but the legislation was not effective until July 1, 2018 and the June bond covenant did not account for the change.
Gov. Dannel Malloy’s administration and the State Treasurer’s Office sought a formal opinion from Jepsen after Nappier alerted lawmakers to the conflict.
According to Jepsen’s opinion, the bond covenant should be interpreted to include the exceptions because the state statutes should be read as a “coherent whole,” and bondholders should have been known about the legislation before purchasing the bonds.
“This interpretation is not only reasonable, but also entirely fair to bondholders who purchased the bonds with the covenants, as the they would be presumed to have purchased them with full knowledge of these legislative actions, all of which had been completed well before the first bond sale with the new covenants,” Jepsen wrote.
According to both Jepsen and the law firm Shipman & Goodwin, government legislation should be seen as an intent to create a “harmonious and consistent body of law,” and the error in the June bond covenant would “eviscerate” legislative intent.
Jepsen and Shipman & Goodwin say there is no definitive way to predict how a court would rule on the issue, but Jepsen’s formal opinion is a greenlight for the state Bond Commission to move forward with the bond cap exemptions passed in 2018.
Connecticut refinances old debt in an effort to save money on debt service payments – one of the fast-growing fixed costs in state government which is crowding out other spending.
As of 2019, Connecticut’s fixed costs – which also include Medicaid and retirement benefits – will take up more than 50 percent of the state budget.
Lawmakers also voted to allow an exception to the cap for issuing $250 million in General Obligation bonds to help support the state’s Special Transportation Fund.
The legislature voted to cap state borrowing at $1.9 billion as part of the 2017 budget agreement, after bonding increased significantly over the past eight years. Connecticut’s significant debt has been cited in credit rating downgrades by ratings agencies.
In statement issued by the Treasurer's Office, Nappier said "I am pleased that the Attorney General has reconciled ambiguous statutory language that would have required conflicting action on my part."
Nappier said Jepsen's opinion is "clearly consistent with our lawmakers’ intent, and will clear the way for the State to benefit from lower cost refunding, and to fund GO Transportation bonds without counting against the bond issuance cap.”
It remains to be seen whether bond holders or ratings agencies will agree with Jepsen’s opinion.