Cash flow report sparks fears state may need to borrow to pay bills on time

A new report showing state government continues to tap into its capital project accounts to pay its operating bills sparked bipartisan fears Wednesday that Connecticut may need a loan later this year to keep its finances running smoothly.

And though state Treasurer Denise L. Nappier also wrote that total available cash remains "adequate" right now, she added that pressures on the state's cash flow continue to mount.

"The common cash pool balance has fallen substantially during the year," Nappier wrote June 1 in her monthly report to the Finance, Revenue and Bonding Committee. "...The common cash pool is trending downward over time and the need for temporary transfers or other resources is growing."

There has been a "significant decline" over the past 12 months, the treasurer wrote. The balance stood at $121 million on May 26, down from $895 million at the same point in 2011.

Weekly disbursements from the entire common pool average approximately $540 million, according to the treasurer's office.

The treasurer, a Hartford Democrat, also noted that her office transferred funds from capital programs both in early June and in April to help cover operating costs. This also was done in January and March.

Connecticut operates from a common pool that mingles tax revenues, federal grants and receipts from fees and licenses with borrowed funds. The treasurer's office is allowed to transfer dollars -- temporarily -- between operating and capital programs. Though it is done infrequently, it has been employed during tough fiscal times when bills exceed tax and other operating fund receipts.

Minority Republicans in the House of Representatives bristled in March when Nappier accused them of "misleading" voters about the health of state finances.

"Either the legislators ... do not understand the nuances of how we manage the state's cash, or they chose to purposely mislead the general public for political ends," the treasurer said in March.

But GOP legislative leaders reacted strongly Wednesday after learning the state has raided its capital programs four times in less than six months.

More importantly, said House Minority Leader Lawrence F. Cafero, R-Norwalk, Nappier's report makes it clear this practice likely will continue.

"We're in trouble as a state. This is a very disturbing trend," he said, adding that it appears Nappier has been "misleading" the public and the legislature. "This is a situation that has been known for months and it's getting worse. When you camouflage or cover up fiscal problems, you make them worse."

In early January, the level of operating cash had fallen to $67.1 million, a level Cafero called "perilously low." By the end of March, the level of operating cash had risen to $382.8 million.

"My office will be prepared to address this potential situation, when and if necessary, and will do so in a timely manner, Nappier responded in a written statement released late Wednesday afternoon. "In the meantime, I have no intentions of splitting hairs over  the timing of and/or degree to which the state's cash flow has and continues to experience pressure.  Make no mistake: Our cash flow is inextricably linked to the State's fiscal challenges."

Nappier wrote that the lack of any emergency budget reserves, as well as the method used to close this fiscal year's state budget deficit, have put more stress on the cash flow situation.

But Deputy House Minority Leader Vincent J. Candelora, R-North Branford, a member of the finance panel and one of the most vocal critics of Connecticut's common cash pool system, said Nappier's report tells only half the story.

State government drained the entire $1.4 billion Rainy Day Fund it held as late as 2009, assigning it to help close deficits -- and postpone deep tax hikes or spending cuts -- in 2010 and 2011.

And lawmakers backed Gov. Dannel P. Malloy's plan last month to divert more than $200 million originally dedicated to pay off 2009 operating debt to instead close the current deficit.

Had the legislature instead cut $200 million in spending, the cash flow would be in better shape, Candelora said.

But none of that can mask the fact that despite more than $1.5 billion in state tax and fee increases ordered in May 2010, "revenues are not coming in at the pace that was anticipated and we are failing to achieve the budget (savings) that we were counting on," Candelora said.

Candelora said, "I find this new letter to be ominous," and both he and Cafero predicted state government may be borrowing funds soon.

And it wasn't just Republicans who expressed this fear Wednesday.

Sen. Eileen M. Daily, D-Westbrook, co-chairwoman of the finance committee, said she also is concerned that formal borrowing could be on the horizon.

Daily said she and the committee's other co-chairwoman, Rep. Patricia Widlitz, D-Guilford, wrote to Nappier this week asking for more detail about the state's cash position.

"We're eager to know exactly what is happening," Daily said. "Representative Widlitz and I share the same concern that Representative Candelora has" about potential borrowing.

While the need for external funding sources is possible, it is not probable at this point," Nappier wrote in her statement.  "We are not currently planning to request authority for any short-term cash flow borrowing.

Malloy's budget director, Office of Policy and Management Secretary Benjamin Barnes, said Wednesday that "I hope it doesn't come to that, but it certainly could happen, especially if we suffer an economic downturn. I certainly share the concern."

Barnes said he also believes most of the pressures on the state's cash flow stem from earlier, poor business practices that the Malloy administration hopes to reverse.

Besides the depletion of the emergency reserve, state finances have been hindered for decades by operating on a modified cash basis, he said. Malloy has pledged to convert them to Generally Accepted Accounting Principles. Under that reporting system, expenses must be promptly assigned to the year in which they were incurred. Similarly, revenues are counted in most situations in the year in which they were received.

Under the GAAP system, the state would need to have another $1.7 billion in the bank to be in balance.

Lastly, Barnes noted that the cash flow also was strained by revenues that have not grown as quickly as officials' originally hoped. Fiscal analysts for the governor and legislature reported in late April that the state can expect $234 million less in tax and other revenue next fiscal year than originally forecast, and $311 million less in 2013-14.

State government did borrow to help pay its bills in 2010 under a plan crafted by Nappier and approved by then-Gov. M. Jodi Rell. The state obtained $580 million in bond anticipation notes -- effectively a short-term loan -- that were paid off one year later with an interest charge of about $10 million.

Cafero and Candelora said Nappier should appear before the finance committee now, adding that the issue can't wait until the regular 2013 legislative session starts Jan. 9.

Nappier added that she remains available to meet with legislators. "If and when updated projections forecast a more dire situation, I believe it would then be appropriate to meet with the Finance and Appropriations Committees in joint session," she wrote. "As matters stand right now, we are not in such a position because we are managing the state's cash needs with available resources."

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