Nearly $600 million borrowed from future capital projects to help state government pay its bills has thrown a wrench into Gov. M. Jodi Rell’s efforts to bond another $260 million for the planned New Haven-to-Springfield commuter rail line.
Rell canceled Wednesday’s scheduled State Bond Commission meeting after leaders of the legislature’s Finance, Revenue and Bonding Committee questioned why the $580 million in short-term borrowing – approved in April 2009 when the state was more than $1 billion in deficit – still hasn’t been repaid.
And Rep. Vincent J. Candelora of North Branford, ranking House Republican on the committee, said he was unaware the financing had been sought to keep the state’s checkbook in balance, and not to finance capital projects.
“There wasn’t any discussion about borrowing for our cash flow at the time,” Candelora, whose finance committee leadership post also makes him a member of the bond commission, said Thursday. “I don’t want there to be any secrets or surprises out there.”
Candelora and his fellow GOP lawmakers already have criticized both Rell, a Republican, and the legislature’s Democratic majority for ordering $2 billion in borrowing over the past year to cover government operating costs.
Despite having nearly $1.4 billion in the state’s emergency reserve, Rell and the legislature agreed last fall to borrow $1.05 billion to cover the 2008-09 budget deficit. This enabled them to use the entire reserve to support the 2009-10 and 2010-11 budgets.
The governor and legislature then agreed to borrow again this past May, approving another $956 million in financing for the current budget–an amount that has been cut to $700 million by recent surplus projections.
And if the state effectively advanced itself another $580 million in April 2009 that will eventually be used for capital projects, why does Rell need another $260 million for the rail project now? Candelora asked.
“I believe it is imperative that the commission members have adequate information prior to its vote,” Candelora wrote this week to Rell, warning he was prepared to vote against further borrowing at the bond commission’s Aug. 11 meeting. The panel, which is being asked to approve $520 million in new general obligation bonding for projects, including $260 million for the commuter line, has been rescheduled to meet Aug. 17.
The governor’s office issued an statement this week indicating the meeting had been delayed because of lawmakers’ concerns about past borrowing. “All of us, including Representative Candelora, the other lawmakers and my administration, deserve to have this extra information before we move ahead,” she wrote.
That borrowing was authorized by Rell, and performed by state Treasurer Denise L. Nappier, in accordance with emergency provisions spelled out in state law. The treasurer is empowered, with the governor’s approval, to borrow funds when the state coffers are at risk of running dry.
Nappier submitted a plan in early March 2009 to Rell, which the governor subsequently approved. The “first line of defense” in that plan stems from a procedure commonly followed when state government finances road repairs, new building construction or other capital initiatives.
The bond commission routinely allocates a fixed amount of borrowing, to be repaid over 15 or 20 years, for such projects. But in the early stages, a relatively small amount of the funds might be needed for tasks such as architectural designs or engineering studies.
This fraction of the total project budget typically is borrowed, at lower interest rates for short terms such as one or two years, through bond anticipation notes.
When the state is ready to move ahead with the bulk of the project, it issues long-term bonds, and uses the proceeds both to repay the anticipation notes and to pay for the remaining work.
Nappier’s plan called for the bond commission to approve $700 million for future capital projects, which it did in April 2009.
The treasurer then used bond anticipation notes to effectively secure an advance of $580 million, to improve the state’s cash flow.
“That plan was reviewed by the governor and shared with the General Assembly,” Nappier wrote this week in a response to Candelora, adding it allowed Connecticut to borrow at rates ranging from 0.47 percent to 1.15 percent. “Had the BANs not been used in FY 2009, to aid the state’s overall cash position, other methods of cash flow borrowing, more than likely at higher interest rates, would have been necessary to ensure our ability to meet the state’s obligations.”
This system works because of state government’s common cash pool, a system that effectively mingles tax revenues, receipts from fees, licenses and penalties, federal grants, and proceeds from borrowing, in one big account.
Originally scheduled to be repaid in June 2010, those notes were extended for another year. Nappier added in her letter that she plans to issue long-term bonds next June to borrow the full $700 million authorized for capital projects back in April 2009, and to use those proceeds to repay the short-term notes.
But what about the $580 million used to shore up state government’s operating budget last year as tax receipts ran low? Is all of that funding effectively still available? If so, why does the Rell administration need more borrowing?
“You want to be able to see how this $580 million fits into the whole context,” Staples said. “The treasurer’s letter provides some information, but it doesn’t provide us with all of the context we need.”
“If we were going to borrow even more money for (operating costs,) this is something that should have been debated by the legislature,” Candelora said.
Staples added committee leaders would be seeking to meet with Nappier in the next few days to better understand the common cash pool.
Candelora and Rep. Craig Miner of Litchfield, ranking House Republican on the Appropriations Committee, questioned during the regular 2010 legislative session whether the state’s operating budget effectively was borrowing from its capital projects to stay afloat.
About 27 percent of the funds in the state’s cash pool at the end of January 2009 came from bonding, while that ratio had jumped to 52 percent one year later, said Candelora, who sponsored a measure enacted this year that requires the treasurer to issue monthly reports on the state’s cash balance starting in October.