Nappier gets OK for $550M emergency loan to help state pay its bills
State government may to need secure $550 million in emergency financing to ensure it can pay its bills promptly this winter, according to a plan prepared by state Treasurer Denise L. Nappier and approved Monday by Gov. Dannel P. Malloy.
That proposal wraps a calendar year during which the treasurer frequently had to temporarily transfer funds from various capital programs to keep government’s operating accounts running smoothly.
This marks the second time in three years the state has needed short-term financing to help cover its operating expenses.
“For several months I have reported reduced cash levels for the state, particularly within the common cash pool that funds daily operations,” Nappier wrote Monday in her letter to the governor, adding she recently had to transfer another $362 million from capital programs after operating accounts slipped into the red. “Circumstances now warrant a contingency plan for ensuring adequate cash resources.”
Emergency provisions spelled out in state law direct the treasurer, with the governor’s approval, to borrow funds when the state coffers are at risk of running dry.
“While not something that is undertaken lightly, this action is necessary because of financial decisions that were made over a long period of time,” Malloy spokesman Andrew Doba said Tuesday. “The state’s failure to convert to GAAP (Generally Accepted Accounting Principals,) the exhaustion of the rainy day fund and the decision to borrow to cover operating expenses all contributed to the state’s low cash flow. Allowing access to this line of credit will make sure that service providers and contractors are paid on time for the hard work they do.”
Since the 2009-10 fiscal year, state government has exhausted more than $900 million in emergency federal stimulus aid as well as a nearly $1.4 billion emergency budget reserve, commonly known as Connecticut’s Rainy Day Fund.
Connecticut operates from a common pool that mingles tax revenues, federal grants and receipts from fees and licenses with borrowed funds. Weekly disbursements from the entire common pool average approximately $540 million, according to the treasurer’s office.
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. And for a while, Nappier used these transfers to stave off the need for borrowing, ordering them in January, March, April and June.
In early January, the level of operating cash had fallen to $67.1 million, a level called dangerously low by some lawmakers. By the end of March, the level of operating cash had risen slightly to $382.8 million, but it fell again to $121 million by late May.
Nappier particularly warned of a “significant decline” in available state cash in her June 1 report to the legislature’s Finance, Revenue and Bonding Committee. “The common cash pool balance has fallen substantially during the year,” she wrote. “…The common cash pool is trending downward over time and the need for temporary transfers or other resources is growing.”
The cash flow situation also stems from the state’s budget deficit, and particularly from tax receipts and other revenues that continue to run below levels projected when the budget was adopted last spring. State Comptroller Kevin P. Lembo certified a $415 million deficit Monday in the general fund, which comprises the bulk of spending in this year’s $20.54 billion overall state budget.
Still, the Republican minority in the state House and Senate, which has argued for the past few years that this transfer system helps mask fiscal problems, intensified its complaints this year as the state increasingly raided its capital projects to help pay its bills.
House Minority Leader Lawrence F. Cafero Jr., R-Norwalk, said the Tuesday that the latest development highlights just how bad the state’s finances really are.
“We have reached a new phase: outright borrowing to pay operating expenses,” he said in a written statement. “We need a harsh dose of reality. We cannot simply try to struggle along on a month-to-month basis… Connecticut is essentially out of money and this line of credit underscores that reality.”
“I certainly believe and have believed for a long time that the Democrats will look at tax increases as part of the solution” to balancing the next state budget, Senate Minority Leader John P. McKinney, R-Fairfield said, adding that the cash flow problems may put even more pressure on Malloy to raise taxes in his February proposal. “He has yet to make a definitive statement about not increasing taxes in the next budget.”
Rep. Vincent Candelora R-North Branford, perhaps the most vocal critic of the transfers, called Monday for Nappier to brief lawmakers on the cash pool prior to the special legislative session to close the budget deficit, tentatively set for the week of Dec. 17. “There needs to be a full disclosure of our financial situation,” he said.
“Given the growing deficit projections and continued pressures on cash, I thought it prudent to take this precautionary measure,” Nappier wrote in a statement released Tuesday. “And without a budget reserve fund … this line of credit is essentially a low-cost buffer that makes sense given everything that we’re facing.”
State government did borrow to help pay its bills in 2010 under a plan crafted by Nappier in March 2009 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.
But Doba added that the Malloy is not following Rell’s fiscal playbook. The last governor and legislature also borrowed to close a huge, $1 billion deficit in June 2009 — even though the state still had $1.4 billion in the Rainy Day Fund at the time. By borrowing rather than tapping the budget reserve, Rell and the last General Assembly were able to use that $1.4 billion to artificially prop up an unbalanced budget, effectively pushing growing state fiscal problems — plus interest — two years down the road and into the Malloy administration.
“We are not doing that,” Doba said. “This is a short term line of credit that will cost the state relatively little and allow necessary payments to be made if the treasurer elects to access it.”
Jacqueline Rabe Thomas contributed to this article.
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