Though Gov. Dannel P. Malloy insists spending cuts will be used to close this year’s $100 million budget deficit, GOP lawmakers say the Democratic governor is poised to quietly use a rarely publicized bonding tool to effectively close much of the shortfall with borrowing.
Senate Minority Leader Len Fasano of North Haven and Deputy House Minority Leader Vincent Candelora of North Branford, both challenged the administration this week to forego using certain proceeds from bonds sold at premium rates to balance the books.
That follows a report late last week from the legislature’s nonpartisan Office of Fiscal Analysis that the budget’s prime account for paying principal and interest on state debt is on pace to finish $105 million in the black.
“This is one of the best-kept secrets in the building,” Candelora, a veteran member of the Finance, Revenue and Bonding Committee, said Monday. “It is essentially like borrowing to build up your savings account. It doesn’t make sense, and it’s the lack of transparency that allows these types of practices to occur.”
“They know this is very complicated stuff,” Fasano added. “You are selling out the taxpayers of the future to get operating income today. If businesses did that, they would be out of business.”
At issue is a tool that helps the treasurer’s office market the state bonds sold on Wall Street to finance school construction and other major capital projects.
The state, in some instances when issuing bonds, will pay a higher interest rate than originally planned, in return for a premium – extra money to the state in addition to the bonds’ face value.
Besides being an effective marketing tool, bond premiums also provide states with additional funds that then can be used to pay off high-interest-rate debt, or to avoid future debt by paying cash for certain projects.
But governors and legislatures also have used bond premiums – usually during times of fiscal crisis – to effectively turn the bonding process into a piggy bank to support the state’s operating budget.
If the state uses the premiums to replace funds already budgeted to reduce debt — rather than to augment them — it leaves a surplus in the debt service account. And if Malloy and the legislature reassign those funds to cover deficits in other areas in the budget, Connecticut effectively will be paying interest to operate government day-to-day.
According to records from the treasurer’s office, the state had taken $41 million in bond premiums through the first four months of the fiscal year.
The treasurer’s office said the state took another $37.7 million premium this week on $300 million in new bonds. That means more than $78 million has been added to the budget’s debt service line item since the fiscal year began.
Could those funds be used to close the deficit?
The governor’s budget office would not rule out that possibility.
“To use the debt service lapse for non-related line items requires legislative approval,” Gian-Carl Casa, spokesman for the governor’s budget office, wrote in a statement Tuesday. “That said, reducing the state’s long-term obligations has always been a goal of the governor’s, and as we confront the present and future budget challenges, that will remain a priority.”
Malloy relied heavily on bond premiums during his first three years in office, using more than $160 million to close budget deficits or to bolster the emergency reserve, connonly known as the Rainy Day Fund.
The governor did announce $48 million in emergency budget cuts last week. And he asked the Legislative and Judicial branches and the state’s watchdog agencies – which are exempt from emergency cuts – to voluntarily accept another $7 million in reductions.
This would reduce the $100 million deficit to $45 million.
But Republican lawmakers said last week that they fear the shortfall will grow again. One particular area of concern involves a warning from Comptroller Kevin P. Lembo, who estimated last spring that the new budget lacked $52 million to cover contractually-required health care benefits for retired workers.
Both Candelora and Fasano added they would introduce legislation in 2015 to require the treasurer to report monthly to the General Assembly on all bond premiums taken, and on the interest rates involved.