Updated 1:25 p.m. Feb. 24

Tensions built Monday between Gov. Dannel P. Malloy’s administration and state Treasurer Denise L. Nappier over the governor’s controversial proposal to use $325 million in borrowed funds to pay off debt over the next two years.

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Budget director Benjamin Barnes

Three days after Nappier warned the proposal could leave a big hole in the next budget and harm Connecticut’s reputation on Wall Street, Malloy budget chief Benjamin Barnes suggested the treasurer was trying to make her own job easier.

Barnes also noted in his letter to the treasurer that she had gone along with similar borrowing practices in the past – albeit with some important differences.

“We cannot afford to over-budget your debt service account in order to simply make the year easier for your office,” the budget chief wrote to Nappier, who – like Malloy – is a Democrat.

But Nappier has two sets of numbers on her side.

Both her office, and the legislature’s nonpartisan Office of Fiscal Analysis say there’s a big hole in the budget Malloy proposed last week for the next two fiscal years.

The problem specifically lies in the general fund debt service account – which covers payments on borrowing used for school construction and other capital projects. The governor’s plan is at least $325 million shy – according to Nappier and OFA – of what contractually must be paid to investors over the next two years combined.

Even though the administration level represents a 9 percent shortfall from those numbers, Barnes wrote Monday that, “We have made a good faith projection of the expenditure needs and the resources available for them.”

But he also confirmed last week, when questioned by the legislature’s Appropriations Committee, that the proposed budget would rely on what are commonly referred to as “bond premiums” to cover the $325 million gap in the biennial debt service account.

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.

This is a tool that helps the treasurer market bonds, particularly when interest rates are low.

But rather than using those premiums to accelerate debt reduction, Malloy and the Democrat-controlled legislature have used them in recent years to effectively cover operating costs in the budget or to build reserves.

The state has taken more than $400 million in bond premiums since Malloy became governor.

State Treasurer Denise Nappier
State Treasurer Denise Nappier State Treasurer's Office

Nappier, whom Republican legislative leaders have charged with taking premiums unnecessarily to aid Malloy, has said the market determines when premium rates must be offered.

And while she also says she cannot control what governors and legislatures do with the premium proceeds, she proposed legislation this year that would prevent the use of premiums as Malloy has proposed.

“While I certainly appreciate your recent change of view on the practice,” Barnes wrote Monday, “I do not support a change in it at the current time, given that it will result in additional cuts to critical public services.”

Nappier issued a statement Tuesday, writing that, “I’m not interested in a tit-for-tat exchange, to the satisfaction of some critics who merely want to sensationalize the issue.”

But the treasurer also repeated her original concerns, and her request to have a “constructive dialogue” with the administration. “While I have an opposing view, it is not a heated or angry one,” she wrote.

Nappier warned Malloy in her letter Friday that interest rates are expected to rise this fall – a development that traditionally reduces investors’ willingness to pay premiums.

How can the governor even be sure Connecticut can secure $325 million in bond premiums next year?

To count on those funds, “before they are realized,” Nappier wrote last week “is equivalent to counting one’s chickens before they hatch.”

Barnes responded in his letter Monday that the state is obligated to repay its debts to its creditors – regardless of whether there are sufficient funds in the next two-year budget to cover those payments.

But Sen. Robert Kane of Watertown, ranking GOP senator on the Appropriations Committee, said Barnes’s argument ignores two crucial details.

State law requires the governor to propose a balanced budget. If the treasurer and nonpartisan legislative analysts are correct, Kane notes, Malloy’s plan is not balanced.

More importantly, the state Constitution requires that the final budget adopted by the legislature also be balanced. In other words, Kane said, it’s not OK to short-change the debt service account — and create a hole in the budget — since the state must pay regardless of whomever’s estimates are correct.

“What they (Malloy administration officials) will do is pick and choose which obligations they will fund sufficiently, and which areas they feel like stretching the truth,” Kane said. “But there’s a Constitution we have to abide by.”

The Watertown lawmaker added, “I give the treasurer a lot of credit. Finally, someone on the other side of the aisle had the wherewithal to call them out.”

Keith has spent most of his 31 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut’s transportation and social services networks. He has been the state finances reporter at CT Mirror since it launched in 2010. Prior to joining CT Mirror Keith was State Capitol bureau chief for The Journal Inquirer of Manchester, a reporter for the Day of New London, and a former contributing writer to The New York Times. Keith is a graduate of and a former journalism instructor at the University of Connecticut.

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