State Treasurer Denise L. Nappier warned Gov. Dannel P. Malloy on Friday that one component of his new budget could harm Connecticut’s reputation on Wall Street.
In a letter released to the media Friday evening, Nappier – a Democrat – called the Democratic governor’s plan to rely on $325 million in borrowing to cover operating costs “too aggressive.”
The new budget the governor proposed this past week includes $1.65 billion next fiscal year to cover general fund debt service and $1.77 billion in 2016-17.
These amounts combined are $325 million shy of what Nappier estimates is necessary to cover contractually obligated payments on state borrowing for municipal school construction and other capital projects. Similarly, Malloy’s recommendations are $328 million less than the legislature’s nonpartisan Office of Fiscal Analysis estimates is necessary.
“Budgeting for fixed costs, such as principal and interest on bonds, is a sound fiscal practice,” Nappier wrote to Malloy. “And failure to do so can become a concern for ratings agencies and investors alike.”
The treasurer added that if she had to request supplemental funding because the adopted budget couldn’t cover Connecticut’s debts, this “may harm its reputation among bondholders and the investment community at large.”
The treasurer wrote she looked forward to meeting with Malloy and his budget staff to solve the issue.
Nappier released her letter to the news media just before 6 p.m. on Friday. The governor’s office said it was reviewing the letter.
Both Malloy and Nappier have faced increasing criticism from Republican legislative leaders over the past year for the state’s growing reliance on what are commonly referred to as “bond premiums.”
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, the governor and the Democrat-controlled legislature have used them in recent years to build up the state’s fiscal reserves, or to close past budget deficits.
Critics argue this not only involves borrowing to cover operating expenses, but it drives up the interest rates the state pays on many of its capital projects.
The state has taken more than $400 million in bond premiums since Malloy became governor.
And Benjamin Barnes, Malloy’s budget chief, confirmed Thursday when questioned by the legislature’s Appropriations Committee, that the proposed budget would rely on bond premiums to cover the $325 million gap in the biennial debt service account.
“This has been a longstanding practice,” Barnes told the committee, adding that the administration would expect critics to find spending cuts elsewhere in the budget to replace the anticipated bond premiums.
But Nappier warned Malloy in her letter that interest rates are expected to rise this fall – a development that traditionally reduces investors’ willingness to pay premiums.
To count on those funds, “before they are realized,” she added, “is equivalent to counting one’s chickens before they hatch.”