State Treasurer Denise L. Nappier Keith M. Phaneuf /
State Treasurer Denise L. Nappier
State Treasurer Denise L. Nappier Keith M. Phaneuf /

Gov. Dannel P. Malloy’s new budget proposal could be $50 million to $74 million out of balance if state Treasurer Denise L. Nappier and the legislature’s nonpartisan analysts are correct about what Connecticut owes on its credit card.

The treasurer, who bumped heads with Malloy on this topic one year ago, told the Appropriations Committee on Tuesday that the governor’s debt service line item is $74.3 million short of what the state needs to pay its investors.

The $2.05 billion debt service appropriation Malloy recommended in the $19.87 billion budget he delivered to legislators last week also falls $51 million shy of what the nonpartisan Office of Fiscal Analysis says is needed.

Debt service costs this fiscal year already exceed the funds the governor and legislators approved last June by about $41 million, Nappier said, adding they caused this problem by adopting “an overly aggressive approach to projecting the use of bond premiums to help fund the debt service budget for FY 2016.”

“Our estimates were based on historic trends – and they’re ones that we believe are obtainable in current market conditions,” said Gian-Carl Casa, spokesman for the governor’s budget office. “As always, the manner in which the deals are negotiated will have an impact on the final number.”

The general fund debt service line item covers payments on bonds issued for municipal school construction, capital projects at public colleges and universities, state building maintenance, open space and farmland preservation, and various smaller projects in legislators’ home districts.

The conflict between Malloy and Nappier — both Democrats — again centers on bond premiums, or  special proceeds the state receives as part of a complex process when borrowing funds for capital projects at a higher rate.

Premiums are an effective tool to market state bonds. Investors sometimes want to pay a premium to acquire bonds that earn higher interest rates, particularly when rates generally are low.

But Connecticut does not use these premiums to accelerate its debt reduction efforts. Rather it uses the proceeds to supplant regular budget funds that otherwise would be used to make debt payments.

In other words, Connecticut is using borrowed funds to make payments on other borrowed funds.

Traditionally, governors and legislatures have not built these premiums into the budget in large quantities.

That changed last year when Malloy proposed funding debt service about $160 million per year below the level Nappier proposed. Bond premiums were to be used to make up the difference.

Nappier called the approach “too aggressive” and warned it could harm Connecticut’s reputation on Wall Street.

In an attempt to compromise, Nappier agreed last April to modify her method of projecting debt service needs that assumes some level of bond premiums will be achieved, using recent experience as a guide.

Rep. Arthur O’Neill, R-Southbury, who serves on the Appropriations Committee, noted that Malloy and Nappier are $74.3 million apart in their debt service forecasts despite the treasurer’s willingness to compromise with a riskier budgeting approach.

O’Neill called the governor’s debt service proposal “a refusal to face reality,” adding he also agrees with Nappier that Connecticut’s misuse of bond premiums threatens the state’s reputation with investors, banks and Wall Street credit rating agencies.

“It clearly has become a very bad habit, a way to make the budget look balanced when it isn’t,” he said. “But there are people who pay really close attention to what we do. They know what we’re doing and I don’t think they’re buying it.”

House Minority Leader Themis Klarides, R-Derby, said Tuesday that a more honest budgeting is ever more critical because of the huge deficits anticipated in the coming years.

“We are facing huge structural budget problems akin to the ones we are seeing today that have to be addressed,’’ she said.

Nonpartisan analysts are projecting deficits topping $1.7 billion and $1.8 billion in the first two new fiscal years, respectively, after the November state elections.

“Treasurer Nappier has been warning about this foreseeable problem for months,” said Senate Minority Leader Len Fasano, R-North Haven. “But each and every time the treasurer and Republican lawmakers sounded the alarm, the governor and Democratic legislative leaders ignored us. They dismissed the warning signs and went forward with their own plans. This is not a new reality. We are seeing a problem today that has been evident and growing for months. It’s not a surprise, but it is still shocking that no one heeded the warnings that were so clear.”

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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