In less than three weeks, state government will contractually bind itself to a new series of budgetary controls for the next five years despite numerous warnings the maneuver could cause fiscal chaos.
State Treasurer Denise L. Nappier announced this week she will issue $500 million in bonds on June 4 on Wall Street — bonds that will include the so-called “bond lock” provision mandated by the General Assembly.
“This bond covenant is a declaration to the municipal finance marketplace of Connecticut’s seriousness in addressing its fiscal challenges,” Nappier said. “Every bond issued with this covenant will include a pledge that the state will address its long-term liabilities, rein in spending and borrowing, and rebuild its Budget Reserve Fund. This is the clearest message yet that Connecticut is on a much needed disciplined path in managing its fiscal affairs.”
In late October 2017, the General Assembly approved four new fiscal controls as part of a bipartisan budget deal.
- A spending cap that says the annual growth in this area cannot exceed average personal income growth in Connecticut or inflation, whichever is greater.
- A bond cap that prohibits the state from issuing more than $1.9 billion in bonding per year. The limit is adjusted annually to reflect the federal Consumer Price Index’s rate of inflation.
- A volatility cap that forces the state to save, rather than spend, any income tax receipts from quarterly filings — which stem chiefly from capital gains and other investment earnings — in excess of $3.115 billion per year. This limit is adjusted annually to reflect growth in personal income.
- And a revenue cap that also forces the legislature to save more funds. Lawmakers can appropriate only 99.5 percent of all estimated revenues, starting in 2020. The other one-half of 1 percent must be saved. This target gradually increases annually until 2 percent must be saved starting in 2026 and continuing at that level thereafter.
To make sure these caps stay in place, legislature mandated the state must pledge not to alter these caps for 10 years in the covenants accompanying bonds issued after May 15, 2018. The covenant essentially is a contract between the state and the investors that buy its bonds.
But several individuals and groups warned this would leave Connecticut with little flexibility to respond to a fiscal crisis. This included Gov. Dannel P. Malloy; the state Commission on Fiscal Stability and Economic Growth; some Democrats and Republicans on the legislature’s Finance, Revenue and Bonding Committee; and progressive policy groups like Connecticut Voices for Children and 1,000 Friends of Connecticut.
Former Norwalk Mayor Alex Knopp, a member of 1,000 Friends and also a former state representative, dubbed it the “doomsday bond covenant” and “possibly the worst piece of legislation enacted in Connecticut” in more than 50 years.
“It commits the state’s finances to an automatic, irreversible course of self-destruction with no realistic, built-in escape mechanism or effective emergency delay provision,” Knopp said about the bond-lock provision earlier this year in testimony before the fiscal stability commission.
Legislators agreed this spring to reduce the “bond-lock” pledge from 10 years to five.
They also stipulated this pledge must lock into place an existing debt limit statute for the next five years. This measure says general obligation debt — bonds paid off using resources from the General Fund, such as income, sales and corporation taxes — may not exceed 1.6 times General Fund tax receipts.
The “bond-lock” pledge does have an emergency provision that allows the legislature to alter any of the new caps or the debt limit statute during the five-year restricted period provided:
- The governor signs a declaration of fiscal emergency.
- And three-fifths of both the House and Senate support the change.