During his first two years on the job, Gov. Ned Lamont rarely passed up an opportunity to decry Connecticut’s excessive borrowing while pitching a “debt diet” for state government.
Yet the first budget Lamont signed delayed a plan to wean state government off a practice that many fiscal purists find disturbing: effectively borrowing more than $100 million annually to pay off other borrowing.
And now, the Democratic governor wants to abandon that reform effort entirely.
“As a Republican leader that cares about fiscal responsibility, I’m still searching for common ground with this governor,” said House Minority Leader Vincent J. Candelora, R-North Branford, who warned the governor’s proposal could jeopardize Connecticut’s reputation on Wall Street. “This reversal, I think, is not only bad for our [credit] rating agency outlooks, but it encourages that bad behavior that we’ve seen out of legislators.”
Changing how CT uses proceeds from bond premiums
At issue are “bond premiums” — a tool that states use to market the bonds they issue on Wall Street to borrow money for capital projects. More specifically, the question is how Connecticut should use the proceeds from these premiums.
Investors sometimes want a bond that pays a higher rate than the state is offering, which they then can trade on a secondary securities market. To get that higher rate, investors offer a premium — extra dollars, above what a state wants to borrow — that matches the added interest costs.
In theory, it’s a wash for states — accepting the premium costs them nothing, if they add it to the funds already earmarked to retire debt. The higher rates simply make the bonds more attractive to investors.
States also could come out ahead by using these premiums to pay cash for future capital projects, thereby avoiding the addition of more debt to the books.
But Connecticut does neither of these things.
Instead, it uses these borrowed dollars to reduce the amount of state money it must spend to cover its minimum required debt payments each year. Effectively, the premiums are used to control the growth in the debt service account — using borrowed dollars — thereby freeing up more money to spend elsewhere in the budget.
Using one credit card to pay off another
And over time, Connecticut’s reliance on this practice— which critics liken to using one credit card to pay off another — has grown.
From the 2005 through 2010 fiscal years, the state took, on average, $36 million per year in premiums, according to records from the treasurer’s office.
In the first four fiscal years of the Malloy administration, from 2012 through 2015, premiums averaged almost $87 million.
By Malloy’s second term, things exploded.
In 2015, state Treasurer Denise L. Nappier also expressed fears Connecticut’s reputation on Wall Street was in jeopardy when Malloy proposed a two-year budget that relied on an average of more than $160 million per year in annual borrowing to help cover debt costs.
The demand for premiums is driven by the market, not by the state budget situation. And the treasurer cannot control how the governor and legislature use these premiums. But Nappier, who was treasurer from 2005 through 2018, challenged officials frequently to reform the budgeting process, arguing that when demand for premiums is high, it’s vital that Connecticut use the proceeds responsibly.
During Lamont’s first full fiscal year in office, 2019-20, the state used $125.7 million in bond premiums to support the budget, according to the treasurer’s office. And another $117.8 million is projected to go for that purpose this fiscal year.
Lamont’s latest biennial budget proposal also relies on using $218.2 million in borrowed dollars — or slightly more than $109 million per year — to make the minimum payments on borrowing, according to the treasurer’s office.
“What about his debt diet?” asked Senate Minority Leader Kevin Kelly, R-Stratford.
With about $27 billion in bonded indebtedness, Connecticut is one of the most indebted states, per capita, in the nation.
“In what world is borrowing to pay off your borrowing debt a smart decision?” Kelly said. “It’s not how middle-class families balance their household budgets. Yet it is the middle-class who suffer most when government engages in these dangerous financial practices.”
Lamont’s deputy budget director, Kosta Diamantis, urged officials to consider the current context, which includes a coronavirus-induced economic downturn, low interest rates and significant projected budget deficits.
Analysts warned in February that state finances, unless adjusted, would run about $2.6 billion in deficit over the next two fiscal years combined.
Maintaining the current system “would preserve General Fund resources in the present, thereby helping close our budget gap and avoid taking steps such as tax increases or additional cuts to services,” Diamantis added.
But Connecticut has more than $3 billion in its emergency budget reserve, commonly known as the rainy day fund. And state officials also are projecting the state will receive close to $2.7 billion in new federal aid that can be used to help balance the next state budget, based on the relief package recently enacted by Congress.
And it’s not just Republicans who say it’s too soon for Connecticut to abandon the borrowing reform effort.
The current state treasurer, Shawn T. Wooden — like Nappier, a Hartford Democrat — also said Tuesday that Connecticut should not repeal this initiative.
But Wooden added that if Lamont and lawmakers decide it’s in the best interest to defer this reform — given the economic challenges of the pandemic — “I would support a delay in the implementation of this provision for two more years to put Connecticut in the best fiscal position during this economic recovery period.”
Sen. John Fonfara, D-Hartford, co-chair of the Finance, Revenue and Bonding Committee, also said Connecticut shouldn’t stop trying to abandon this practice.
The bipartisan budget enacted four years ago included many fiscal reforms, including new spending and borrowing caps, two programs to force greater budget savings — and an end to using bond premiums to support the state budget starting in 2019.
The first budget Lamont signed, in June 2019, delayed that reform effort for two years. His second budget recommends canceling it entirely.
“Spending volatile revenue is one of the more obvious issues that needed to be addressed” in 2017, Fonfara said, “but there are other, less obvious ways in which we’re not budgeting honestly that is costing the taxpayers of the state much more than we need to.”