The Connecticut State Capitol. Sean Pavone Photography

Ned Lamont had barely been governor for one month in February 2019 when he challenged legislators to go on a “debt diet” and help Connecticut shrink the billions of dollars it owes to bond investors.

But while that endeavor remains a work in progress, Lamont is struggling to kick what many call another bad habit that involves the state’s credit card: using borrowed funds to make payments on borrowing.

The $50.5 billion budget Lamont proposed Feb. 8 for the next two fiscal years would use $80 million in borrowed funds to make payments on borrowing. More importantly, it would continue for two more years, a questionable practice that legislators from both parties took steps to end in 2017.

“We should be in the business of eliminating budget gimmicks as much as possible,” said Rep. Maria Horn, D-Salisbury, co-chairwoman of the Finance, Revenue and Bonding Committee.

“Everybody likes to crow about our fiscal reforms and how good we’re being, but there is always a slow erosion,” said House Minority Leader Vincent J. Candelora, R-North Branford. “I’m concerned that people will forget the history and we will end up in bad practices again.”

The history that grabs headlines includes the decade of the 2010s, most of which was marred by persistent state budget deficits, and more than seven decades of poor savings habits between 1930 and 2010 that left the state’s pension and retiree healthcare programs with more than $60 billion in unfunded obligations.

But there were other problems, although not as glaring, that still needed attention, Candelora said.

Bond premiums

One of them involves “bond premiums” — a standard tool that states often use to market the bonds they issue on Wall Street to borrow money for capital projects. The question is how the Connecticut governor and legislature 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 can be a wash for states. Accepting the premium costs them nothing — if they use the proceeds to immediately start paying back what they’ve borrowed. The back-and-forth arrangement technically allows for a higher interest rate and makes 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 replace state money it must spend to cover future payments on other borrowing — thereby freeing up more money to spend elsewhere in future budgets.

Critics often compare it to using one credit card to make payments on another.

Lamont’s budget proposal envisions using $80 million in bond premium proceeds over the next two fiscal years combined to support state finances.

That’s only about one-sixth of 1% of overall spending he’s proposed.

And it’s a far cry from the nearly $325 million in borrowed funds Gov. Dannel P. Malloy proposed using in his 2015 budget plan to make payments on borrowing.

Former state Treasurer Denise L. Nappier warned in a public letter to Malloy that this practice, if abused, could harm Connecticut’s reputation on Wall Street.

In 2017, the legislature adopted a bipartisan budget that called for this practice to end in the 2019-20 fiscal year. Lamont, who took office in January 2019, convinced legislators to defer this reform until 2023-24. And his latest budget would push things back until July of 2026.

The administration says if legislators want to discontinue this practice, then they have to either cut $80 million in spending from the governor’s proposal, raise $80 million in added revenue or come up with some combination of these two options.

[READ: Lamont has proposed Connecticut’s next two-year budget. What’s in it?]

Still, state finances — in the short term — are in good shape. 

Connecticut holds a record-setting $3.3 billion in its rainy day fund, and the current fiscal year is on pace to close June 30 with $3.2 billion left over, which would be the second-largest surplus in state history.

The current state treasurer, Erick Russell, said Tuesday that the state should make the fix now.

Making the change “is a more fiscally responsible approach that will decrease borrowing and result in long-term savings for taxpayers,” Russell said. “Although implementing this change as originally intended will require additional resources now, it complements the successful efforts by Gov. Lamont and legislators to improve Connecticut's long-term financial well-being. While the current policy was necessary during times of severe budgetary strain, we are now fortunate enough to be in a stronger position to adopt this responsible and forward-looking solution.”

Lamont was successful earlier this year in convincing legislators to renew other budget control measures adopted in 2017 that have helped generate large surpluses in recent years. These include stringent caps on spending and borrowing, as well as savings programs that limit the government’s ability to spend certain tax receipts.

But Candelora noted that legislatures and governors, historically, have found loopholes to get around many budget controls. The best way to ensure all provisions are honored, he added, is to weed out as many fiscal gimmicks as possible, right away.

“Collectively," he said, “we have to keep this conversation going.”

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.