GOP wants to team up with Democratic treasurer to rein in ‘bond premiums’ [CT Mirror]

January 20, 2015

CT Mirror

Republican legislative leaders hope they have a key Democratic ally in their fight to reform state budget practices tied to borrowed funds.

Treasurer Denise L. Nappier, a Hartford Democrat, and nearly a half dozen GOP lawmakers have said they want to restrict how the state uses proceeds from bonds sold at premium rates.

“The question is, is there really a growing bipartisan fiscal concern?” Senate Minority Leader Len Fasano, R-North Haven, asked. “It seems we have had a 180-degree shift post-election.”

Fasano and his fellow Republicans have been complaining for more than a year now that Gov. Dannel P. Malloy and his fellow Democrats in the legislature’s majority have taken advantage of a little-publicized aspect of the state’s bonding process to close budget deficits and build reserves with borrowed funds.

At issue is a tool that helps the treasurer’s office market the state bonds sold on Wall Street to finance school construction and other major capital projects.

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.

Besides being an effective marketing tool, bond premiums also provide states with additional funds that then can be used to pay off high-interest-rate debt, or to avoid future debt by paying cash for certain projects.

But governors and legislatures also have used bond premiums – usually during times of fiscal crisis – to effectively turn the bonding process into a piggy bank to support the state’s operating budget.

If the state uses the premiums to replace funds already budgeted to reduce debt — rather than to augment them — it leaves a surplus in the debt service account. And if Malloy and the legislature reassign those funds to cover deficits in other areas in the budget, Connecticut effectively will be paying interest to operate government day-to-day.

And the GOP notes that Connecticut has paid premium rates far more frequently since Malloy took office in 2011 than it did under the prior administration of Republican Gov. M. Jodi Rell.

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 have averaged almost $87 million.

The 2011 fiscal year was split, with Rell serving as governor during the first six months and Malloy during the final six. The state took $74.6 million in premiums that year – almost all of it occurring during the Malloy administration.

Deputy House Minority Leader Vincent J. Candelora, R-North Branford, said the trend is very clear: taking bond premiums has become much more frequent over the last four years.

Nappier’s GOP challenger during last fall’s campaign, Shelton First Selectman Tim Herbst, charged that the treasurer took premiums and issued bonds at higher rates to secure more funds to help Malloy close budget deficits.

But Nappier has said on several occasions – most recently at last Monday’s State Bond Commission meeting – that “it really is driven by the market.”

The treasurer noted that when interest rates are low – which they have been throughout Connecticut’s lengthy recovery from The Great Recession – investors are more likely to pay premiums and insist upon higher rates of return.

Nappier added that it is up to the legislature and the governor to decide how those premium payments are used.

Still, the treasurer wrote in a Dec. 10 letter to the Hartford Courant that she would propose legislation this year to require that these premiums be used to help avoid future borrowing.
“I’ve extended the offer to have the other side of the aisle join me,” Nappier said this week. “I see it as being sound fiscal policy.”

Most Democrats have been mum on the issue.

The governor’s budget office has noted that using bond premiums to support other segments of the state budget is a choice the administration cannot make alone, but also requires legislative approval.

“I would hope we could have bipartisan support” to change this trend, said Deputy House Minority Leader Vincent J. Candelora of North Branford, another of the Republican lawmakers who wants bond premiums to be used to pay down existing debt or to reduce future borrowing.

Sen. L. Scott Frantz of Greenwich, ranking GOP senator on the Finance, Revenue and Bonding Committee, said this week that Connecticut’s bonded debt now approaches $21 billion.

“At some point this is going to be painful. We have never had more bonded indebtedness in the state,” he said. “Interest rates may be low, but (by paying premium rates) we are not taking advantage of them.”