State Treasurer Denise Nappier wrote Gov. Dannel P. Malloy Friday saying his two-year budget proposal, which is shy about $325 million in debt service, is “too aggressive” and could harm Connecticut’s reputation with investors.
In the letter, Nappier said her office may come in under budget for debt service but “the budgeting of potential budget savings before they are realized is equivalent to counting one’s chickens before they hatch. I am concerned that even if one were to accept budgeting for bond premiums not yet received, the adjustments are too aggressive.”
Nappier said she recognized Malloy’s “unenviable task” of crafting a two-year budget amid “extraordinary” fiscal challenges and competing demands for funding. But she said the governor’s budget did not reflect her office’s debt service estimates.
“Budgeting for fixed costs, such as principal and interest on bonds, is a sound fiscal practice, and failure to do so can become a concern for rating agencies and investors alike,” Nappier wrote.
Nappier, a Democrat, explained that Malloy’s debt service figures are $152.7 million and $172.5 million below her current estimates for 2016 and 2017. Taken together that represents a reduction of $325.2 million.
Nappier bluntly told Malloy in a letter released to the media Friday that the “consequences of having to go before the Finance Advisory Committee to restore a deficiency in the debt service account would only add fuel to the state’s fiscal challenges, and may harm its reputation among bondholders and the investment community at large.”
Asked about Nappier’s letter, Gian-Carl Casa, spokesman for the Office of Policy and Management, said, “We’re reviewing it.”
Last week, Sen. Rob Kane, R-Watertown, questioned Office of Policy and Management Secretary Benjamin Barnes about the discrepancy in debt service figures. Barnes told Kane during an Appropriations Committee hearing that officials are “applying bond premiums to debt service in the manner that has been carried out by the treasurer of the state of Connecticut for decades in accordance with current practice and current law.”
Kane questioned whether the $325.2 million was being used to help balance the budget.
“We are using bond premiums to pay debt service,” Barnes replied.
He went onto explain that the administration is using principal and interest on existing debt to pay off bonds.
Barnes said he understands the practice of doing this is not ideal, but if the state wants to stop the practice it will have to find an additional $150 million and “this is not the year to do that.”
Kane asked Barnes whether he took Nappier’s numbers into consideration when putting together the state budget.
“We always consider the budget requests of state agencies, but we do not feel bound to transmit them as part of the governor’s budget,” Barnes replied. “We made an independent, exhaustive assessment of the debt service requirements for the coming year and included that.”
Nappier said she expects interest rates to rise as the Federal Reserve tightens monetary policy this fall. That “will have a direct impact on debt service costs and savings in the debt service budget that have been realized in the past. That is why it is imperative that we budget for debt service carefully, cautiously and with full recognition of the payments we have promised to make,” Nappier wrote.
Nappier said she looks forward to having her staff work with Malloy’s staff in resolving the issue.