HARTFORD, CT — There are growing concerns about some of the constraints the legislature enacted last year as part of the bipartisan budget.
Section 706 of the bipartisan budget created a new bond covenant that will require the General Assembly to guarantee payment of general obligation and credit revenue bonds over the next 10 years, while also adhering to restrictive bonding, spending, and volatility caps.
The provision was to be attached to bonds issued after May 15, 2018. However, the bill that came out of committee last month would delay the implementation date to July 1, 2019, limit it to five years, and remove the definitions of the spending and bonding caps, while keeping the volatility cap.
“It remains to be seen whether we’re going to move forward with that or not,” Rep. Jason Rojas, D-East Hartford, said Monday of the amended bill.
Rojas, co-chairman of the Finance, Revenue, and Bonding Committee, said he’s working with Rep. Chris Davis, R-East Windsor, on the bill, which is no longer part of budget negotiations.
Rojas said there are still unanswered questions about moving forward with the so-called bond lock and what it would mean for Connecticut’s finances going forward.
In a letter to Attorney General George Jepsen Monday Gov. Dannel P. Malloy said the bond lock “appears to bind future legislature’s in Connecticut.” And he wanted to know if the provision would “violate the constitution.”
Jepsen told Malloy that his office is not in a position to “adequately review and respond to the questions posed.” The legislative session ends at midnight on May 9.
He said if the legislature ends up delaying implementation of the provision then his office would be happy to offer an opinion.
Ellen Shemitz, executive director of Connecticut Voices for Children, said Connecticut should be cautious about how it proceeds.
The last bond covenant Connecticut did for the Teachers Retirement System is less strict, and will balloon to a point where annual payments required will be between $4 billion and $6 billion, Shemitz said. Unlike the annual payments to the state employees retirement system, which extended the debt repayment period, the bond covenant makes the Teachers Retirement System harder to modify.
“We already found as a state that it creates serious problems,” Shemitz said of the bond covenant for the Teachers Retirement System.
Shemitz said all the budget proposals from Democrats and Republicans work around the volatility cap, but if they go out to market for bonds, it would “make a workaround impossible.” It would take the flexibility away from the legislature for the next five to 10 years.
“The breadth of the bond covenant is so unique,” Shemitz said.
Even Wall Street has mixed feelings about the proposal.
“One interesting note is that bondholders are not asking for these proposed bond covenants — it was a political decision reached during recent budget negotiations to reassure some legislators that their budget reform proposals would not be overturned by future legislature,” David Hitchcock, an analyst with S&P Global Ratings, wrote back in March.
There are still questions from Wall Street as to whether they will change actual budget performance, “particularly because state economic performance has also been weak and because of Connecticut’s high fixed costs,” Hitchcock concluded.
A Moody’s analyst said that while the bond covenant “would strengthen the state’s longterm credit profile, covenanting to follow them reduces budgetary flexibility.”
Davis said as Republicans they don’t want to make it easier to spend money in the future. He said the volatility cap is important to maintain fiscal discipline and the bond lock is still an ongoing conversation.
Davis said he hopes it’s resolved before midnight Wednesday.
The outline of the Democratic budget released Monday would modify the volatility cap to index it in the future.
The cap had been set at $3.15 billion, but if the estimates and finals portion of the state income tax rises in the future, so will the cap.
Legislative leaders were planning to discuss their budget proposals late Monday night before heading home and returning Tuesday.
Democrats and Republicans spent all day bickering about the differences between their budgets, including how much money they want to leave in the state’s Rainy Day Fund.
The Republican budget would leave $864.5 million in the fund while the Democratic plan would leave $1.2 billion.
Democratic Gov. Dannel P. Malloy said Republicans complain about not having any money in the Rainy Day Fund and then they finally get money for a Rainy Day Fund and “spend it immediately.”
Kelly Donnelly, a spokeswoman for Malloy, said they would like to see less spending than is called for in either of the Democratic or Republican proposals.
“However, the Democrats’ plan leaves approximately twice as much money in the Rainy Day Fund as the Republican alternative, and contains a more serious solution for our short-term transportation needs,” Donnelly said. “The Republican plan also includes special interest giveaways and policy initiatives that have already been rejected by the legislative process. For all these reasons, the Democrats’ plan released this morning appears to be the simpler and more responsible approach.”
House Minority Leader Themis Klarides, R-Derby, said the Democratic budget cuts the Judicial branch by $14 million and doesn’t fund the 31 new judges and support staff.
“It’s disingenuous to vote for these judges, but not provide funding,” Klarides said.
Senate Republican President Len Fasano, R-North Haven, echoed her comments.
“It’s not fair to vote for them and not to fund them,” Fasano said Monday. “It’ll immediately put the judiciary account into a deficit.”
As far as the budget is concerned, Republicans complained that all they have is “bits and pieces of their budget.”
He said the one piece of paper is not sufficient.
He said if they can’t reach an agreement soon then he’s more than willing to put two different budgets out — a Republican one and a Democratic one — and let them be called for a vote.
Klarides said they’ve made it clear to the Democratic majority that they feel they need to do a full budget for the next fiscal year.
“I think they are afraid to vote on a full budget to fix the problems we all agree on,” Klarides said.
Klarides said it takes 76 votes in the House to pass something and they have 79 members so they could do something without the Republicans.
“There’s a reason they want us to so desperately be in there with them,” Klarides said.
She said the only reason they’re spending more of the Rainy Day Fund is because they’re investing in reducing the unfunded pension liability in the State Employees Retirement plan and the Teachers Retirement System.
As of Monday night there was no agreement on how to proceed.
“For the good of the state at some point the bickering has to slow down,” Rep. Toni Walker, D-New Haven, said.
She said making sure they stay on “content and not on personals” sets the tone for the rest of the state.
“We have to make sure we don’t make it us against them, urban vs. suburban, rich against poor,” Walker said.
Jack Kramer contributed to this report.
