HARTFORD, CT — Attorney General George Jepsen agrees with State Treasurer Denise Nappier that the General Assembly messed up some of the language referring to a bond covenant in its budget legislation this year, but he concluded that lawmakers could not have intended to violate their own rule three times on the last night of the legislative session.
The bond covenant was adopted as part of the bipartisan budget this year to help improve fiscal discipline by locking in Connecticut’s borrowing and budgetary practices with bond purchasers. It’s sometimes referred to as the “bond lock.”
In a formal opinion, Jepsen told Nappier that the covenant provided to bond purchasers was “proper” and so were the exclusions the legislature passed, including borrowing for higher education through CSCU 2020 or as part of UConn 2000, or the $250 million approved annually in transportation bonds.
Nappier wrote Jepsen in September to raise concerns about drafting errors she found in the budget adjustment passed by lawmakers in the final hours of the legislative session on May 9.
The words “upon passage” were changed to “July 1, 2018” in the bipartisan budget bill in reference to the effective date of the bond covenant.
The effective date, according to Nappier, is important because the bond covenant pledges that no changes can be made to the underlying bond cap. And Nappier’s office has already sold bonds twice pledging to adhere to the $1.9 billion bond cap, which effectively locks the state into a more restrictive bond cap than initially intended.
Jepsen agreed that the language presented problems.
“After creating a bond covenant, including a direction that no act of the General Assembly taking effect on or after May 15, 2018 shall alter the obligation to comply with the provisions of its terms, the General Assembly enacted at least three provisions taking effect on or after May 15, 2018 that appear to conflict with the obligations required by the covenant,” Jepsen wrote.
Aside from the issue with the dates, Jepsen said the exclusions to the bond covenant were known to bondholders.
“This interpretation is not only reasonable, but also entirely fair to bondholders who purchased the bonds with the covenants, as they would be presumed to have purchased them with full knowledge of these legislative actions, all of which had been completed well before the first bond sale with the new covenants,” Jepsen wrote.
Jepsen said there is a statutory interpretation that can reasonably and harmoniously reconcile the two.
“First, in light of the fact that the legislature only provided direction for the Treasurer not to issue bonds in excess of the bond cap ‘on or after July 1, 2018,’ the legislature could not have intended for a bond covenant to apply a cap before that date, since it gave no direction about how to determine such a cap,” Jepsen wrote.
“Second, because the bond cap first takes effect on or after July 1, 2018, it seems apparent that the legislature intended the cap to include all statutory provisions defining the cap as of that date,” Jepsen added. “Those provisions include the additional exclusions for bonds for refunding, certain revenue anticipation bonds, and transportation bonds of up to $250M for each of calendar years 2018 and 2019.”
But that leaves in question the language adopted as part of the 2017 budget. The two-year budget says the bond covenant is “for bonds issued on or after May 15, 2018 and before July 1, 2020, the state shall covenant that no act of the General Assembly taking effect on or after May 15, 2018 shall alter the obligation to comply with the provisions.”
Jepsen said because it can not be assumed the legislature would repeatedly contradict itself, “the only plausible explanation is that the legislature intended to bar any new public act, or any public act other than one already passed prior to May 15, 2018, that would alter the covenants in question.”
“This construction resolves all of the otherwise conflicting legislative directives in an entirely harmonious way,” Jepsen wrote.