April 26, 2018

Hartford bailout maxes out state's credit card — for now

Connecticut's bailout of the city of Hartford will max out the state's ability to borrow this summer — at least temporarily — House Minority Leader Themis Klarides, R-Derby, said Wednesday.

In a letter to state Treasurer Denise L. Nappier, Klarides wrote that the legislature's nonpartisan Office of Fiscal Analysis projects "the state would exceed the statutory bond cap by $522 million" effective July 1 because of the Hartford deal.

Under that agreement, which was implemented earlier this spring by Gov. Dannel P. Malloy's administration and by Nappier's office, Connecticut would pay off the city's $534 million in outstanding bonded debt and an undetermined about of interest. Legislators ordered assistance for Hartford last October as part of a new state budget deal, but many assert the agreement went beyond what lawmakers authorized.

The state is expected to retire this debt over 20 to 30 years, depending on how Hartford officials renegotiate their obligations with bondholders. Interest charges will depend on those negotiations.

Connecticut has long had in statute a debt limit that rises or falls with state revenues. This limit applies not only to bonding the state already has issued, but other bonded debt it has committed to undertake in the future.

Klarides asked Nappier's office for clarification as to when Hartford's debt was included in calculations of the state's debt burden.

Unless legislators abandon the cap, the only alternatives to exceeding the limit this summer are:

  • Delay or cancel planned bonding for various projects, such as municipal school construction or capital programs at public colleges and universities.
  • Increase taxes or impose other measures that would increase projected state revenues.
  • Or vote to modify the debt limit statute and grant an exemption for the emergency aid for Hartford.

The last two measures likely are non-starters for Republicans, who hold 71 out of 151 seats in the House and half of the 18 seats in the Senate.

The GOP traditionally has opposed tax hikes, particularly in a state election year. And Republicans already have indicated they plan to campaign on their efforts to stabilize state finances over the past two years.

Any effort to curtail other projects is likely to draw objections from both sides of the aisle.

Nappier's office did not comment immediately after Klarides issued her letter.

But the governor's office, effectively said Wednesday that lawmakers should have known the assistance would count against the state's debt limit.

"The contract assistance agreement is perfectly in keeping with the legislation passed last year by the bipartisan coalition," said Chris McClure, spokesman for the governor's budget office. The language the legislature drafted and passed. with the vote of Representative Klarides … stated that contract assistance agreements would constitute a full faith and credit obligation of the state. This was not ambiguous then, and it is not now. The only question that continues to arise regarding the contract assistance agreement is did Representative Klarides have any idea what she was voting for?"

The bonding cap dispute is only the latest problem to vex the debt assistance deal, which some lawmakers from both parties assert went beyond the level of assistance legislators intended.

All sides agree that the two-year state budget enacted last October appropriated about $80 million in assistance for the city — $40 million in this fiscal year and $40 million in 2018-19. Lawmakers also agreed that the city would seek to refinance its debt over the long-term, and that the state would guarantee this refinancing.

But under the deal, Connecticut would make annual debt assistance payments close to $40 million for 20 to 30 years, until the city's entire $534 million general obligation debt is retired.

House and Senate Republican recommended budget adjustments last week that would reduce traditional state grants to Hartford each year, starting in 2019-20, by an amount equal to the debt assistance — effectively neutralizing the deal.

Klarides said legislators were very clear in what they ordered, and that the governor and treasurer negotiated last-minute changes with the city and its bondholders that overstepped their authority.

"We only agreed to a two-year lifeline," she said. "This was a deal that was done in the dark of night."

Klarides declined to speculate on how the legislature might address this latest debt problem but said if lawmakers are forced to begin canceling planned borrowing "let's de-authorize Hartford projects."

But House Majority Leader Matt Ritter, D-Hartford, said exempting the aid for his home community from the statutory debt limit might be the best solution. And he noted that both parties still want to make adjustments to the state budget for the next fiscal year before the session ends on May 9 — a goal that requires bipartisan cooperation.

The Hartford debt deal "is another part of the conversation," Ritter said.

The single-largest amount of state borrowing is used to support municipal school construction, and canceling more than $500 million in planned borrowing by July 1 likely would impact many communities across Connecticut, Ritter said.

"If we all agree we want safe schools for our kids," he added, "we should come together and talk."

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