Nappier: Connecticut Debt Could Spawn Markets Backlash

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Connecticut’s treasurer warned that reliance of $325 million of debt service to cover operating costs could generate a backlash in the capital markets.

Such a move “would only add fuel to the state’s fiscal challenges, and may harm its reputation among bondholders and the investment community at large,” Denise Nappier said in a letter to Gov. Dannel Malloy, released late Friday.

Malloy two days earlier presented a two year, $40 billion budget to the General Assembly that includes $1.65 billion and $1.77 billion to cover general fund debt service in 2015-16 and 2016-17, respectively.

According to Nappier, these amounts are $325 million, or 7.6%, short of what her office estimates is necessary to meet debt-service requirements.

A key difference, said Nappier, is that Malloy’s budget relies on bond premiums, or the trading of bonds beyond their par value.

“The budgeting of potential budget savings before they are realized is equivalent to counting one’s chickens before they hatch,” Nappier wrote. “I am concerned that even if one were to accept budgeting for bond premiums not yet received, the adjustments made are too aggressive.”

Both Nappier and Malloy are Democrats.

Republican leaders have criticized Malloy and Nappier, over what they call an increasing reliance on bond premiums.

Moody's Investors Service rates Connecticut's $15 billion of general obligation debt Aa3. Fitch Ratings and Standard & Poor's rate the state AA. Moody’s downgraded the state’s GOs from Aa2 in January 2012. Moody’s in December cited Connecticut’s “high combined fixed costs for debt service, pension, and post employment benefits relative to the state's budget.”

Malloy’s spending plan would kick-start an overhaul to the state’s transportation infrastructure and calls for a drop in the sales tax to 6.2% from 6.35%.

Also on Friday, state budget Secretary Benjamin Barnes projected a $61.2 million deficit for fiscal 2015, down $59.7 million from January's $120.9 million.

In a letter to state Comptroller Kevin Lembo, Barnes cited $36 million in one-time revenue from the multi-state settlement on securities ratings in the lead-up to the 2008 financial crisis. He also referenced Malloy’s $25 million of second-round cuts, or rescissions, announced Jan. 23.

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