Connecticut plans to use a budget surplus to reduce a planned deficit borrowing by about a third, Gov. M. Jodi Rell announced Friday.

The state now plans to borrow $646.6 million for operating costs, down from the $956 million expected in May when the governor and General Assembly agreed to modify the state’s two-year budget.

Comptroller Nancy Wyman reported last week that Connecticut ended fiscal 2010 with a $449.4 million surplus. In July, the governor’s Office of Policy and Management had projected a lower surplus of $393.3 million.

The windfall comes at a key time for Connecticut, which has exhausted its rainy-day fund.

Before the May modification, the adopted biennial budget for fiscal 2010 to 2011 called for about $1.3 billion of deficit borrowing. Rell said the state will cut interest costs on the debt to $121 million from $245 million, by borrowing roughly half as much as planned in the adopted budget.

“The savings mean smaller payments for years to come,” Rell, a Republican, said in a press release.

A date hasn’t yet been set for marketing the deficit bonds, which are called economic recovery bonds and will be issued as serial bonds with maturities out to eight years. They will likely be issued in the first quarter of calendar 2011, though the deal could come sooner, a state Treasury source said.

The bonds are secured by utility charges. About 35% of the revenue will come from an existing charge for conservation load management, which helps consumers and businesses find ways to conserve energy.

The remainder of the revenue will come from an extension of the utility bill surcharge for “stranded costs” — legacy costs associated with industry deregulation when electric utilities got out of the power generation business at the beginning of the decade. Those charges were set to expire, but will now remain on customers’ bills at a lower rate.

The state last sold deficit debt in 2004 when it issued $97 million of economic recovery notes that were also secured by utility bill surcharges.

Rell and Wyman offered different opinions on the main causes of the surplus.

The governor cited higher sales and income tax revenue due to the improving economy, as well as tight fiscal policies. The comptroller said a modest improvement in tax revenues helped, but attributed much of the surplus to the use of rainy-day funds, $1 billion of federal stimulus money, and the delay of a $100 million payment to the state pension fund.

The state had planned to tap its $1.4 billion rainy-day fund to balance the biennial budget. It scrapped a plan to divide the financial buffer between both years and depleted all but $103.2 million in fiscal 2010. The rainy-day fund is now empty.

“State government was fortunate to have these one-time funds available to help weather the economic downturn, but there was little other positive news in a very difficult year for our state and our taxpayers,” Wyman said in a press release.

The lower amount of deficit borrowing is a positive but is “still a deficit financing,” said Moody’s Investors Service analyst Edith Behr. “Connecticut has a history of deficit borrowing when in recessionary periods.”

The state has a record of paying the money back over a short time, she said, noting that its use of the rainy-day fund was not unusual.

“Most states have used all or a portion of their rainy-day funds at this point,” Behr said.

The reduced deficit borrowing won’t affect other planned bond issues for capital spending. The state plans to market $520 million of general obligation bonds and up to $600 million of special tax obligation bonds — which fund transportation projects — before the end of calendar 2010.

The state has sold $13.56 billion of new-money GOs since 2001, according to Thomson Reuters.

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