File No. 724

Senate, April 20, 2009

The Committee on Finance, Revenue and Bonding reported through SEN. DAILY of the 33rd Dist., Chairperson of the Committee on the part of the Senate, that the substitute bill ought to pass.

AN ACT AUTHORIZING ECONOMIC RECOVERY NOTES.

Be it enacted by the Senate and House of Representatives in General Assembly convened:

Section 1. (NEW) (Effective from passage) (a) For the purpose of funding the deficit in the General Fund arising from the operations of the state General Fund for the fiscal year ending June 30, 2009, as reported by the Comptroller to the Governor in accordance with section 3-115 of the general statutes, the Treasurer is authorized to issue notes of the state from time to time in an amount not to exceed five hundred million dollars, and to deposit the proceeds thereof in the General Fund.

(b) The notes shall be designated economic recovery notes and shall be issued on or after the effective date of this section.

(c) All such notes shall be general obligations of the state and the full faith and credit of the state of Connecticut are pledged for the payment of the principal of and interest on said notes as the same shall become due, and accordingly and as part of the contract of the state with the holders of said notes, appropriation of all amounts necessary for punctual payment of such principal and interest is hereby made, and the Treasurer shall pay such principal and interest as the same become due. All such notes shall be sold at not less than par and accrued interest in such manner and on such terms as the Treasurer may determine is in the best interest of the state, and shall be signed in the name of the state and on its behalf by the Treasurer. All such notes shall mature before July 1, 2016, in such principal amounts and at such times, bear such date or dates, be payable at such place or places, bear interest at such rate or different or varying rates, payable at such time or times, be in such denominations, be in such form with or without interest coupons attached, carry such registration and transfer privileges, be payable in such medium of payment, be subject to such terms of redemption with or without premium and have such additional security, covenant or contract provisions, including credit facilities which may include a letter of credit or insurance policy from a commercial bank or insurance company authorized to do business within or without the state, and the necessary or appropriate provisions to ensure the exclusion of interest on the notes from taxation under the Internal Revenue Code of 1986, or any subsequent corresponding internal revenue code of the United States, as amended from time to time, as appropriate or necessary to improve their marketability, as the Treasurer shall determine prior to their issuance. In connection with any such credit facility, the Treasurer may enter into any reimbursement agreements, remarketing agreements, standby purchase agreements or any other necessary or appropriate agreements securing or insuring such notes, on such terms and conditions as the Treasurer determines to be in the best interest of the state. In the event the credit facility is drawn upon to pay the principal of or interest on such notes, the full faith and credit of the state is pledged to the repayment of the amount so drawn and the Treasurer is authorized to include such pledge in any such agreement as part of the contract with the provider of such credit facility. The Treasurer shall apply any appropriation for the payment of such notes to such reimbursement repayment if such credit facility is drawn upon. Any expense incurred in connection with the initial issuance of the economic recovery notes shall be paid from the accrued interest and premiums or otherwise from the General Fund. All such notes, their transfer and the income therefrom, including any profit on the sale or transfer thereof shall at all times be exempt from all taxation by the state or under its authority and are hereby made and declared to be (1) legal investments for savings banks and trustees unless otherwise provided in the instrument creating the trust, (2) securities in which all public officers and bodies, all insurance companies and associations and persons carrying on an insurance business, all banks, bankers, trust companies, savings banks and savings associations, including savings and loan associations, building and loan associations, investment companies and persons carrying on a banking or investment business, all administrators, guardians, executors, trustees and other fiduciaries and all persons whatsoever who are or may be authorized to invest in notes of the state, may properly and legally invest funds including capital in their control or belonging to them, and (3) securities that may be deposited with and shall be received by all public officers and bodies for any purpose for which the deposit of notes of the state is or may be authorized.

(d) (1) There is established a fund to be known as the "Economic Recovery Note Debt Retirement Fund". Investment earnings credited to the assets of said fund shall become part of the assets of said fund. Any balance remaining in said fund at the end of the fiscal year, except as otherwise provided herein, shall be transferred and credited to the General Fund.

(2) The fund shall be used by the Treasurer for the payment of (A) the principal of and interest on such notes maturing in each fiscal year, (B) any expenses in connection with the operation of the Economic Recovery Note Debt Retirement Fund including payment of underwriting fees and expenses and such other costs of issuance not otherwise paid or provided for and costs of obligations incurred in the event a credit facility is obtained for the security of the notes, as the case may be, and (C) pursuant to the provisions of subsection (f) of this section, the purchase price or redemption price, if applicable, on notes purchased or redeemed prior to maturity. The amounts required for such payments as aforesaid are deemed appropriated therefore and the Treasurer is authorized to pay such amounts when due.

(3) At such time or times in each fiscal year, but in any event not later than the day before an interest or principal payment date on the economic recovery notes, the Treasurer shall cause that amount of tax revenues otherwise applicable to the General Fund equal to the aggregate amount of principal of and interest on the notes and that amount of such expenses of the Economic Recovery Note Debt Retirement Fund becoming due in such fiscal year in accordance with the schedule set forth in subsection (b) of this section to be credited to the Economic Recovery Note Debt Retirement Fund established under this section and applied solely for the purpose of paying such interest of and principal on the notes and such expenses. The Comptroller is hereby authorized and directed to record such amount of revenues so credited as receipts of the Economic Recovery Note Debt Retirement Fund and shall not account for such amounts as a revenue or receipt of the General Fund.

(e) Notwithstanding any provision of the general statutes, for the purpose of determining at any time or times the position of the General Fund as of June 30, 2010, the Comptroller is authorized and directed to give effect to and to show the funding of the General Fund deficit as of June 30, 2009, in an amount equal to the principal amount of the notes issued and deposited in the General Fund, provided the notes authorized in this section have been so issued prior to such time or times of determination, it being hereby declared to be the intent and purpose of this section to provide for the General Fund deficit as of June 30, 2009, by the funding thereof through the issuance of the notes.

(f) Notwithstanding the provisions of section 4-30a of the general statutes, after the accounts for the fiscal years ending June 30, 2010, and June 30, 2017, are closed, the Comptroller determines there exists an unappropriated surplus in the General Fund, after any amounts required by provision of law to be transferred for other purposes have been deducted, the amount of any such surplus shall be used for redeeming prior to maturity any outstanding notes issued under this section or, in accordance with the contract with the holders of any notes, for deposit in the Economic Recovery Note Retirement Fund to be held by the Treasurer, in trust, for either the purchase of notes at a price not more than par plus accrued interest thereon or the payment of the principal of and interest on notes and the redemption premium, if any, in any such year, as provided by law or as the Treasurer deems appropriate.

Sec. 2. Subsection (a) of section 3-21 of the general statutes is repealed and the following is substituted in lieu thereof (Effective from passage):

(a) No bonds, notes or other evidences of indebtedness for borrowed money payable from General Fund tax receipts of the state shall be authorized by the General Assembly or issued except such as shall not cause the aggregate amount of the total amount of bonds, notes or other evidences of indebtedness payable from General Fund tax receipts authorized by the General Assembly but which have not been issued and the total amount of such indebtedness which has been issued and remains outstanding to exceed one and six-tenths times the total General Fund tax receipts of the state for the fiscal year in which any such authorization will become effective or in which such indebtedness is issued, as estimated for such fiscal year by the joint standing committee of the General Assembly having cognizance of finance, revenue and bonding in accordance with section 2-35. In computing such aggregate amount of indebtedness at any time, there shall be excluded or deducted, as the case may be, (1) the principal amount of all such obligations as may be certified by the Treasurer (A) as issued in anticipation of revenues to be received by the state during the period of twelve calendar months next following their issuance and to be paid by application of such revenue, or (B) as having been refunded or replaced by other indebtedness the proceeds and projected earnings on which or other funds are held in escrow to pay and are sufficient to pay the principal, interest and any redemption premium until maturity or earlier planned redemption of such indebtedness, or (C) as issued and outstanding in anticipation of particular bonds then unissued but fully authorized to be issued in the manner provided by law for such authorization, provided, as long as any of such obligations are outstanding, the entire principal amount of such particular bonds thus authorized shall be deemed to be outstanding and be included in such aggregate amount of indebtedness, or (D) as payable solely from revenues of particular public improvements, (2) the amount which may be certified by the Treasurer as the aggregate value of cash and securities in debt retirement funds of the state to be used to meet principal of outstanding obligations included in such aggregate amount of indebtedness, (3) every such amount as may be certified by the Secretary of the Office of Policy and Management as the estimated payments on account of the costs of any public work or improvement thereafter to be received by the state from the United States or agencies thereof and to be used, in conformity with applicable federal law, to meet principal of obligations included in such aggregate amount of indebtedness, (4) all authorized and issued indebtedness to fund any budget deficits of the state for any fiscal year ending on or before June 30, 1991, (5) all authorized indebtedness to fund the program created pursuant to section 32-285, (6) all authorized and issued indebtedness to fund any budget deficits of the state for any fiscal year ending on or before June 30, 2002, (7) all indebtedness authorized and issued pursuant to section 1 of public act 03-1 of the September 8 special session*, (8) all authorized indebtedness issued pursuant to section 3-62h, [and] (9) any indebtedness represented by any agreement entered into pursuant to subsection (b) or (c) of section 3-20a as certified by the Treasurer, provided the indebtedness in connection with which such agreements were entered into shall be included in such aggregate amount of indebtedness, and (10) all indebtedness authorized and issued pursuant to section 1 of this act. In computing the amount of outstanding indebtedness, only the accreted value of any capital appreciation obligation or any zero coupon obligation which has accreted and been added to the stated initial value of such obligation as of the date of any computation shall be included.

The following Fiscal Impact Statement and Bill Analysis are prepared for the benefit of the members of the General Assembly, solely for purposes of information, summarization and explanation and do not represent the intent of the General Assembly or either chamber thereof for any purpose. In general, fiscal impacts are based upon a variety of informational sources, including the analyst's professional knowledge. Whenever applicable, agency data is consulted as part of the analysis, however final products do not necessarily reflect an assessment from any specific department.

OFA Fiscal Note

State Impact:

Note: GF=General Fund

Municipal Impact: None

Explanation

The bill authorizes the Office of the State Treasurer to issue up to $500 million in Economic Recovery Notes (ERNs) bonds to finance the FY 09 General Fund deficit. The total General Fund debt service cost for principal and interest payments on this amount over 7 years, assuming a 3.5% interest rate, is $570 million.

The Out Years

The future fiscal impact of issuing the ERNs is the payment of the debt service mentioned above over the life of the bonds (up to 7 years).

OLR Bill Analysis

sSB 930

AN ACT AUTHORIZING ECONOMIC RECOVERY NOTES.

SUMMARY:

This bill authorizes the state to issue up to $500 million in economic recovery notes to fund the FY 09 General Fund deficit. The notes are state general obligations and must mature before July 1, 2016. The bill exempts the debt attributable to the notes from the statutory limit on state General Fund-supported debt (see BACKGROUND).

The bill establishes a separate Economic Recovery Note Debt Retirement Fund. The treasurer must use the fund to pay (1) principal and interest on the economic recovery notes maturing each fiscal year; (2) for costs and expenses not otherwise provided for issuing the notes, operating the fund, and, if necessary, paying any obligations incurred in obtaining a credit facility (such as insurance or a letter of credit) for the notes; and (3) for purchasing and redeeming notes before maturity.

The bill requires the treasurer to credit to the debt retirement fund rather than the General Fund whatever tax revenue is needed to pay the principal, interest, and other expenses of the notes each fiscal year. Under the bill, the necessary amounts are appropriated to the fund no later than the day before the payments are due. The comptroller must record the necessary revenue as part of the fund's receipts.

The bill also allocates to the debt retirement fund, rather than the Budget Reserve Fund, any unappropriated General Fund surpluses for FY 10 “and” FY 17. (It is unclear why the bill excludes any available unappropriated surpluses from the fiscal years between the specified years.) The treasurer must use these funds to pay the notes off early or, if the contract with the note holders does not allow early redemption, hold them until the notes mature.

EFFECTIVE DATE: Upon passage

ECONOMIC RECOVERY NOTE PROCEEDS

The treasurer must issue the notes on or after the bill's passage and deposit the proceeds from their sale in the General Fund. In any determination of the General Fund's position for FY 10, the comptroller must reflect the amount of the note proceeds funding the FY 09 General Fund deficit, if the notes have been issued before the determination.

TAX EXEMPTION AND USE OF NOTES FOR INVESTMENT

The bill exempts interest on, and gains from the sale of, the notes from all taxes imposed by the state or under its authority. It also requires the treasurer to structure the notes so their interest is excluded from federal taxes if that is appropriate or necessary to improve the notes' marketability.

Finally, the bill makes the notes legal investments for banks, insurance companies, fiduciaries, and public bodies and allows public officers to accept them for any purpose for which they may receive or deposit state notes.

BACKGROUND

Statutory Debt Limit

State law limits the amount of state General Fund-supported debt to 1.6 times the net General Fund tax receipts the Finance, Revenue and Bonding Committee projects for the fiscal year in which the legislature authorizes the debt. Certain types of debt are excluded from the debt limit calculation, including debts incurred for federally reimbursable public works projects, assets in debt retirement funds, and debt incurred in anticipation of revenue and some other purposes.

COMMITTEE ACTION

Finance, Revenue and Bonding Committee

Joint Favorable Substitute