Connecticut Seal

General Assembly

File No. 643

    February Session, 2018

Substitute House Bill No. 5590

House of Representatives, April 23, 2018

The Committee on Finance, Revenue and Bonding reported through REP. ROJAS of the 9th Dist., Chairperson of the Committee on the part of the House, that the substitute bill ought to pass.

AN ACT CONCERNING BOND COVENANTS AND THE BOND ISSUANCE CAP AND REQUIRING A STUDY OF BOND COVENANTS.

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

Section 1. Subsection (aa) of section 3-20 of the 2018 supplement to the general statutes is repealed and the following is substituted in lieu thereof (Effective May 15, 2018):

(aa) (1) For each fiscal year during which general obligation bonds or credit revenue bonds issued on and after May 15, 2018, and prior to July 1, 2020, shall be outstanding, the state of Connecticut shall comply with the provisions of (A) section 4-30a of the general statutes, revision of 1958, revised to January 1, 2017, as amended by section 704 of public act 17-2 of the June special session, and (B) section 2-33c in effect on October 31, 2017. [, (C) section 2-33a of the general statutes, revision of 1958, revised to January 1, 2017, as amended by section 709 of public act 17-2 of the June special session, (D) subsections (d) and (g) of this section, revision of 1958, revised to January 1, 2017, as amended by sections 710 and 711 of public act 17-2 of the June special session, and (E) section 3-21 of the general statutes, revision of 1958, revised to January 1, 2017, as amended by section 712 of public act 17-2 of the June special session.] The state of Connecticut does hereby pledge to and agree with the holders of any bonds, notes and other obligations issued pursuant to subdivision (2) of this subsection that no public or special act of the General Assembly taking effect on or after May 15, 2018, and prior to July 1, 2028, shall alter the obligation to comply with the provisions of the sections [and subsections] set forth in subparagraphs (A) [to (E), inclusive,] and (B) of this subdivision, until such bonds, notes or other obligations, together with the interest thereon, are fully met and discharged, provided nothing in this subsection shall preclude such alteration (i) if and when adequate provision shall be made by law for the protection of the holders of such bonds, or (ii) (I) if and when the Governor declares an emergency or the existence of extraordinary circumstances, in which the provisions of section 4-85 are invoked, (II) at least three-fifths of the members of each chamber of the General Assembly vote to alter such required compliance during the fiscal year for which the emergency or existence of extraordinary circumstances are determined, and (III) any such alteration is for the fiscal year in progress only.

(2) The Treasurer shall include this pledge and undertaking in general obligation bonds and credit revenue bonds issued on or after May 15, 2018, and prior to July 1, 2020, provided such pledge and undertaking (A) shall be applicable for a period of ten years from the date of first issuance of such bonds, and (B) shall not apply to refunding bonds issued for bonds issued under this subdivision.

Sec. 2. Section 3-20 of the 2018 supplement to the general statutes is amended by adding subsection (bb) as follows (Effective July 1, 2019):

(NEW) (bb) (1) For each fiscal year during which general obligation bonds or credit revenue bonds issued on and after July 1, 2019, and prior to July 1, 2021, shall be outstanding, the state of Connecticut shall comply with the provisions of (A) section 2-33a of the general statutes, revision of 1958, revised to January 1, 2017, as amended by section 709 of public act 17-2 of the June special session, (B) subsections (d) and (g) of this section, revision of 1958, revised to January 1, 2017, as amended by sections 710 and 711 of public act 17-2 of the June special session, and (C) section 3-21 of the general statutes, revision of 1958, revised to January 1, 2017, as amended by section 712 of public act 17-2 of the June special session and section 3 of this act. The state of Connecticut does hereby pledge to and agree with the holders of any bonds, notes and other obligations issued pursuant to subdivision (2) of this subsection that no public or special act of the General Assembly taking effect on or after July 1, 2019, and prior to July 1, 2029, shall alter the obligation to comply with the provisions of the sections and subsections set forth in subparagraphs (A) to (C), inclusive, of this subdivision, until such bonds, notes or other obligations, together with the interest thereon, are fully met and discharged, provided nothing in this subsection shall preclude such alteration (i) if and when adequate provision shall be made by law for the protection of the holders of such bonds, or (ii) (I) if and when the Governor declares an emergency or the existence of extraordinary circumstances, in which the provisions of section 4-85 are invoked, (II) at least three-fifths of the members of each chamber of the General Assembly vote to alter such required compliance during the fiscal year for which the emergency or existence of extraordinary circumstances are determined, and (III) any such alteration is for the fiscal year in progress only.

(2) The Treasurer shall include this pledge and undertaking in general obligation bonds and credit revenue bonds issued on or after July 1, 2019, and prior to July 1, 2021, provided such pledge and undertaking (A) shall be applicable for a period of ten years from the date of first issuance of such bonds, and (B) shall not apply to refunding bonds issued for bonds issued under this subdivision.

Sec. 3. Subsection (f) of section 3-21 of the 2018 supplement to the general statutes is repealed and the following is substituted in lieu thereof (Effective from passage):

(f) (1) (A) On and after July 1, 2018, the Treasurer may not issue general obligation bonds or notes pursuant to section 3-20 or credit revenue bonds pursuant to section 3-20j that exceed in the aggregate one billion nine hundred million dollars in any fiscal year. Commencing July 1, 2019, and each fiscal year thereafter, the aggregate limit shall be adjusted in accordance with any change in the consumer price index for all urban consumers for the preceding calendar year, less food and energy, as published by the United States Department of Labor, Bureau of Labor Statistics.

(B) Any calculation made pursuant to subparagraph (A) of this subdivision shall not include (i) any general obligation bonds issued as part of CSCU 2020, as defined in subdivision (3) of section 10a-91c, or UConn 2000, as defined in subdivision (25) of section 10a-109c, (ii) any bonds, notes or other evidences of indebtedness for borrowed money which are issued for the purpose of refunding other bonds, notes or other evidences of indebtedness, or (iii) obligations in anticipation of revenues to be received by the state during the twelve calendar months next following their issuance.

(2) (A) Not later than January 1, 2018, and January first annually thereafter, the Treasurer shall provide the Governor with a list of allocated but unissued bonds. The Governor shall post such list on the Internet web site of the office of the Governor.

(B) Notwithstanding section 4-85, the Governor shall not approve allotment requisitions pursuant to said section that would result in the issuance of general obligation bonds or notes pursuant to section 3-20 or credit revenue bonds pursuant to section 3-20j that exceed in the aggregate one billion nine hundred million dollars in any fiscal year. Commencing July 1, 2019, and each fiscal year thereafter, the aggregate limit shall be adjusted in accordance with any change in the consumer price index for all urban consumers for the preceding calendar year, less food and energy, as published by the United States Department of Labor, Bureau of Labor Statistics. Not later than April 1, 2018, and April first annually thereafter, the Governor shall provide the Treasurer with a list of general obligation bond and credit revenue bond expenditures that can be made July first commencing the next fiscal year totaling not more than one billion nine hundred million dollars. Commencing July 1, 2019, and each fiscal year thereafter, the aggregate limit shall be adjusted in accordance with any change in the consumer price index for all urban consumers for the preceding calendar year, less food and energy, as published by the United States Department of Labor, Bureau of Labor Statistics. The Governor shall post such list on the Internet web site of the office of the Governor.

(C) Any calculation made pursuant to subparagraph (B) of this subdivision shall not include (i) any general obligation bonds issued as part of CSCU 2020, as defined in subdivision (3) of section 10a-91c, or UConn 2000, as defined in subdivision (25) of section 10a-109c, (ii) any bonds, notes or other evidences of indebtedness for borrowed money which are issued for the purpose of refunding other bonds, notes or other evidences of indebtedness, or (iii) obligations in anticipation of revenues to be received by the state during the twelve calendar months next following their issuance.

Sec. 4. (Effective from passage) The Secretary of the Office of Policy and Management, the Attorney General, the Comptroller and the Treasurer, or their designees, shall study the use of bond covenants, including the bond covenant set forth in section 2 of this act, as a mechanism to dictate state spending and bonding. Such study shall include, but not be limited to, the legality of such covenants, the possible long-term financial and economic effects of such covenants, the possible impact of such covenants on the operations of state government, including the state's ability to fund social service programs, public education and workforce development programs, and recommendations for alternative methods the General Assembly may use to implement prudent long-term fiscal decision-making. Not later than January 1, 2019, the secretary, Attorney General, Comptroller and Treasurer shall jointly submit a report, in accordance with the provisions of section 11-4a of the general statutes, of the findings of such study to the joint standing committee of the General Assembly having cognizance of matters relating to finance, revenue and bonding.

This act shall take effect as follows and shall amend the following sections:

Section 1

May 15, 2018

3-20(aa)

Sec. 2

July 1, 2019

3-20

Sec. 3

from passage

3-21(f)

Sec. 4

from passage

New section

FIN

Joint Favorable Subst.

 

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:

Agency Affected

Fund-Effect

FY 19 $

FY 20 $

Treasurer, Debt Serv.

GF - Potential Savings

See Below

See Below

Note: GF=General Fund

Municipal Impact: None

Explanation

The bill delays the bond covenant which requires the state to follow the cap on appropriations to bonds issued between July 1, 2019 and prior to July 1, 2021 from May 15, 2018, and prior to July 1, 2020. The cap on appropriations limits General Fund and Special Transportation Fund appropriations at a specified percentage of estimated revenues beginning in FY 20 at 99.5% of revenue and increasing gradually to 98% of revenue by FY 26.

The bill excludes from the cap on bond issuances bonds which are issued for: 1) refunding outstanding bonds or other indebtedness or 2) for temporary obligations in anticipation of revenue to be received within the next 12 months. This could result in savings in debt service payments to the extent the state is able to refinance outstanding debt at a lower cost.

The bill requires the Office of Policy and Management, the Attorney General, the Comptroller, and the Treasurer to conduct a study concerning bond covenants. The completion of the study is not anticipated to require additional resources for any of the four agencies required to take part in the study and therefore will have no fiscal impact.

The Out Years

The annualized ongoing fiscal impact identified above would continue into the future subject to inflation.

OLR Bill Analysis

sHB 5590

AN ACT CONCERNING BOND COVENANTS AND THE BOND ISSUANCE CAP AND REQUIRING A STUDY OF BOND COVENANTS.

SUMMARY

Current law requires certain state bonds issued from May 15, 2018, to June 30, 2020, to include a pledge to bondholders that the state will comply with specified state laws, except under certain conditions. This bill delays the application of the bond pledge (i.e., covenant) to the state spending and bond cap laws and instead applies the pledge for these laws to bonds issued from July 1, 2019, to June 30, 2021. Under the bill, the current bond covenant provision continues to apply, beginning May 15, 2018, to the Budget Reserve Fund (BRF) law and cap on General Fund and Special Transportation Fund (STF) appropriations.

The bill also requires specified state officials to study the use of bond covenants as a fiscal control mechanism and, by January 1, 2019, report their findings to the Finance, Revenue and Bonding Committee.

Lastly, the bill excludes from the caps on bond issuances and expenditures (1) refunding bonds and (2) bonds and other notes issued in anticipation of certain revenue (e.g., bond anticipation notes).

EFFECTIVE DATE: Upon passage, except the provisions delaying and reinstating the application of the bond covenant to certain laws are effective May 15, 2018, and July 1, 2019, respectively.

1-2 & 4 — BOND COVENANT

Current law expressly requires the state to comply with certain state laws (described below) for each fiscal year during which state general obligation (GO) or credit revenue bonds issued from May 15, 2018 to June 30, 2020, are outstanding. It also requires, for GO and credit revenue bonds issued during this timeframe, that the treasurer include a pledge to bondholders that the state will not enact any laws taking effect from May 15, 2018, to June 30, 2028, that change the state's obligation to comply with the specified laws until the bonds are fully paid off, unless certain conditions are met. The pledge must apply for 10 years from the bonds' first issuance date.

Under current law, these requirements apply to the following laws:

The bill delays the application of these requirements to the state spending and bond cap laws so that they only apply to bonds issued from July 1, 2019 to June 30, 2021. In doing so, it creates two parallel bond covenant provisions that apply to bonds issued during two different, overlapping timeframes, but are tied to different state laws. Under the bill, the current requirements continue to apply to the BRF law and cap on General Fund and STF appropriations for bonds issued from May 15, 2018, to June 30, 2020.

Under current law, the bond pledge prohibits the state from enacting laws taking effect from May 15, 2018, to June 30, 2028, that change the state's obligation to comply with the laws listed above until the bonds are fully paid off, unless one of the following conditions are met:

The bond pledge the bill creates, which applies to the state spending and bond cap laws, prohibits the state from enacting laws taking effect from July 1, 2019, to June 30, 2029, unless the same conditions described above are met. As with the pledge under current law, the pledge the bill creates must apply for 10 years from the bonds' first issuance date but not to refunding bonds issued to pay the original bonds.

3 — BOND ISSUANCE AND EXPENDITURE CAPS

Existing law imposes a $1.9 billion aggregate cap on the amount of GO bonds or notes and credit revenue bonds (1) the treasurer may issue in any fiscal year, beginning with FY 19, and (2) for which the governor may approve allotment requisitions (i.e., expenditures) in any fiscal year, beginning with FY 17.

The bill excludes from these caps (1) any bonds, notes, or other evidences of indebtedness for borrowed money which are issued to refund other debt (i.e., refunding bonds) and (2) obligations issued in anticipation of revenues to be received by the state during the 12 calendar months following a debt issuance (e.g., bond anticipation notes).

By law, GO bonds issued as part of the Connecticut State Colleges and Universities 2020 or UConn 2000 infrastructure programs are also excluded from these caps.

4 — BOND COVENANT STUDY

The bill requires the Office of Policy and Management secretary, attorney general, comptroller, and treasurer (or their designees) to study the use of bond covenants, including Connecticut's, as a mechanism to control state spending and bonding. The study must consider the covenants':

By January 1, 2019, the officials must report, to the Finance, Revenue and Bonding Committee, their findings and recommendations for alternative methods the General Assembly may use to implement prudent long-term fiscal decision-making.

BACKGROUND

BRF Law

Existing law directs to the BRF any (1) unappropriated General Fund surplus at the end of each fiscal year and (2) revenue the state receives each fiscal year in excess of $3.15 billion from personal income tax estimated and final payments (referred to as the “volatility cap”).

BRF funds are deemed appropriated in any fiscal year in which the comptroller has certified a deficit for the immediately preceding fiscal year. The legislature may also transfer funds from the BRF to (1) the General Fund when a deficit is projected, under specified conditions, and (2) pay unfunded pension liabilities when the fund's balance equals 5% or more of net General Fund appropriations for the current fiscal year.

The BRF's maximum balance is 15% of net General Fund appropriations for the current fiscal year; once it reaches the 15% ceiling, the treasurer must transfer any remaining surplus funds, as she determines to be in the state's best interests, for reducing either the State Employee Retirement Fund's or Teachers' Retirement Fund's unfunded liability. Any amounts that remain after this transfer may be used to make additional payments for outstanding state debt (CGS 4-30a).

Cap on General Fund and STF Appropriations

Beginning in FY 20, the law prohibits the General Assembly from authorizing for any fiscal year General Fund and STF appropriations that, in the aggregate, exceed a specified percentage of the estimated revenues included in the budget act, unless certain conditions are met. The percentage ranges from 99.5% in FY 20 to 98% in FY 26 and thereafter. The General Assembly may exceed the specified percentage if either of the following conditions is met:

State Spending Cap

The state's statutory and constitutional spending cap bars the legislature from authorizing an increase in general budget expenditures for any fiscal year that exceeds the greater of the percentage increase in personal income or inflation unless (1) the governor declares an emergency or extraordinary circumstances and (2) at least three-fifths of each house of the legislature approves the extra expenditure for those purposes (CGS 2-33a & Conn. Const., art. III, 18(b)).

Bond Caps

The law imposes caps on GO and credit revenue bond authorizations, allocations, issuances, and spending. Specifically, it caps at:

COMMITTEE ACTION

Finance, Revenue and Bonding Committee

Joint Favorable Substitute

Yea

26

Nay

25

(04/05/2018)

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