Denisc L. Nappier, State Treasurer, 112118 CTAGO, AGO 11212018

• Case Date: November 21, 2018
• Court: Connecticut

Denisc L. Nappier, State Treasurer AGO 11212018 No. 11212018 Office of the Attorney General State of Connecticut November 21, 2018          Connecticut Office of the State Treasurer          55 Elm Street Hartford, CT 06106          Dear State          Treasurer Nappier:          By letter of November 9, 2018, you have requested a formal opinion concerning the impact of recent legislative amendments on the state's bond cap and bond covenants. In making this request, you provided us a legal memorandum prepared by one of your outside bond counsel concerning the same questions you have posed to us. We have carefully and independently analyzed those questions and have reached conclusions consistent with those of your outside counsel. As explained below, we conclude that the covenant the State provided to bond purchasers on May 15. 2018 was proper, and that the State may exclude certain classes of debt from the calculation of the bond cap as recently directed by the legislature in Public Act 18-178.          Summary          By way of initial background, in 2017, the legislature first enacted a "cap" of $1.9 billion per year on State borrowing through general obligation bonds, to be effective July 1, 2018, and a provision requiring the state to offer certain covenants to bondholders about that cap. effective May 15, 2018. On May 9, 2018, the legislature enacted several bills affecting the bond cap and covenants that the State was required to offer to bond purchasers in connection with future bond offerings.          The original bond cap, enacted in 2017, provided an exclusion from the calculation of the bond cap for general obligation bonds issued as part of CSCU 2020 or as part of UConn 2000. See Public Act 17-2 § 712(f)(1)(B). This year, by Public Act 18-178, § 16(f)(1)(B), effective July 1, 2018, the legislature added three additional exclusions to the calculation of the bond cap for (1) bonds for the purpose of refunding other bonds, (2) certain revenue anticipation bonds and (3) bonds for transportation projects for up to $250 million for each of calendar years 2018 and 2019. These new exclusions were codified as Conn. Gen. Stat. § 3-21(f)(1)(B)(ii-iv). Because these new exclusions took effect July 1, 2018, while the requirement for a bond covenant took effect May 15, 2018, there is uncertainty about whether the additional three exclusions should be incorporated into the bond covenants. To resolve this uncertainty, you have requested a formal opinion addressing the following questions:

Considering all legislative enactments through 2018 regarding the bond cap and bond covenants, in calculating the $1.9 billion annual bond cap, shall I apply all of the exclusions in Conn. Gen. Stat. §3-21(f)(1)(B)(i-iv) as effective July 1, 2018, or only the exclusions for general obligation bonds issued as part of CSCU 2020 and UConn 2000?

Considering all legislative enactments through 2018 regarding the bond cap and bond covenants, am I obligated to covenant to bond purchasers that no changes will occur to the $1.9 billion annual bond cap taking into account all of the exclusions in Conn. Gen. Stat. § 3-21(f)(l)(B)(i-iv) as effective July 1, 2018, or only the exclusions for CSCU 2020 and UConn 2000?

         After careful review and consideration, we have concluded that in calculating the $1.9 billion annual bond cap, you should apply all of the exclusions in Conn. Gen. Stat. § 3-21(f)(l)(B)(i-iv) as effective July 1, 2018. We have further concluded that the legislature intended that the covenant you provide to bond purchasers requires that, during the time the covenant is in effect, no changes will occur to Conn. Gen. Stat. § 3-21 (f)(I )(B)(i-iv) as effective on July 1, 2018. Lastly, we conclude that the covenant that you provided to purchasers of bonds after May 15. 2018 was consistent with the legislative intent.          The Statutes          Analysis of the issues presented by your questions must begin with a review of sections of several key interrelated acts - one from October, 2017 and three passed on the last day of this year's legislative session, May 9, 2018. A summary of the key relevant portions of those statutes and a description of when each was passed, signed by the governor, and stated it was effective, is as follows:

1. Public Acts, Spec. Sess., June, 2017, No. 17-2 (P.A. 17-2), §§712. 706 passed and signed October 31, 2017

§ 712. "Bond Cap" - 'effective from passage [October 31, 2017]" - added new Conn. Gen. Stat. § 3-21(f) which provided that on and after July 1, 2018, the Treasurer may not issue bonds that exceed $1.9 billion in any fiscal year, except as part of CSCU 2020 or UConn 2000, to meet cash flow needs, or to cover emergency needs in times of natural disasters.

§ 706. "Bond Covenant" - effective "May 15, 2018" - added new Conn. Gen. Stat. § 3-20(aa) which provides that for bonds issued on or after May 15, 2018 and before July 1, 2020, the state covenants to comply with subsections (A)-(E), including subsection (E), which is the bond cap provision, and also including subsection (A), which encompasses the requirements of Conn. Gen. Stat. § 4-30a, a provision that requires the transfer of annual income tax revenues over $3.15 billion per fiscal year to the Budget Reserve Fund, to be used as statutorily directed. Further, for bonds issued between those dates, May 15, 2018 and July 1, 2020, no act of the General Assembly taking effect on or after May 15, 2018 shall alter the obligation to comply with the provisions of (A) through (E).

2. Public Acts 2018, No. 18-49, § 8 (P.A. 18-49) - passed May 9. 2018, 10:42 pm; (by its terms, "effective May 15, 2018" although not signed until May 31, 2018) (change to bond covenant)

§ 8. Changed the bond covenant in Conn. Gen. Stat. § 3-20(aa)(1) by amending subsection (aa)(1)(A) to add a reference to compliance with (A) as amended "by Section 7 of this act [18-49]," which section included in the calculation of the Budget Reserve Fund the revenue from the new Business Entity tax.

3. Public Acts2018. No. 18-81, §21 (P.A. 18-81)- passed May 9, 2018, 11:21 pm, signed May 15, 2018, (by its terms, "effective May 15, 2018") (changes to bond covenant) § 21. Reduced the length of time that the bond covenant will be effective so that it will end on July 1, 2023, instead of July 1, 2028 (reduction from 10 years to 5 years) and added a reference in Conn. Gen. Stat. § 3-20(aa)(1)(A) to §20 of this act [18-81], which amended Conn. Gen. Stat. § 4-30a to provide for an annual adjustment to the threshold for the transfer of revenue to the Budget Reserve Fund and then limited further changes.

4. Public Acts 2018, No. 18-178, § 16 (P.A. 18-178) -- passed May 9, 2018. 11:23 pm, signed June 14, 2018, (by its terms, effective July 1. 2018) (changes to bond cap)

§ 16. Added three new exclusions to the bond cap (not covenant) statute, Conn. Gen. Stat. §3-21(f)(1)(B), and also to Conn. Gen. Stat. § 3-21(f)(2)(C) for refunding bonds, certain revenue anticipation bonds, and transportation bonds of up to $250 million for each of calendar years 2018 and 2019.

         The Apparent Statutory Conflicts          As noted above, the bond covenant statute, as first passed in 2017, P.A. 17-2, and as modified in 2018 by P.A. 18-49 and P.A. 18-81, says that the state covenants that no act' of the General Assembly '"taking effect on or after May 15, 2018" shall alter the obligation to comply with Conn. Gen. Stat. § 3-20(aa)(l)(A)-(E). The obligations not to be altered included provisions establishing the bond cap. However, after enacting the covenant provision limiting alteration of the bond cap, the legislature appeared to directly violate and contradict that mandate by altering the manner that the bond cap is calculated and directing other actions inconsistent with the mandate.          First, on May 9, 2018, the legislature enacted P.A. 18-49, which it explicitly stated was to be effective May 15, 2018. P.A. 18-49 changed the covenant requirements by adding to Conn. Gen. Stat. § 3-20(aa)(1)(A) a reference to § 7 of P.A. 18-49, which added an additional source of funding for the Budget Reserve Fund ("The Affected Business Entity Tax") created by § 1 of P.A. 18-49. effectively placing a limit on how those funds could be used. Thus, P.A. 18-49 appears to be an alteration, taking effect on or after May 15, 2018, to an obligation, in place on October 31, 2017, to comply with the provisions of (A)-(E) of the bond covenant requirements.          The legislature then, also on May 9, 2018, enacted P.A. 18-81, § 21, also, by its terms, effective May 15, 2018. That Act explicitly modified Conn. Gen. Stat. §...