Connecticut Treasurer Francisco L. Borges last week warned state lawmakers that the state's bond ratings could plunge and borrowing costs rise if a budget did not emerge by sometime Sunday, the last day in the state's fiscal year.

"A budget impasse of more than a very few days would have a substantial impact on state finances," Mr. Borges said, according to a press release issued by the state treasury Thursday.

On the same day, Mr. Borges sent a letter to lawmakers in the state's General Assembly listing risks of not having a budget set for the beginning of the budget year on Monday. By late Friday, lawmakers were still negotiating and a legislative source said hope for a fiscal accord over the weekened stil existed.

The letter from Mr. Borges tried to spur the legislators to keep such hope alive. Gov. Lowell P. Weicker Jr. pursued similar tactics Friday, when he outlined plans to close all but "essential" services, such as prisons and courts, if the state began its fiscal year today without a budget agreement.

Mr. Borges also listed additional costs amounting to nearly $5 million that would stem from short-term borrowing necessitated by the absence of a budget. "Although a delay in adoption of the budget will incur added borrowing and expense, it is not a necessary or feasible option to permit the state to run out of cash," Mr. Borges wrote.

Without more short-term borrowing, his letter warned, the state might face a "possibility" of being unable "to assure sufficient cash to make the debt service payment of $68 million due on July 31 and Aug. 1." That would permanently mar "Connecticut's standing in the credit markets," he said.

Steven Hochman, an assistant director of state ratings of Moody's Investors Service, however, said bondholders would receive their money as scheduled, regardless of what happened over the weekend with the state budget.

"Debt service is payable regardless of whether a budget is enacted by July 1," he said, adding that he believed the state would have the necessary cash to meet investor demands, even in the absence of a fiscal accord. "That doesn't mean that the failure to enact a budget on time won't have consequences," he said.

One of the main victims of the lack of a budget, the letter from Mr. Borges warned, would be a financing to cover an accumulated deficit now estimated at $942 million. "In the absence of a budget, the deficit financing cannot occur," the letter said. The budget was expected to contain legislation authorizing the issue.

Mr. Borges also said rating agencies would take a dim view of the situation and lower ratings on the state's bonds. "We want the legislators to understand that whether they adopt the budget before the end of the fiscal year or after has more consequences than just a few days delay and confusion," said Benson R. Cohn, the state's assistant treasurer for debt management, on Friday.

Lower ratings could dog the state for months or even years, he said. And seeking ratings for a big issue, such as a $350 million general obligation deal also slated for sometime before Sept. 9, could trigger the agencies to take action.

"It would make it harder for [the agencies] to hold off and give us the benefit of the doubt for a little longer," Mr. Cohn said.

Richard Marino, a vice president in the general obligations department of Standard & Poor's Corp., said Friday the agency would not definitely downgrade Connecticut debt just because of a late budget.

"We're in a wait-and-see position as to whether they pass the budget on time," Mr. Marino said. "If the state fails to pass a budget on time, we'll review our options." The agency rates the state's general obligation bonds AA and has placed them on CreditWatch with negative implications.

Mr. Hochman also said failure to meet the yearend deadline would not necessarily lead to a downgrading of its Aa rating on Connecticut bonds.

"Many states this year are up against this weekend's budget deadline, with a budget not yet enacted," Mr. Hochman said. "What's more important for the rating is the nature of the budget solution that the state comes up with."

Over the months since Gov. Weicker proposed his radical revenue plan for fiscal 1992, debate has centered on whether the state should take the historic step of taxing wages and salaries, rather than just investment income, sales, and corporate profits.

Last week's letter from Mr. Borges showed that the debate was beginning to threaten bond sales. "It is not practical to issue long-term fixed-rate bonds while the budget is an open question," Mr. Borges told lawmakers. "We would be forced to lock in rates which are too high."

A delay of "only a few weeks," the letter said, would lead to such a "market penalty" of high interest costs on three issues: the deficit financing, which could carry maturities of up to five years; the $350 million in GO bonds; and a $240 million issue backed by dedicated revenues of the state's transportation fund, consisting largely of motor vehicle fees and fines.

But he said the state probably will have to issue some securities next month, even without a budget, as cash dwindles. "By Aug. 1, the state would have only $11 million in its coffers," said Avice A. Meehan, Gov. Weicker's press secretary.

While the state has the ability to issue up to $739 million of commercial paper to meet its cash needs, it already has $569 million outstanding, leaving little extra capacity. The commercial paper program might have to expand by $100 million or $200 million late this month without a budget by today, Mr. Cohn said.

And, while the state's current revenue system would stay in place in the absence of legislative action, the structure would not meet the more than $7 billion in spending requirements of the state in the fiscal year that began today.

Mr. Cohn said the state might issue its special tax obligation bonds early if a budget had not materialized by today. Those bonds, backed by automobile fines and fees, rely less on the state's general fund position and budgetary outlook. Issuing the transportation bonds earlier than August, as is now planned. would increase the state's interest costs by $1.5 million.

After the special tax bonds, the deficit financing could take place in August, according to the Borges letter. The GO bonds also are slated to come to market that month. A late budget could force the state to issue variable-rate GO debt, to be converted later to fixed, the treasurer said. And that, along with the other attempts to cope with legislative inaction, would have hidden costs.

"The IRS compliance procedures required for variable-rate bonds are exceedingly complext and will strain our ability to keep up with the rest of our work," the letter said. Issuing the deficit notes and the GO bonds -- some $1.2 billion in Connecticut debt -- in the same month would exact a "market penalty," the treasurer added.

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