On heels of new AAA rating, Connecticut on tap with $1.1B transportation deal

Connecticut will bring more than $1.1 billion of bonds to market for various transportation initiatives in a pricing next week.

One of the oldest and most densely populated states, Connecticut has taken steps to shore up aging infrastructure, Peter Scherer, director in KBRA's Public Finance Group, told The Bond Buyer.

KBRA upgraded the long-term rating on the state's special tax obligation transportation infrastructure purposes bonds to AAA with stable outlook from AA-plus ahead of the deal, slated for the week of Oct. 16.

Gov. Ned Lamont, who chairs the Connecticut State Bond Commission, which approved the deal, said Friday the bond allocation would help support projects upgrading and improving roads, bridges and public transit systems. 

"State bond funding we are releasing today positions our state to create the transportation network of the future, which will connect people to jobs, employment, and all our state has to offer," Lamont said. 

Metropolitan Transportation Authority/Patrick Cashin

Connecticut's Office of the Treasury said it plans offer through negotiated sale $1.1 billion of special tax obligation bonds for transportation infrastructure purposes, in two series; $875 million of 2023 Series A tax-exempt bonds that will fund capital work and about $340 million of 2023 Series B refunding bonds to refinance previously issued bonds to lower interest rates and capture debt service savings.

KBRA said its upgrade recognized "the increased diversity and resilience of pledged revenues per the phased-in dedication of certain general sales and use taxes, motor vehicle sales tax, and highway use tax receipts; and, the recent stabilization of motor fuel tax receipts following the end of a gas tax holiday that was in place from March 2022 through April 2023."

That includes a dedicated, growing basket of taxes and fees to its Special Tax Fund, used exclusively to pay transportation bond debt service and pay-go funding transportation projects.

"STF revenues grew by a notable 69% over the decade ending in fiscal year 2023," Scherer said.
"Funding from the 2021 federal Infrastructure Investment and Jobs Act will also help accelerate investment with the state expecting a 30% increase in Federal Transportation Authority funding and 48% increase in Federal Highway Administration funding through FY 2027."

While slowing tax collections could impact the state's "capacity and appetite" for transportation borrowing in the years ahead, he said revenues dedicated to the special tax obligation bonds have "historically experienced limited downside volatility."

"Together with descending debt service requirements, it provides a measure of rolling capacity," Scherer said. "The state has also historically been proactive in dedicating new revenues to the STF, and could do so again to boost program borrowing capacity."

Moody's Investors Service assigned the transportation bonds a rating of Aa3 with stable outlook, S&P Global a rating of AA with stable outlook, and Fitch Ratings, AA-minus with stable outlook.

Thirteen projects are slated to receive funds, according to officials, with over $666 million allocated to public transportation and $300 million to road and bridge improvement.

Just more than $398 million, the largest single allocation of the bonds, will go to support work on the Northeast Corridor, a 457-mile stretch of rail traversing 8 states, used by passenger, intercity, and freight transportation. The governor's office said the allocation comes on top of $2.1 billion of various federal transportation funding dedicated to the project.

The corridor is the nation's busiest rail route and one of its busiest sections running from New Haven to New York is currently the focus of capital work estimated to cost $8 billion to 10 billion through 2035 directed by the Connecticut Department of Transportation. The end goal is to rebuild the railroad for faster service and reduce trip times by as much as 25 minutes for commuters, officials said.