Connecticut's momentum with the rating agencies continued with Wednesday night’s upgrade from Fitch Ratings to its roughly $7 billion in special tax obligation bonds for transportation infrastructure purposes to AA-minus from A-plus.
The state already had received general obligation
"These upgrades are further confirmation of significant improvements in Connecticut’s fiscal standing," state Treasurer Shawn Wooden said. "As a result, we will continue to attract new investors and save taxpayers millions of dollars by securing lower financing cost for critical transportation investments for years to come."
Special tax obligation bonds are secured by a gross lien on pledged revenues and other receipts deposited to the special transportation fund before any other uses.
Fitch said the upgrade reflects that of the state’s issuer default rating on May 14 to AA-minus from A-plus, and the standalone credit quality of the dedicated taxes. Fitch’s rating on the STO bonds remains capped at the state's AA-minus, given Connecticut’s ability to statutorily adjust the rates of pledged taxes and fees and their distribution.
“STO bonds are supported by very strong resiliency and solid debt service coverage,” Fitch said. “The rating considers the state's active management of the special transportation fund. as underlying growth prospects for revenues over time are otherwise slow.”
This credit is exposed to state operations through the state's ability to statutorily adjust both the rates of pledged taxes and fees and their distribution among the state's funds.
Although voters approved a constitutional dedication of revenues in the fund for transportation purposes in 2018, the legislature retains its discretion to adjust rates and/or allocations of pledged revenues before deposits of revenues into the fund.
For example, in the fiscal 2020-2021 biennium, the scheduled phase-in of expanded sales tax deposits to the fund was modified to support the general fund. The state actively manages capital, debt issuance, revenues and expenditures in the fund to identify and address cumulative deficits in the fund over the state's longer-term transportation planning window.
After the GO upgrades, Kroll Bond Rating Agency and S&P Global Ratings rate Connecticut AA and A-plus, respectively. Moody’s Investors Service assigns its Aa3 rating.
Connecticut sold $1 billion of GOs on May 18, after a one-day retail period. That sale included $600 million of bonds to fund new projects, which includes local school construction, economic development, housing, and municipal grants statewide, and roughly $400 million of refunding bonds for lower interest rates for savings.
Retail orders totaled $556.2 million, which according to Wooden marked the second-highest on any state bond sale.
Rating agencies cited structural improvements and the bolstering of the state’s rainy-day account. State officials in April projected a $250 million budget surplus, as opposed to an $880 million deficit it forecast in October.
The state is also in store for $2.6 billion under the federal American Rescue Plan.
“Connecticut has sizable reserves and money from the American Rescue Plan will enable it to make investments during the upcoming fiscal 2022 and 2023 biennium,” said research firm CreditSights. “The infrastructure currently under debate in Washington, D.C., could bring sorely needed new funds for the Nutmeg State's creaky transportation infrastructure.”
