Connecticut plans to sell $840 million of GOs, with social component

Connecticut is set to price $840 million of general obligation bonds next week, the state's last issuance of a year with landmark fiscal policy decisions.

The state, which renewed fiscal responsibility measures, lowered income taxes and maintained strong economic metrics, kept its solid ratings from all four agencies for the upcoming deal. 

"Management in Connecticut, we believe, is best-in-class," Kroll Bond Rating Agency analyst Douglas Kilcommons said. "That's something that, in our view, supports the very high ratings that we have on Connecticut, and … provides the ability for the state to manage various crises as they present themselves." 

Norwalk Public Schools

Ahead of the deal, Kroll affirmed Connecticut's AA-plus GO bond rating, with a stable outlook. Moody's Investors Service affirmed its Aa3 rating, S&P Global Ratings affirmed its AA-minus rating and Fitch Ratings affirmed its AA-minus rating.

The deal, all tax-exempt, is comprised of $400 million of 2024 Series A GOs; $250 million of 2024 Series B social GOs, which will reimburse school construction projects; and $190 million of 2024 Series C social refunding GOs, which will refinance 2014 bonds that funded school construction.

Retail pricing is planned for Monday ahead of institutional pricing Tuesday, according to an online investor presentation.

The senior manager is Jefferies for a 23-member syndicate; Acacia Financial Group and TKG & Associates are financial advisors. Day Pitney LLP is bond counsel.

The two social bonds are Connecticut's fifth and sixth issuances with a social designation. 

The state is self-designating the bonds as social, saying their use to fund public school projects is in line with the Social Bond Principles outlined by the International Capital Markets Association.

"Social Projects include access to essential services including education," the state says in the deal's preliminary official statement.

The state has also issued five series of green bonds. ESG investors receive first preference in Connecticut's institutional order period, and it uses the social designation "in recognition of this emerging investor class," State Treasurer Erick Russell said in a statement. 

The refunding series will provide debt service savings, Russell said. The state's policy is to combine new money sales with refunding sales when the call date for the refunding series aligns with a scheduled new money issuance.

Connecticut has been reaping the benefits of its conservative fiscal management, Kroll's analysts said. The state has paid down some of its unfunded pension liabilities and created repeated budget surpluses 

The state earlier this year extended "fiscal guardrails" intended to enforce responsible spending earlier this year. 

"These 'fiscal guardrails' are designed to capture volatile revenues and use them to build reserves and pay down pension liabilities," Russell said. "Since their enactment, Connecticut has filled its Rainy Day Fund to capacity and generated nearly $8 billion in additional pension contributions."

The policies cap expenditure growth to the percentage increase in average personal income and inflation; limit appropriations to less than 99% of the revenue forecast, guaranteeing a surplus; and mandate that certain tax revenue and any surplus funds go to the rainy day fund, the deal's roadshow presentation explains.

The guardrails also restrict how Connecticut can issue and use debt. Next year, the state's annual debt issuance is capped at $2.4 billion, as is the state Bond Commission's allocations and the allotment of previously allocated funds. 

The fiscal guardrails also direct funds from Connecticut's rainy day fund to its unfunded pension liabilities. In 2018, the state's aggregate funding ratio for pensions was 41% — well below the national average of 71%. The state now meets actuarially determined contributions and directs billions in surplus toward pension obligations. 

Connecticut has more debt than most U.S. states, because it frequently borrows on behalf of municipalities. Its liability burden is still considered moderate compared to personal income, according to Fitch's rating report.

Connecticut projects that it will end the year with a surplus; Kroll's ratings report concurs. This will be the sixth surplus in a row for the state.

Connecticut employs, Kroll analyst Peter Scherer said, "a structured, formal mechanism that directs those surplus revenues right towards the pensions, and I think that is, again, just distinguishing and really unique."

The budget that Connecticut passed earlier this year lowered the income tax for the lower tax brackets, which Scherer said will cost the state around half a billion dollars per year. He said this won't have much impact on the total revenue. Gov. Ned Lamont said the state could afford to lower taxes thanks to its improved fiscal policy over recent years. 

"They're not the only state doing that. It's been a flush time for states in general," Scherer said. "It's part of the normal ebb and flow we'd expect to see for a state."

The state's economy is very strong and diverse, but has slow growth, like many Northeast states, according to Kroll's rating report. Connecticut's unemployment rate was at 3.5% in October, lower than the 3.9% national average, and its per capita income last year was $84,972, 130% of the national average.

This will be Connecticut's third issuance this fall. The state previously offered $1.1 billion of bonds for transportation initiatives in October, and around $227 million of bonds for the UConn 2000 program. 

"We anticipate being in the market again sometime in Spring 2024 with a GO bond sale," Russell said. "The size is still to be determined, but the state's spring bond sales typically include a taxable bond series."

Connecticut earlier this month received a Bond Buyer Deal of the Year award in the Innovative Financing category for its "CT Baby Bonds" program.