Connecticut is gearing up to issue $450 million of general obligation bonds aimed first to retail Monday, in a deal with many features that are popular in the current market, particularly more than half offered to taxable muni investors.
The bonds will also be buoyed by Connecticut's brand — the state has developed a reputation for sound fiscal management over the last five years, and its treasurer said it intends to maintain those policies.
"We've seen drastic change in Connecticut over the last many years, and it's been due in large part to what we have coined the fiscal guardrails," State Treasurer Erick Russell said. Through this set of policies, Connecticut has developed a "culture of addressing many of the long-standing challenges that we've had, as we continue to make investments in our state."
That brand was burnished ahead of the deal as two rating agencies lifted their outlooks on Connecticut debt to positive.
Ahead of the deal, Moody's Ratings lifted the outlook to positive from stable on its was rated Aa3 rating of Connecticut's issuer rating and GO bonds, and Fitch Ratings raised the outlook to positive on its AA-minus rating for the state.
Moody's Ratings changed its outlook to positive from stable on its Aa3 rating on the state, while Fitch Ratings raised also raised its outlook to positive on its AA-minus rating for the state.
The deal is negotiated, with $200 million of tax-exempts maturing through 2044 and $250 million of federally taxable bonds maturing through 2034. The retail order period will begin Monday, with institutional pricing Tuesday.
Moody's Ratings said it changed its outlook to positive from stable on its Aa3 rating on the state.Fitch Ratings raised the outlook to positive on its AA-minus rating for the state.
The deal also carries ratings of AA-plus from Kroll Bond Rating Agency, with a stable outlook, and AA-minus from S&P Global Ratings, with a stable outlook.
BofA Securities is senior manager, with Acacia Financial Group and TKG & Associates as co-financial advisors.
Bond counsel are Pullman & Comley, LLC, Robinson & Cole LLP and Squire Patton Boggs LLP.
Patrick Luby, senior municipal strategist at CreditSights, said several features of the deal align with the market's appetites.
"I think there'll be strong interest," Luby said, adding, "especially for the taxables. Because of the heavy redemption activity of Build America Bonds, the appetite from investors for taxable munis is very strong."
The deal's relatively short amortization schedule is also advantageous in the current environment, Luby said.
"The new-issue calendar has had a lot of refunding [deals], and new money and refunding deals combined. So [within] the new issue market, the pace of issuance has been heavy, but the amounts of principal due every year have been pretty lumpy," Luby said. "Last week, there's a lot of money that was borrowed in the intermediate part of the curve that helped upward pressure on yields in the belly of the curve."
The deal also has level principal repayment schedules on both the taxable and tax-exempt sides, which Luby said could make it easier for investors to participate.
Moreover, Connecticut's economy seems strong, Luby said; sales tax collections through April are up 12% over last year. Investors will take note of Connecticut's reputation as an issuer who comes to market often and takes its fiscal responsibilities seriously.
The state's history since 2017 was front and center in KBRA's rationale for affirming its AA-plus rating.
The rating agency cited "fiscal guardrails" embodied in bond covenants since then, "which have accommodated strong reserves and progress in addressing its large unfunded pension liabilities over the last seven years."
Those guardrails and covenants
The guardrail commitments include annually depositing general fund surpluses toward the state's budget reserve fund; appropriating income tax revenue above a certain threshold to the BRF; and directing any BRF balance above a certain threshold at the end of the year toward the state's unfunded pension liabilities.
Thanks to these policies, Connecticut has funded its BRF to the statutory limit every year for the past four years, KBRA reported, and it's spent $7.6 billion in supplemental pension contributions since fiscal 2020. The state expects a BRF balance of $4.62 billion at the end of this fiscal year, $600 million of which will be deposited into its unfunded pension liabilities.
Connecticut's unfunded pension liabilities and tax-supported debt are still high compared to average personal income — three times the national average, KBRA said. It's one of the biggest strains on the state's credit. But the state's fiscal management is digging it out of the hole.
"The outlook revision to positive is driven by the state's prudent financial policies that have led to increased budgetary reserves and consistent pension contributions that have begun moderating the state's very high unfunded pension liabilities," Moody's said Thursday.
The "revision to positive reflects Fitch's view that Connecticut is likely to see medium-term revenue growth at or slightly above Fitch's long-term expectations for national inflation, while the state maintains its renewed commitment to budgetary guardrails that constrain expenditure growth," the agency said Thursday.
The coming years may be the hardest in which to maintain conservative budgeting policies, Luby said.
"The inflationary environment is making some budgetary choices difficult for state and local governments," Luby said. "The cost of providing services and especially the cost of infrastructure investment has really gone up a lot over the last couple of years."
In addition to higher costs, many states' revenue is expected to slow from recent years' highs, and pandemic and infrastructure aid from the federal government is running out. Under these conditions, there may be a political or even economic cost to saving more money.
"I would argue we can't afford not to invest right now. We have a $14 billion surplus," Shapiro said. "Even the ratings agencies have said that there's too much money sitting in surpluses around the country – instead of being driven out into our communities,"
Does this sentiment exist in Connecticut? To some extent, yes, Russell said.
"But I think that even in those conversations, folks are looking at doing those within the general parameters of our guardrails," Russell said. "I think people know, as we look at the additional payments that we've made to our unfunded liability, that it's freeing up about $700 million on an annual basis in our budget. And so people are seeing the benefits of this patience and discipline."
The legislature renewed its fiscal guardrails almost unanimously in last year's budget for another five years.
Last year, the state also won The Bond Buyer's
That program has been running smoothly, Russell said; the trust fund has been established and funded, and the investments are doing well.
"As of April 1 of this year, there have been 13,300 babies born eligible for the baby bonds program that have been born in 166 of our 169 towns across the state," Russell said. "We've been working to build out the best ways for notifying families, eligible recipients… and we're doing a lot of work with the philanthropy and nonprofit community to not only think about access to capital through the program 30 years down the road but also to connect families with existing supports and wraparound services that are in existence, as well as looking for opportunities to add new wraparound programming for families and eligible children."
Connecticut plans to return to the market in mid-July with roughly $200 million of competitive refunding GOs.
