The Connecticut State Bond Commission Friday approved $3.64 billion of bonds, including $2 billion for the state’s Teachers’ Retirement Fund. With the approval of the bond allocations, the state looks toward a pension obligation bond sale in the spring.
|Denise L. Nappier|
Treasurer Denise L. Nappier’s office said the state plans to issue the $2 billion of taxable POBs either in one or two sales, which will close before the end of fiscal 2008 on June 30.
Nappier, a Democrat, last Friday announced that Bear Stearns & Co and Merrill Lynch would work together as lead book-runner and co-book-runner for the deal. These firms have also led POB transactions for Illinois, Oregon, and Puerto Rico. Additionally, Nappier named Citi, Lehman Brothers, M.R. Beal & Co., Morgan Stanley, JPMorgan, Ramirez & Co., Siebert Brandford Shank & Co., and UBS Securities LLC as co-senior managers to the deal. Co-managing underwriters will be named closer to the first sale date.
Public Resources Advisory Group and P.G. Corbin & Co. are financial advisers on the transaction, and Day Pitney LLP and Lewis & Munday are co-bond counsel. Also, Finn Dixon & Herling LLP and Soeder and Associates will serve as co-disclosure counsel, and Updike, Kelly & Spellacy and Gonzalez Saggio & Harlan LLP are underwriters counsel.
During the state’s 2007 legislative session, Nappier and Rep. James A. Amann proposed a bill that authorized the sale of up to $2 billion of bonds to help close a $6.9 billion shortfall in the Teachers’ Retirement Fund and requires the state to make the actuarially required payments into the fund each year. After lawmakers approved the bill, Republican Gov. M. Jodi Rell, who chairs the Bond Commission, last August signed into law the authorization of $2 billion of pension bonds.
“I have long maintained that adequately funding the state’s pension obligations needs to be our top priority,” Nappier said in a statement. “Not only is it the right thing to do, it is fiscally prudent and, over time, will save taxpayers an estimated $2.8 billion over the next 25 years.”
Under the legislation enacted, Connecticut will sell up to $2 billion of bonds with a maximum maturity of 25 years. If the state gets a 5.6% interest rate, debt service cost over 25 years is estimated to be $4.54 billion. But the state’s $6.9 billion unfunded liability is currently charged at 8.5%, so replacing $2 billion of that with an interest rate of 5.6% could save the state about $2.76 billion.
Still, there are some who are opposed to issuing bonds to pay for pension debt, including Connecticut Rep. Shawn T. Johnston, a Democrat, who voted against the legislation last year.
Johnston acknowledges that the transaction will save taxpayers the $2.8 billion over the next 25 years, but this is not without a tremendous amount of debt service costs and hefty annual contribution payments of $1 billion and more starting in 2020. By 2031, Connecticut will be paying $1.97 billion toward the TRF under Nappier’s plan, he said.
“I ask myself how, in the years 2023 and 2024 are we ever going to make a payment of $1.4 billion?” Johnston said. “It’s not going to happen; there’s not a chance in heck that’s going to happen without completely destroying the state budget.”
Johnston believes the state should simply bite the bullet and pay more up front now than is required, so that years down the road, it doesn’t have to make such large payments.
“If we’re going to do something, let’s have a little bit of sacrifice now,” Johnston said.
Dick Larkin, a senior vice president municipal trading desk analyst at JB Hanauer & Co. said that POB transactions can be positive for states, if the sale is done properly. Larkin noted that when states are left to their own devices, they can usually find ways to reduce or skip payments in the pension funds.
Connecticut is a prime example, having had a chronic shortfall in its TRF for two decades. Although Rell began to address the $6.9 billion gap when she authorized fully financing the fund beginning in fiscal 2006, future governors might not do so. The $2 billion POB act that lawmakers passed and Rell signed into law requires the state to fund the full actuarial recommended contributions for the 25-year term of the POBs.
“Basically it’s a more disciplined way of trying to pay down an unfunded pension liability that was probably built up over years of neglect with underfunding,” Larkin said.
“In any given year, this pension might earn less or may even lose money on top of interest that the state has to pay for the borrowing,” Larkin said. “But if the funds investment is managed properly over the long-term, those losses should be offset by gains.”
While Larkin doesn’t think there is a specific demand for POBs in the market, they are viewed as fairly safe investments.
“The market is usually receptive to state level debt issuance, because usually states are very good credits, and the bonds are usually backed by the general obligation [of the state],” Larkin said.
Fitch Ratings and Standard & Poor’s give Connecticut’s GO debt a AA rating, while Moody’s Investors Service assigns it a Aa3 rating.
Fitch director Douglas Offerman said that Connecticut’s debt levels are very high, so a POB issuance would make the state’s outstanding tax supported debt higher. Still, Connecticut is a high wealth state and amortizes its debt very rapidly.
“Connecticut has had an issue for a while insofar as its pension systems are not well-fund,” Offerman said. “To the extent that this is beginning to address the funding issue for one of those systems, it is a positive.”