Falling tax collections have widened Connecticut's current year budget deficit to nearly $1 billion, Gov. M. Jodi Rell said yesterday. The announcement came as the state prepared for institutional pricing today of a $424.2 million transportation bond refunding following a two-day retail order period.
"The economic tempest that has already ravaged so much of the nation has now made landfall in Connecticut with all of its fury," Rell said in a press release. "Lawmakers can no longer cling to false optimism that we can squeak by for one more fiscal year before facing up to any truly difficult financial decisions."
The state has been hit hard by troubles in the financial services, insurance, and real estate industries. Income tax collections in the current fiscal year are now expected to fall $665 million below projections, and the deficit, even after roughly $200 million of spending cuts in recent months, is expected to be $921.9 million.
Rell spokesman Chris Cooper said all options to close the gap are on the table except tax increases. The governor has been focusing on spending cuts but has indicated that over the next three years the state may have to dip into its rainy-day fund, Cooper said.
Rell plans to release a budget plan for fiscal 2010 and 2011 on Feb. 4 that will close a nearly $8 billion deficit. Soon after that the governor will release a new deficit mitigation plan to close the current year gap, Cooper said. The state has already trimmed roughly $200 million from its budget for the current fiscal year that ends June 30.
Connecticut is marketing its 2009 Series 1 second-lien special tax obligation transportation refunding bonds to refinance variable-rate bonds issued in 2003 as fixed rate and to pay for a termination payment on associated swaps. The 2003 bonds were sold in two series, and as recently as the beginning of June had reset below 2%, but at the end of that month they spiked to 9% where, for the most part, they have stayed ever since. Both carried Ambac Assurance Corp. insurance.
Goldman, Sachs & Co. and Banc of America Securities LLC are lead managing the sale. A.C. Advisory Inc. is financial adviser, Updike, Kelly & Spellacy PC is bond counsel, and Lewis & Munday is co-bond counsel.
The bonds are backed by dedicated transportation-related revenues, such as motor fuel taxes and motor vehicle registration fees, that are deposited into the state's transportation fund.
Information on the retail order period was not available at press time.
"The money that backs these bonds comes from a diversified stream of transportation-related revenues, and while there's been some fluctuation in the gas tax, it certainly hasn't disrupted their revenue stream and hasn't affected coverage on the bonds," Moody's Investors Service senior analyst Nicole Johnson said.
While the credit is susceptible to the economic cycle, "they've managed pretty well," she said, adding that the bonds tend to get about 2.6 to 2.7 times debt service coverage.
The bonds' rating - A1 with stable outlook - is closely related to Connecticut's Aa3 rating, but they are not linked, she said.
Fitch Ratings assigns the bonds its AA-minus rating and Standard & Poor's rates them AA. Both assign stable outlooks.