Connecticut holds on to refunding portion of GO deal plan

Bloomberg News

Connecticut plans to price a $1.475 billion general obligation bond deal this week. 

This exceptionally volatile phase of the muni market may not present the best opportunity for such a deal, but the state plans to press forward — even with a refunding. 

"Following the recent 10-day run-up in rates, we are optimistic that rates may normalize by the time the bonds price next week," said Maliha Ahsan, director of communication for the Office of the State Treasurer. "We have witnessed lower rates over the past two trading days and hope that trend continues and we get some more bumps. Like all issuers, we are predominantly at the mercy of the market. We are targeting at least 3% overall savings."

"Lower coupon maturities (sub-5.0% coupon bonds) will probably not be included in the refunding," she added.

The deal, expected to price Wednesday with a retail order period Tuesday, includes Connecticut's first forward delivery bonds since 2021, Ahsan said; the deal team is closely monitoring the tranche to make sure it's producing savings.

The two refunding series were originally planned to be bigger. The amounts listed in the notice of potential sale on Sept. 1 were $180 million greater than the offerings in the POS. 

The deal has four tranches. The first series, $800 million of Series 2026C new-money bonds, is set to mature from 2027 to 2046, callable in October 2035. 

The second new-money tranche, $300 million of Series 2026B new-money bonds, is federally taxable and exempt from state taxes. It's set to mature from 2027 to 2036.

Refunding Series 2026D, $241.96 million of tax-exempt bonds, is set to mature from 2030-2035. Proceeds will refund Series 2015A, 2016E and 2016F.

Series 2026E, $133.04 million of tax-exempts, is a forward delivery refunding of Series 2017A, set to mature from 2027 to 2030. Its closing date is in January 2027.

The deal is managed by Jefferies, with 19 co-managers. Acacia and Knight & Day are municipal advisors. Day Pitney, Bryant Rabbino, HLF, Pullman & Comley, Robinson + Cole, Shipman and Squire Patton Boggs are co-counsels.

The bond proceeds will support affordable housing, economic development, and school construction, according to Ahsan. The state plans to offer its taxable bonds to overseas investors for the first time, she said, although that is still to be confirmed.

S&P lifted the outlook on its AA-minus rating for Connecticut to positive from stable ahead of the deal. The move reflects analysts' view of the state's commitment to reducing its high unfunded pension liabilities and sustaining healthy reserves. 

The deal was rated Aa2 by Moody's Ratings, AA by Fitch and AA-plus by KBRA, all with stable outlooks. 

"The outlook revision also reflects our expectation that the state will maintain its commitment to fiscal balance and reducing long-term liabilities in the next fiscal biennium, while not significantly altering the guardrails it established to support budget predictability and fiscal balance, lower unfunded pension liabilities, and limit annual debt issuance," S&P analysts wrote.

"S&P Global's improved outlook for Connecticut is another affirmation of our fiscal direction and the long-term commitments we've made to strengthen the state's balance sheet," Treasurer Erick Russell said in a statement. "This outlook reflects disciplined budgeting, constructive engagement with the rating agencies, and measurable progress in reducing long-term pension liabilities. Stronger credit ratings help lower borrowing costs and expand Connecticut's capacity to invest in the priorities that matter to our residents."

Moody's and Fitch upgraded the state in September 2025, ahead of a $1.8 billion GO deal from the state. The agencies cited improvements in Connecticut's governance, including a set of "fiscal guardrails" instituted in 2018 to escape a fiscal crisis. 

"Moody's is downgrading the United States of America. And we've had [eight] straight upgrades over the last six years," Gov. Ned Lamont said in a press conference following the upgrades. 

He also stressed that the state was "not out of the woods." 

"I know there's a certain sense, maybe 'Yippee, we're done, we can get back to business as usual,'" Lamont said. "We're still below average."

Before 2021, the state had gone 20 years without a rating upgrade.

Connecticut's leaders often emphasize the state's comeback story and the strength of its fiscal guardrails — in fact, some lawmakers have criticized the guardrails for being too strong and preventing necessary investment in areas like human services. 

The guardrails contain several components, including a cap on spending growth, a bonding cap, and a volatility cap which directs excess revenues to the state's rainy day fund and, when the rainy day fund is full, to pension funds.

The policies have helped pay down the state's unfunded pension liabilities. Last year, it paid $1.5 billion toward pensions. Connecticut has made $11.5 billion of supplemental pension payments to date, according to the Yankee Institute.

However, many argue the guardrails limit spending too much, and the volatility cap restricts far more revenues than are actually volatile. Connecticut's comptroller has pushed to widen the guardrails to fund special education.

This year, Connecticut passed a $28 billion budget, which spent several hundred million dollars more than the volatility cap originally allowed. The budget also included some municipal tax relief, aid to hospitals, and additional funds to address federal changes.

Connecticut's budget history still weighs on its credit. The state still has high outstanding debt and pension liabilities, often criticized in rating reports. Connecticut's outstanding debt is $17.04 billion, and has been steadily declining since 2021.

The Trump administration has also presented fiscal challenges for Connecticut. In addition to lower Medicaid and SNAP funding, the administration is withholding grants for energy projects — illegally, according to a federal judge. 

The president also repeatedly tried to block the construction of a Connecticut wind farm, although the project has proceeded and is now providing energy to the grid.

Total volume from Connecticut's municipal bond issuers in the first half of the year grew by nearly 40% year-over-year, according to LSEG data, and reached roughly double its volume from the first half of 2024. 

Volume hasn't slowed down since. In July, a $2.4 billion deal from the Aquarion Water Authority priced, to strong demand. 

According to Connecticut's forward financing schedule, its next planned deal is $1.2 billion of special tax obligation bonds in December. The state also has $178 million of state revolving fund general revenue refunding green bonds scheduled for January and $625 million of GOs from the University of Connecticut in March.