Connecticut to include fiscal-restraint covenant in GO sale

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Connecticut plans to issue $500 million of general obligation bonds in June that for the first time will include a bond covenant that commits the state to four financial-restraint measures the General Assembly passed, state Treasurer Denise Nappier said.

The June 5 institutional pricing, after a one-day retail order period, will feature $400 million in new-money bonds and a $100 million refunding. Bank of America Merrill Lynch will lead the underwriting syndicate.

Legislation that Gov. Dannel Malloy and the General Assembly approved in October and amended earlier this month requires a five-year bond covenant that includes four promises.

The volatility cap requires that estimated and final tax payments to the state that exceed $3.15 billion in fiscal 2018 be transferred to Connecticut’s budget reserve fund. For FY2019 and beyond, this threshold will be indexed annually to the rate of growth of Connecticut’s personal income.

The revenue cap constrains the amount of revenue that can be appropriated, equal to 99.5% of estimated revenue in fiscal 2020, and declining thereafter by one quarter of a percentage point per year until it reaches 98% in FY2026.

The statutory spending cap requires the annual growth in state spending not exceed the percentage increase in personal income or inflation, whichever is greater.

And the bond cap restricts bond allocations to $2 billion per year and bond allotments and bond issuance to $1.9 billion per year each, with the limits adjusted annually based on the U.S. Consumer Price Index.

“This bond covenant is a declaration to the municipal finance marketplace of Connecticut’s seriousness in addressing its fiscal challenges,” said Nappier. “Every bond issued with this covenant will include a pledge that the state will address its long-term liabilities, rein in spending and borrowing, and rebuild its budget reserve fund.”

Connecticut's covenants could set a precedent for other states to adopt, S&P Global Ratings said in a March report.

“We believe these bond covenants regarding financial practices could improve state credit quality if they help a state maintain structural budget balance or lead to increased reserves during economic expansions,” S&P analyst David Hitchcock wrote.

The covenant prohibits the state from altering the four caps for five years from issuance of the bonds and prevents changes to the formula that establishes the state’s debt limit. General obligation bond authorizations may not exceed 1.6 times general fund tax receipts, except in cases when the governor has declared an emergency and three-fifths of each chamber of the General Assembly votes in support of a change to any cap for that year.

Each time Connecticut has an offering of general obligation or credit revenue bonds from May 15, 2018, to June 30, 2020, it must include the covenant.

All four bond rating agencies downgraded Connecticut over the past year, citing budget imbalance and high legacy debt. Moody's Investors Service rates Connecticut GOs A1, while Fitch Ratings and Kroll Bond Rating Agency assign A-plus and AA-minus ratings, respectively.

S&P, which assigns an A rating, last month downgraded the state one notch, citing the additional debt Connecticut must carry as guarantor of capital city Hartford's $540 million of GO debt over 20 to 30 years.

Of the $400 million in new-money bonds, said Nappier, more than half will provide funding for school construction projects. The remaining funds will be used for grants-in-aid to towns, economic development, brownfield remediation, general capital improvements and the clean water and drinking water programs.

Disclosure counsel are Day Pitney LLP and Soeder & Associates. Tax counsel are Robinson & Cole and Soeder & Associates. Financial advisors are Acacia Financial Group Inc. and PFM Financial Advisors LLC.

The bonds are scheduled to close June 20.

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Primary bond market General obligation bonds State budgets Denise Nappier State of Connecticut Connecticut