PROVIDENCE, R.I. — Connecticut intends to come to market next week with a $750 million negotiated sale of general obligation bonds that will include a $200 million refunding.
The sale comes as state lawmakers are debating Gov. Dannel Malloy's proposed $40.6 billion biennial budget. Budget imbalance triggered three bond rating downgrades last year.
"Connecticut stands at a fiscal crossroads," said Janney Capital Markets. "Connecticut, considered the wealthiest state in the country by some measures, has taken difficult steps [tax increases] in the past to stabilize finances, but more effort is needed if the state is to achieve fiscal stability."
Connecticut's spread to the 10-year AAA benchmark yield was 69 basis points as of March 8, according to Janney, which examined underlying metrics and credit conditions in Connecticut and four others with the highest yields – Illinois, Louisiana, New Jersey and Pennsylvania.
Final pricing is expected Tuesday after a retail order period Monday, according to the state treasurer's office. Citi and Rice Financial Products are leading a syndicate of 19 underwriting firms, according to the preliminary official statement.
Acacia Financial Group and PFM are financial advisors on the deal. Day Pitney LLP is lead bond counsel.
S&P Global Ratings assigns its AA-minus rating and negative outlook to Connecticut GOs. Fitch Ratings and Kroll Bond Rating Agency also assign AA-minus ratings, though with stable outlooks. Moody's Investors Service rates the bonds an equivalent Aa3 rating and negative.
Malloy, a Democrat, is looking to close a $1.7 billion annual deficit. Localities are pushing back against the governor's proposal to transfer roughly $408 million of annual employer teacher pension contributions — one-third the total cost, based on how school costs are funded – to cities and towns. The state now pays all of them.
"No longer can Connecticut be the only state that fully absorbs this cost," Malloy told reporters at the State Capitol in Hartford on Tuesday.
House Minority Leader Themis Klarides, R-Derby, called the move "the ultimate gimmick."
Budget deliberations could be even pricklier this year, after Republicans gained three Senate seats to secure an 18-18 tie in the upper chamber. Already, Democratic Lt. Gov. Nancy Wyman had to vote to break a Senate tie to pass a bill lowering the assumed rate of return on pensions. The GOP also whittled the Democratic advantage to 79-72 in the House of Representatives.
"Despite repeated, and generally structural, responses to bring the current biennial budget into balance, it remains unclear whether the state has aligned its budget to potential future economic and revenue performance," Fitch said in a presale report.
S&P lowered its outlook on Connecticut in November.
"The negative outlook reflects our belief that there exists a one-in-three chance during our two-year outlook horizon that fixed costs as a percent of the budget could rise significantly enough to seriously impede the state's ability to maintain structural balance in a period of national growth," said S&P.
"Should fixed costs rise substantially further as a percent of the budget, pension-funded ratios decrease below 40% or the state resort to structurally unbalanced budget balancing measures during a time of national growth, we could lower our rating."
Malloy's proposed changes to the school-aid formula – which could also help comply with a state Superior Court order to better assist its poorest cities – are also generating a backlash in smaller communities. Connecticut's cities and towns are responsible for kindergarten through 12th grade education and the state spends about 81% of its $5 billion of local aid on education.
Moody's said its negative outlook reflects a lagging economy and weakening demographics that have strained Connecticut's budget as fixed costs have risen.
"While we expect the state to solve the budgetary gaps with recurring solutions, we believe that economic trends will place negative pressure on the state's finances in the next few years, while very high fixed costs reduce flexibility."