Connecticut touts budget, pension work ahead of refunding deal

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Connecticut officials hope rating outlook boosts, an on-time budget, pension revisions and higher reserves will benefit its $244 million Series 2019B general obligation bond refunding, set for Thursday.

It marks the state's first issuance since passing its $43.8 billion biennial budget last month. That spending plan includes moves aimed at improving the sustainability of the Teachers' Retirement System, one of the state’s two major public pension funds.

Changes include reducing the assumed rate of return to 6.9% from 8%; re-amortizing unfunded liability over a new 30-year period, a 17-year extension; and transitioning to level dollar amortization over a level percent of payroll, phased in over five years.

They mirror the 2017 adjustments to the State Employees’ Retirement System.

Acacia Financial Group Inc. and PFM Financial Advisors LLC are co-financial advisors to the competitive sale of the tax-exempt, fixed-rate serial bonds, which are scheduled to close Aug. 7. Day Pitney LLP is lead bond counsel and lead disclosure counsel. Robinson & Cole LLP is lead tax counsel.

Proceeds will refund Series 2009A and 2009B bonds. Maturities will run through 2029.

Roughly 90% of Connecticut’s debt is fixed-rate, state Treasurer Shawn Wooden said on an investor call.

“The state has minimum swap exposure with only one GO swap outstanding,” said Wooden, who took office in January as did Gov. Ned Lamont. A $20 million outstanding notional is set to expire next June.

S&P Global Ratings on March 19 revised its outlook to positive from stable, while Kroll Bond Rating Agency on July 9 bumped up its outlook to stable from negative.

Kroll and S&P rate Connecticut’s general obligation bonds AA-minus and A, respectively. Moody’s Investors Service rates Connecticut GOs A1, while Fitch Ratings rates them A-plus. Outlooks from Moody's and Fitch are stable.

Moody’s warned last week that retirement liabilities, including support for teacher benefits, still drag on state's credit.

According to Moody’s, Connecticut's balance-sheet leverage is among the highest of the 50 states.

Citing recent data, Moody’s pegged Connecticut’s debt, unfunded pension and other post-employment benefit liabilities relative to its gross domestic product as highest among the states. New Jersey and Illinois are at 38% and 37%, respectively. Teacher retirement liabilities account substantially for the state’s leverage, said Moody’s, but state support for these benefits materially relieves local government balance sheets.

In addition, according to Moody’s, some Connecticut governments face a challenge to accumulate pension assets.

“Several local pension systems in the state have very negative non-investment cash flow relative to assets,” said Moody’s. “The more negative the NICF, the more investment return volatility is likely to constrain asset accumulation.”

In its final report, the Connecticut Pension Sustainability Commission said converting eligible state assets into a trust and using state lottery proceeds could benefit Connecticut’s public pension system.

Other budget provisions lower GO issuance to $1.6 billion per fiscal year — except University of Connecticut bonds — to reflect Lamont’s “debt diet” initiative.

The spending plan also funds $75 million against the cumulative deficit under generally accepted accounting principles; reserves funds from the fiscal 2019 budget for a tentative agreement with the state hospitals; adheres to all budgetary caps; and boosts state reserve levels — traditionally a sticking point with rating agencies — to a projected $2.2 billion balance for fiscal 2019, Connecticut’s highest balance ever.

This represents about 11.6% of the state’s estimated expenses. “We expect the balance to continue to grow in the next biennium,” Wooden said.

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Primary bond market State budgets Public pensions Ned Lamont Shawn Wooden State of Connecticut Connecticut