Connecticut treasurer's plan would bond against income tax revenue

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Connecticut Treasurer Denise Nappier has proposed legislation to create a tax-secured bonding program that she said could rebuild reserves and help restore the state’s waning reputation in the capital markets.

A dedicated portion of the state’s personal income tax revenues would back the bonds, she said in a statement Monday.

She said debt service savings generated from the program could rebuild the rainy day fund. Preliminary estimates by her office show that the state could realize nearly $980 million in cumulative deposits to that fund through fiscal 2029, assuming a level of borrowing consistent with current average annual general obligation sales.

“This would represent a step in the right direction toward shoring up the state’s fiscal health, rather than further eroding it,” said Nappier.

Nappier said this structure would capitalize on Connecticut’s high wealth levels and would insulate the bonds from budget and pension concerns, thereby earning higher credit ratings and lowering borrowing costs. The new program, she added, could earn credit ratings two to three levels above those of GOs.

A rainy-day commitment could also mollify major credit rating agencies.

The bill is before the General Assembly’s finance, revenue and bonding committee.

Budget imbalance triggered three general obligation bond rating downgrades to Connecticut last year.

“With the recent downgrades of the state’s general obligation credit ratings leading to increased borrowing costs – on a relative basis -- over the last few years, it is time to counter that trend,” said Nappier.

S&P Global Ratings assigns its AA-minus rating and negative outlook. 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, also with a negative outlook.

“I think it’s a good idea to use a different type of tax-secured revenue bond. It’s worked well in states like New York with their PIT [personal income tax] bonds and sales-tax bonds,” said Alan Schankel, a managing director at Janney Capital Markets in Philadelphia.

“I see a lot of moving parts to this, including the refunding,” said Schankel.

“The real benefit is having in place an alternative borrowing vehicle if times are tough – say, if a recession hurts Connecticut more than other states. Replenishing the rainy-day fund would be a nice benefit. If they can save $1 billion by 2029, that would be wonderful.”

The new tax-secured revenue bonds, according to Nappier, would be especially attractive to investors who may have reached GO capacity limits or seek a safer investment based on worries about Connecticut’s budgetary and pension challenges.

Connecticut may have no choice but to adopt the proposal, said the bonding committee co-chairman, state Sen. Scott Frantz, R-Greenwich.

“While it sends out a message that Connecticut is becoming more desperate to shore up its fiscal foundation, the state needs to do everything it can to reduce expenses and manage through its perpetual short-term cash crunch,” said Frantz.

The state, according to Nappier, would reduce GO issuance while issuing the new bonds instead.

The bonds would be subject to bond commission authorizations and the state’s debt cap. According to Nappier, the move would not materially affect the amount of money budgeted each year for debt service.

The bill, in current form, would direct savings to Connecticut’s rainy day fund and limit the fund to its existing statutorily authorized use, which primarily is to cover a prior year deficit.

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Debt holders Deficits General obligation bonds Revenue bonds Denise Nappier Connecticut