Why MMA assails Connecticut over special revenue bonds

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Connecticut’s planned issue of credit revenue bonds is “a good short-term but potentially terrible long-term solution,” said Municipal Market Analytics.

According to the state Treasury’s forward financing calendar for fiscal 2019, the state intends to issue the special bonds as part of its $850 million issuance in November.

“Investors in Connecticut GO bonds may want to re-evaluate their holdings as they may be placed into a subordinated position versus a new type of state-issued bond,” MMA said in a commentary.

Connecticut Treasurer Denise Nappier said last month that the new bonds, which the General Assembly approved in 2017 on Nappier’s recommendation, will lower borrowing costs. A secure revenue stream from state income tax receipts will back the bonds, she said.

“This program, in MMA’s opinion, falls cleanly into the growing category of schemes employed nby fiscally strained governments to try to convince rating agencies to assign higher ratings and cajole investors into purchasing debt at lower yields," its comment piece said.

“As with COFINA, this is a good short-term but potentially terrible long-term solution,” MMA added, referencing the Puerto Rico Sales Tax Financing Corp. restructuring agreement.

Nappier said that decreasing the amount of GO bonds the state issues, while issuing credit revenue bonds instead, could lower Connecticut’s borrowing costs while providing scarcity value to the state’s outstanding GO bonds, “which Wall Street may appreciate.”

Connecticut has been in the crosshairs of the bond rating agencies, all four of which downgraded state GOs last year. They cited budget imbalance and high legacy costs.

Moody’s Investors Service rates Connecticut A1, while S&P Global Ratings and Fitch Ratings rate the GOs A and A-plus, respectively. Kroll Bond Ratings Agency assigns its AA-minus rating.

Kroll assigns a negative outlook, the others stable.

Nappier’s office has estimated that use of the new credit revenue bond structure for for its $889.2 million mid-August sale could have yielded $42 million in additional savings on the tax-exempt bonds over 10 years.

According to Nappier, the estimated savings could result from improved credit ratings, lower interest costs, and a bond structure commonly used for tax-backed revenue bonds.

“Only in the alternate universe of public officials trying to address mounting budgetary stress do these ‘solutions’ make sense,” said MMA.

“Unlike Chicago that, for the time being at least, is using its securitization structure only to refund outstanding GO bonds for savings, Connecticut plans to calculate its yearly savings based on the differential between what it would have hypothetically cost to service new GO debt versus the new credit revenue bonds.”

While MMA does not expect a default scenario for Connecticut in the foreseeable future, it said the structure could create a “hostile environment” and pit credit revenue bondholders against GO bondholders and pensioners in a worst-case scenario.

MMA also said such vehicles as Connecticut's proposed income tax bonds and Chicago’s sales tax bonds work best amid stringent oversight and fiscal control. "Such is not possible in Connecticut, and neither the state nor Chicago has much of a culture of financial conservatism," MMA added.

Connecticut also intends to issue $850 million of special tax obligation bonds, including a $100 million refunding, for transportation infrastructure next month.

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