NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA-' rating to the following State of Connecticut general fund obligation (GFO) bonds:
--$22 million GFO bonds, 2014 series A, issued by Connecticut Innovations, Inc.
The bonds are expected to sell via negotiated sale on May 8.
In addition, Fitch affirms the ratings on outstanding state GFO and bonds of other state-linked entities whose ratings are secured by appropriations of the state, as detailed at the end of this release.
The Rating Outlook is Negative.
SECURITY
The GFO bonds are special obligations secured by state general fund payments deemed appropriated without further legislative approval.
KEY RATING DRIVERS
RATING LINKED TO STATE GO: The 'AA-' rating on state GFO bonds, including series 2014A, reflects the bonds' source of security, state general fund payments deemed appropriated without further legislative approval; the ratings are not linked to the performance of the funded projects. The state's own GO rating is 'AA'.
NEGATIVE OUTLOOK BASED ON BUDGET VULNERABILITY: The Negative Outlook on state appropriation bonds, as with the state's own GO bonds, reflect its reduced fiscal flexibility at a time of lingering economic and revenue uncertainty. The adopted budget for the current biennium relied on one-time items and anticipated little near-term progress in rebuilding fiscal flexibility. Recent revenue momentum, if it continues, may allow the state to materially improve its reserve position.
HIGH WEALTH LEVELS: Connecticut is the nation's wealthiest state as measured by per capita personal income. Economic recovery has been slow and uneven since the recession, and the state's large and important finance sector continues to weaken.
CYCLICAL REVENUES AND SPENDING PRESSURE: State revenue performance is cyclical, while high fixed costs limit its ability to respond during revenue downturns.
HISTORICAL WILLINGNESS TO BUILD BALANCES: During past economic recoveries the state has demonstrated a willingness and ability to rapidly repay deficit borrowing and rebuild its rainy day balance. The current slow recovery has hampered rebuilding of reserves in the current biennium.
HIGH DEBT: Tax-supported debt is high for a U.S. state. Most GO bonds, excluding GO bonds issued to fund the teachers' retirement system, amortize rapidly.
SIGNIFICANT PENSION OBLIGATIONS: Unfunded liabilities for employees are significant, including for state employee and teacher pensions. The state fully funds actuarially calculated pension contributions and maintains a fixed amortization date. Additionally, the state has taken steps to reform retirement pension and health liabilities.
OTHER APPROPRIATION CREDITS LINKED TO STATE GO: State contract bonds issued by Capital City Economic Development Authority (CCEDA, now Capital Region Development Authority) are secured by contract assistance payments subject to biennial appropriation, and are likewise rated one notch below the state's GO. Connecticut Health and Educational Facility Authority (CHEFA) child care revenue bonds' source of security includes both an annual general fund debt service appropriation and an intercept of appropriated child care program funds, and are rated two notches below the state's GO.
RATING SENSITIVITIES
RATING LINKED TO STATE CREDIT QUALITY: The rating is sensitive to changes in the state's GO bond rating, to which this rating is linked.
CREDIT PROFILE
The rating on GFO bonds of Connecticut Innovations, the successor agency to the Connecticut Development Authority (CDA), reflects the security afforded by state general fund payments to cover debt service, which are deemed appropriated without further approval by the legislature. The proceeds are expected to fund a retail project as part of the much larger Steel Pointe economic development project in Bridgeport, Connecticut. Incremental tax revenue growth is forecast to exceed debt service on the bonds at the time of financing, but bond repayment is not dependent on the performance of the project's tax collections.
The state has issued appropriations-supported debt through various issuers and under several different security structures, primarily to support economic development. Previous GFO bonds issued by Connecticut Innovations (or CDA) supported various tax increment-financed economic development projects, and are likewise supported by state general fund appropriations for debt service; approximately $17.6 million are outstanding. Funded projects include an amusement park in Bristol and a retail center in East Hartford. Parking and energy fee revenue bonds issued by Capital City Economic Development Authority (CCEDA, now succeeded by Capital Region Development Authority) were issued to fund a redevelopment project in Hartford and benefit from state contract assistance payments equal to debt service, likewise subject to appropriation.
CHEFA's child care facilities revenue bonds, series G, which are rated 'A+' by Fitch, are supported by two appropriated payments streams, a direct debt service subsidy and an intercept by the treasurer of appropriated program funds for child care. The state's ongoing commitment to child care centers and the treasurer's oversight of both payment streams mitigate risks of state changes to child care center funding or operating risks at centers receiving loans. However, the credit's reliance on separately appropriated revenue streams in the pledge results in a rating two notches below the state's GO rating.
Connecticut's GO rating, at 'AA,' reflects its vast wealth and income resources, tempered by a comparatively high burden of debt, retirement liabilities and other fixed costs. The Negative Outlook is based on the state's inability in its adopted fiscal 2014-2015 budget to return to more structurally sustainable budgeting and rebuild flexibility at a time of unusually slow economic and revenue recovery.
The biennium budget was balanced only through a number of non-recurring resources, including refinancing the outstanding economic recovery notes (ERNs) that were used to fund deficits in the last recession. Improved revenue collections in early 2014 and below budget expenditures have materially expanded the forecast fiscal 2014 surplus, despite the continued slow overall growth of the state's economy and uncertainty about revenues through the remainder of the fiscal year. The governor has proposed directing most of the forecast surplus to replenishing its reserves and reducing liabilities, steps which Fitch believes would improve the state's fiscal flexibility.
RELATED AFFIRMATIONS:
Fitch affirms the following ratings on outstanding bonds rated by Fitch and secured by an appropriation rating of the state:
--$17.6 million in outstanding Connecticut Development Authority GFO bonds, affirmed at 'AA-';
--$80.1 million in CCEDA parking and energy fee revenue bonds, affirmed at 'AA-';
--$15.8 million in Connecticut Health and Educational Facilities Authority revenue bonds (child care facilities program), series G, affirmed at 'A+'.
The Rating Outlook is Negative.
For further information on the State of Connecticut, please see Fitch's press release dated March 4, 2014, 'Fitch Rates $400MM Connecticut GO Bonds 'AA'; Outlook Negative,' at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033
Additional Disclosure
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