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Fitch Ratings assigns an 'AA-' rating to the following Connecticut Higher Education Supplemental Loan Authority (CHESLA, or the authority) revenue bonds issued under its 1990 resolution:
--$13.06 million CHESLA revenue refunding bonds (CHESLA loan program) 2012 series A.
The bonds are expected to sell via negotiated sale on March 14. In addition, Fitch affirms the following outstanding ratings:
--Approximately $86.5 million in CHESLA revenue bonds issued under the 1990 resolution, at 'AA-';
--Approximately $14.6 billion general obligation (GO) bonds and notes of the state of Connecticut (the state) at 'AA'.
The Rating Outlook is Stable.
Special obligations of the authority issued under the 1990 indenture are secured by education loan repayments and by other funds held by the trustee, including a special capital reserve fund equal to maximum annual debt service. In the event of a draw on the fund, the state deems appropriated from its general fund an amount necessary to replenish the fund.
KEY RATING DRIVERS
--RATING LINKED TO STATE GO: The 'AA-' rating on bonds carrying a special capital reserve fund (SCRF), including CHESLA's 1990 resolution bonds, reflect the state's pledge to fund the SCRF without requiring further legislative approval. Thus SCRF bonds' credit quality is linked to the state's 'AA' GO rating.
--HIGH WEALTH LEVELS: Connecticut is the nation's wealthiest state as measured by per capita personal income. Economic performance has stabilized following the recession, but the recovery has been slow and uneven.
--RECENT FISCAL CHALLENGES: State financial performance is driven by a reliance on cyclical revenues and persistent spending pressures, including for labor and Medicaid. In response to recessionary budget gaps, the state used one-time resources, including borrowing, to address budgetary gaps. Financial performance remains uneven given the slow economic recovery.
--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 'AA-' rating on bonds carrying a SCRF reflects the 'AA' rated GO credit quality of the state of Connecticut. The SCRF mechanism is a longstanding means for the state to provide additional security for various state authorities and municipalities on a contingent basis. Use of a SCRF is legislatively authorized and the SCRF is typically funded at a minimum of maximum annual debt service, as is the case with CHESLA's revenue bonds issued under the 1990 resolution. In the event of a draw, the authority or local government must certify an insufficiency to the state budget director and treasurer, and an amount to replenish the SCRF is deemed appropriated on or before Dec. 1 without further legislative approval.
The state's 'AA' GO rating reflects its vast wealth and income resources, tempered by a relatively high burden of debt and retirement liabilities. The state faced significant recessionary fiscal challenges in recent years despite a demonstrated history of setting aside substantial budgetary reserves. Steep and persistent revenue underperformance and the resulting budgetary gaps were addressed primarily through one-time resources, including budgetary reserves, federal funds and borrowing.
Economic growth has resumed, albeit unevenly, with tax revenue collections following suit. The enacted budget for the fiscal 2012-2013 biennium, which began July 1, 2011, incorporated tax rate increases, spending cuts and labor savings to achieve balance. After lowering its consensus revenue forecast in January 2012, the state is proposing additional mid-biennium adjustments to maintain budgetary balance and improve pension system funding.
Connecticut has a wealthy, diverse economy anchored by a large finance sector and important manufacturing, education and health sectors. The state entered the recession later than the U.S. as a whole, with employment growth stalling in 2008 before falling 4.3% in 2009 and 1.1% in 2010. Economic growth resumed in late 2010, although it has remained uneven since then. December 2011 employment rose 0.5% over December 2010, well below the 1.3% growth rate recorded nationally. Unemployment has fallen, to 8.1% in December 2011, compared to an 8.5% rate reported nationally. The state remains the wealthiest as measured by personal income per capita, at 137% of the national average in 2010. After falling sharply in the recession, personal income is rebounding, with the third quarter 2011 up 4.5% year-over-year.
Fiscal performance was strained through the recession, with the state relying on non-recurring resources to close persistent budgetary gaps, including borrowing $916 million in GO economic recovery notes (ERNs). The fiscal 2010-2011 biennium experienced revenue gains in keeping with the state's stabilizing economy, enabling the state to cancel an additional planned borrowing for operations and reduce the outstanding balance of ERNs.
The enacted budget for the fiscal 2012-2013 biennium closed gaps of approximately $3 billion in each year, equivalent to 19.3% and 17% of baseline projected revenues, respectively. Projected gaps were addressed primarily through recurring actions, including new tax revenues ($1.5 billion annually), labor concessions ($1.6 billion through the biennium), and spending cuts ($758 million). The uneven pace of economic recovery and persistent spending needs have eroded forecast revenues and fund balances since then. The January consensus forecast lowered the general fund revenue outlook by $95 million in fiscal 2012 and $139 million in fiscal 2013.
The governor's mid-biennium budget proposal, released in early February, assumes use of rescissions to maintain fiscal 2012 balance. The governor announced $72 million in fiscal 2012 rescissions on Feb. 28; including these measures, the state budget office now forecasts a fiscal 2012 ending budgetary balance of $35.9 million, below the $80.9 million level forecast at budget adoption and below the level targeted by the state as part of its multi-year plan to convert to GAAP-based budgeting. The governor's proposal also includes a net $314 million in fiscal 2013 spending adjustments, including accelerating pension contributions and making targeted social service cuts. The proposal forecasts a fiscal 2013 budgetary ending balance of $51.6 million, well below the $488.5 million expected at budget adoption.
The state has a history of conservative revenue forecasting and accumulating excess revenues in its budget reserve fund (BRF). Prior to the onset of the downturn, the BRF balance had risen to $1.38 billion in fiscal 2007, equal to 8.5% of appropriations; the statutory maximum is 10%. The balance was fully drawn in the fiscal 2010-2011 biennium. Given planned application of any near-term surpluses to early repayment of ERNs, there are no planned BRF deposits through the biennium.
The state's fixed debt burden is high compared to other states, with net tax-supported debt as of February 2012 at almost $18.2 billion, or 9.3% of 2010 personal income. Three-quarters of net tax-supported debt is GO, a large share of which is issued for local school capital needs. Excluding $2.3 billion in GO pension bonds issued for the teachers' retirement fund (TRF), the debt burden falls to a still high 8.1% of personal income.
Funding levels for the state's major pension systems remain a concern. As of June 30, 2011, the state employees' retirement system (SERS) was funded at 47.9%, and the TRF was funded at 61.4%, with the latter having benefited from the 2008 issuance of pension bonds. Using Fitch's more conservative 7% investment return assumption (instead of the 8.25% rate assumed by SERS and the 8.5% rate assumed by TRF) reduces funding levels to 42.1% and 52.7%, respectively. The state fully funds an actuarially required contribution (ARC) to TRF under a covenant linked to the POBs, and the SERS ARC is again fully funded in the budget. The governor's mid-biennium budget revision proposes increasing the state's contributions to SERS beyond the ARC to accelerate improvement to the funded ratio.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the 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. 15, 2011);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
Fitch Inc., 1 State Street Plaza, New York, NY 10004
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