TEXT - Fitch rates Connecticut's special tax obligation bonds
Nov 30 - Fitch Ratings assigns an 'AA' rating to the following State of Connecticut special tax obligation (STO) bonds: --$500 million STO bonds transportation infrastructure purposes 2012 series A; --$125 million STO refunding bonds transportation infrastructure purposes 2012 series B. The par amount of both series of bonds may change. The bonds are expected to sell via negotiation on or about December 10 and 11, 2012. In addition, Fitch affirms the following ratings: --$2.6 billion in outstanding STO senior lien bonds at 'AA'; --$498 million in outstanding STO second lien bonds at 'AA'. The Rating Outlook is Stable. SECURITY The bonds are secured by a gross lien on pledged revenues and other receipts deposited to the state's special transportation fund prior to any other uses. KEY RATING DRIVERS SOUND COVERAGE: The bonds benefit from sound coverage of debt service for senior and second lien STO bonds by pledged revenues, with a 2x annual coverage requirement and a 2x maximum annual debt service (MADS) test for additional bonds. ESTABLISHED, STABLE PROGRAM: The STO bond program is a well-established part of a comprehensive and legislatively authorized long-term transportation infrastructure program. CONSERVATIVE FORECASTING: Revenue forecasting and budgeting is conservative, although rising debt service and higher transportation needs present ongoing challenges. The state has the flexibility to slow capital spending if necessary. TRANSPORTATION FUND AFFECTED BY STATE'S GENERAL FUND CONDITION: Interdependence with general fund operations has led to revenue and cost shifts in the past, particularly during periods of state general fund fiscal pressure. WEALTHY STATE ECONOMY: The state's economy is fundamentally strong and wealthy, despite recent recessionary weakness and a slow return to economic growth. CREDIT PROFILE Connecticut's STO bonds are issued under a senior and second lien, and are secured by pledged revenues deposited to the state transportation fund (STF). Pledged revenues include taxes and fees on motor vehicle fuel, casual vehicle sales, licenses, as well as transfers from the state's general fund of taxes collected on oil companies' gross earnings and other statutory transfers. The 'AA' rating for bonds on both senior and second liens reflects an additional bonds test on each requiring 2x coverage of principal and interest. Moreover, the state covenants under the second lien that any senior issuance must meet all second lien requirements, both senior and second lien bonds are subject to an annual 2x debt service coverage test, and the bonds are backed by an aggregate debt service reserve funded at maximum annual debt service. At present, $2.6 billion in senior lien bonds and $498 million in second lien bonds are outstanding. Senior lien bonds have been issued periodically under a 1984 indenture to fund statewide transportation capital, with second lien bonds issued since 1990 primarily to refund outstanding senior and second lien bonds. The STO bond program is very well established, with conservative forecasting and budgeting, 20-year final maturity and flexibility to slow capital projects as necessary. Offsetting these strengths are forecast debt service growth that generally rises faster than pledged revenues, interdependence with the state general fund that has led to revenue or cost shifts during past periods of general fund fiscal stress, and large planned spending for transportation capital. Pledged revenues are available first for senior lien debt service and reserves, followed by second lien debt service and reserves. Thereafter, pledged revenues are available for transportation-related general obligation bond debt service and operating expenses of the departments of transportation and motor vehicles. The state actively manages the STF to maintain ample resources for projected debt service, capital program needs and operating expenses through a five-year forecast period. To bolster the STF fund balance after a draw in FY 2009, the state took corrective action in its FY 2010 - 2011 biennium budget, enacting direct general fund transfers to the STF, among other changes. With economic stabilization augmenting tax receipts, FY 2011 ended with a balance of $107 million (9.2% of net revenues) while coverage of combined senior and second lien debt service remained solid at 2.7x. The state took additional action in its FY 2012 - 2013 adopted budget to augment revenues pledged to transportation, including raising the statewide sales tax rate (the casual motor vehicles sales portion of which is deposited to STF) and increasing the statutory transfer of oil companies tax from the general fund. On an unaudited basis, FY 2012 operations produced a $38.4 million operating surplus, bringing the STF balance to 11.8% of net revenues. Coverage of combined senior and second lien debt service improved to 2.9x. As updated by the state's November 2012 revised revenue forecast, FY 2013 operations are forecast to produce a $3.9 million operating surplus and an STF balance of $149.7 million (12% of net revenues), while coverage of outstanding senior and second lien bonds would remain solid at 2.8x. Over the forecast period through FY 2016, revenues and associated coverage would grow due to improving economic performance and higher planned oil companies tax transfers.