Fitch Rates Connecticut Higher Ed Supplemental Loan Auth State-Supported Revs ‘A+’; Outlook Stable

NEW YORK

Fitch Ratings has assigned an ‘A+’ rating to the following Connecticut Higher Education Supplemental Loan Authority (CHESLA) revenue bonds:

–$15 million CHESLA state supported revenue bonds (CHESLA Loan Program), 2016 series A.

The bonds are expected to sell via negotiation on or about June 2, 2016.

The Rating Outlook is Stable.

SECURITY

State supported revenue bonds issued under the 1990 resolution are special obligations of the authority secured by education loan repayments and a special capital reserve fund (SCRF) 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 SCRF.

KEY RATING DRIVERS

SCRF Rating Linked to State Credit Quality: The ‘A+’ rating on bonds carrying a SCRF, including CHESLA’s 1990 resolution bonds, reflects 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-‘ Issuer Default Rating (IDR).

Economic Resource Base: Connecticut has a mature and diverse economy anchored by a large finance sector and important manufacturing and education and health sectors. The last downturn in the state was severe, and the recovery has been very slow compared to previous economic cycles. Over the 2012 – 2015 period, employment in the state rose at roughly half of the pace enjoyed by the nation, and current employment remains below the pre-recession peak. The state is the wealthiest in the U.S. as measured by per capita personal income, although aggregate personal income gains have trailed the nation’s and key finance and manufacturing sectors are experiencing only modest growth after the retrenchment of recent years.

Revenue Framework: ‘aa’ factor assessment

Tax revenues are diverse, with the largest tax source, personal income tax (PIT), subject to considerable cyclicality, particularly the component derived from capital gains. Sales, corporate income, transportation and gaming taxes serve to further diversify the tax base. Baseline growth prospects for taxes are limited given the state’s mature, slowly growing economy. The state has unlimited legal ability to levy taxes.

Expenditure Framework: ‘aa’ factor assessment

As with most states, Connecticut’s pace of spending growth is expected to be higher than that of revenues in the absence of policy action given the prominence of Medicaid; other social services, education, municipal aid, debt service and pension contributions add further to spending pressure. The state has consistently demonstrated the ability to manage its high fixed cost burden, including making full actuarial contributions.

Long-Term Liability Burden: ‘a’ factor assessment

The burden of debt and unfunded pension liabilities in relation to resources is elevated and among the highest for a U.S. state. Net tax-supported debt consists primarily of GO and transportation borrowings, with much of GO borrowing undertaken on behalf of local schools. Unfunded pensions, including for local teachers, are more significant, with high discount rates suggesting that future funded ratio erosion and higher contribution needs are a risk, despite an otherwise very conservative amortization policy.

Operating Performance: ‘aa’ factor assessment

Frequent revenue reforecasting allows the state to identify revenue underperformance and quickly implement corrective actions. Gap-closing capacity remains strong but is less robust than during past expansions given that the state has been unable to quickly rebuild reserve balances and it already has implemented tax increases and spending cuts in the course of the current expansion. Further expenditure adjustments remain a source of additional flexibility, although high fixed costs limit the state’s scope of action.

RATING SENSITIVITIES

RATING LINKED TO STATE CREDIT QUALITY: The rating is sensitive to changes in the state’s ‘AA-‘ Issuer Default Rating, to which this rating is linked.

CREDIT PROFILE

The ‘A+’ rating on bonds carrying a SCRF reflects the ‘AA-‘ credit quality of the State of Connecticut, whose IDR is currently ‘AA-‘. The SCRF mechanism is a longstanding means for the state to provide additional security for various state authorities and municipalities on a contingent basis. Almost $3.9 billion in debt is outstanding that carries the SCRF pledge, issued by a range of state entities.

Use of a SCRF is legislatively authorized and overseen by the state’s treasurer. Bonds issued under CHESLA’s 1990 resolution carry a SCRF sized at MADS. In the event of a draw to cover principal or interest, the authority covenants to certify the 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 aggregate amount of outstanding CHESLA bonds which may be secured by SCRFs is $300 million; following the current issue, about $165 million will be so secured.

Connecticut’s ‘AA-‘ IDR was downgraded on May 19, 2016 from ‘AA’. The downgrade reflects both negative underlying credit trends and the application of Fitch’s revised U.S. Tax-Supported Rating Criteria, released April 18, 2016. The state has experienced chronic economic and fiscal challenges during the current expansion and consequently its scope of flexibility to address future cyclicality, in Fitch’s view, has been reduced. Despite repeated, and generally structural, responses to bring the current biennial budget into balance, it remains unclear whether the state has succeeded in fully aligning its budget to potential future economic and revenue performance. The Stable Outlook reflects Fitch’s view that, despite its high fixed cost burden and ongoing economic uncertainty, recent state corrective actions have primarily been structural in nature, and state managers continue to pursue fiscal management changes to improve the state’s longer term prospects.

For further information on the State of Connecticut, please see Fitch’s press release dated May 19, 2016, ‘Fitch Downgrades Connecticut’s Rating to ‘AA-‘; Outlook Stable,’ at ‘www.fitchratings.com‘.

Date of Relevant Rating Committee: May 19, 2016.

Additional information is available at ‘www.fitchratings.com‘.

In addition to the sources of information identified in Fitch’s applicable criteria specified below, this action was informed by information from CreditScope and Lumesis.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478

Additional Disclosures

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