Fitch Rates CHESLA State-Supported Rev Bonds 'AA-'; Outlook Remains Negative

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AA-' rating to the following Connecticut Higher Education Supplemental Loan Authority (CHESLA) revenue bonds:

--$21.42 million CHESLA state supported revenue and revenue refunding bonds (CHESLA Loan Program) 2015 series A.

The bonds are expected to sell via negotiation the week of June 8, 2015.

The Rating Outlook remains Negative.

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 (MADS). 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

RATING LINKED TO STATE GO: The 'AA-' 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' general obligation (GO) rating.

NEGATIVE OUTLOOK BASED ON BUDGET VULNERABILITY: The Negative Outlook on this obligation and the state's GO bonds reflects the state's 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. Fiscal performance during the biennium to date has been challenged by ongoing revenue uncertainty, although the state made some progress restoring its rainy day fund in fiscal 2014.

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: The state's 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.

COMPARATIVELY HIGH DEBT LEVELS: Tax-supported debt is high for a U.S. state. This is partially attributable to the above-average role the state plays in relation to local levels of government when compared to most other states. Most GO bonds, excluding GO bonds issued to fund the teachers' retirement system, amortize rapidly.

SIGNIFICANT PENSION OBLIGATIONS: Net liabilities for retired employees are significant, including for state employee and teacher pensions. The state fully funds actuarially calculated pension contributions and maintains fixed amortization dates. Additionally, the state has taken steps to reform retirement pension and health liabilities.

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 '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. Approximately $3.7 billion in debt is outstanding carrying SCRF pledges, 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, $175.5 million will be so secured.

Connecticut's 'AA' GO rating reflects its high wealth and income resources, tempered by a comparatively high burden of bonded debt, retirement liabilities and other fixed costs. The Negative Outlook is based on the state's inability in its last adopted budget, for the fiscal 2014 - 2015 biennium, to return to more structurally sustainable budgeting and rebuild flexibility. The budget relied on non-recurring resources to achieve balance, and although some progress has been made since then in rebuilding the rainy day fund (RDF), economic and revenue under-performance remain near-term risks.

Performance in fiscal 2015, which ends on June 30, continues to track slightly behind expectations. As of May 20, 2015, the state's comptroller has forecast a deficit of $164.9 million, which incorporates an updated consensus revenue forecast that lowered fiscal 2015 expected revenues by $24.3 million from an April 30th estimate, offset by $21.1 million in reduced expenditures. The state is working to close the forecast fiscal 2015 gap through a combination of administrative and legislative actions. To the extent that it is unable to achieve this objective, Fitch believes there is a possibility that the RDF will be tapped.

The governor's executive budget proposal for the fiscal 2016 - 2017 biennium, released in February 2015, absorbs rising fixed costs, achieves narrow forecast balance, and avoids reliance on non-recurring resources, but leaves the RDF balance nearly unchanged from the current balance of $519.2 million (2.9% of general fund appropriations). The legislature continues to deliberate on the budget.

For further information on the State of Connecticut, please see Fitch's press release dated March 9, 2015, 'Fitch Rates Connecticut's $500MM GO Bonds 'AA'; Outlook Negative,' at 'www.fitchratings.com'.

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

Applicable Criteria

Tax-Supported Rating Criteria [686015 - 14-AUG-2012] (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteria [686033 - 14-AUG-2012] (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

U.S. State Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985399

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20150527006422/en/

Fitch Ratings
Primary Analyst
Douglas Offerman
Senior Director
+1-212-908-0889
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Marcy Block
Senior Director
+1-212-908-0239
or
Committee Chairperson
Karen Krop
Senior Director
+1-212-908-0661
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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