October 16, 2017. Alan Schankel, Managing Director, Municipal Strategy. By most measures, Connecticut (A1/A+/A+) is one
CONNECTICUT CONUNDRUM October 16, 2017 Alan Schankel, Managing Director, Municipal Strategy By most measures, Connecticut (A1/A+/A+) is one of the wealthiest states. The US Commerce Department’s Bureau of Economic Analysis (BEA) ranks Connecticut first in per capita personal income among states at $71,033 compared to the $49,571 US median level. GDP per capita was $64,511 in 2016 according to BEA, ranking the state just behind Massachusetts and New York. The post-recession economy however, has been increasingly challenging for Connecticut and many of its towns and cities. Connecticut’s once robust manufacturing sector accounts for a declining share of jobs in the state. Gross State Product (GSP), which was robustly growing in 2007, contracted for seven straight years before turning mildly positive in 2015. Connecticut is one of only six states to experience population decline since 2013 (along with IL, MS, NM, VT, WV) according to US census data. These economic and demographic headwinds have contributed to the state’s fiscal hurdles. In relation to GDP, Connecticut’s debt load, at 9.2% of GDP, is highest among states. Only Illinois (Baa3/BBB/BBB) must allocate more of its spending (33.7%) to fixed costs (debt service, pension contributions, retiree health insurance) than Connecticut (30.7%). For a third consecutive year, Connecticut finished FY 2017 with a deficit. Income tax and sales tax revenues fell short of projections, although corporate tax receipts beat projections. Even with spending levels $407 million below budget, the final tally was a $23 million deficit. The three primary rating agencies have lowered the state’s ratings 5 times in the past 18 months. Connecticut’s GO bond prices have deteriorated, with 10-year credit spreads around 80 basis points, well above historical levels. As we publish, the state remains without a fiscal 2018 budget, operating through gubernatorial executive orders. If/when approved, the budget is likely to further reduce educational and other aid to the states towns and cities. The governor’s budget proposal included a change in the funding of teacher pension plans to require larger contributions from local government (and less from the state).
As another week ended with no resolution to Connecticut’s budget impasse, S&P revised its outlook on the state’s A+ rating to negative on Friday October 13th, citing “increasing constraints on Connecticut achieving long-term structural balance.”
CT Gross State Product Growth Has Lagged New England and US Post-recession 6.0%
Connecticut
New England
US
4.0%
2.0% 0.0% -2.0% -4.0% -6.0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Bureau of Economic Analysis, US Dept of Commerce (US is GDP)
Population Change - CT is One of Six States With Declining Population 1.2%
Connecticut
New England
US
0.8% 0.4%
0.0% -0.4% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: US Census Bureau, CT Information Statement
Credit Spreads for Connecticut GO Bonds Have Widened Substantially 4.00%
Spread
CT GO
Muni AAA
100 bps
3.00%
85 bps
2.00%
70 bps
1.00%
55 bps
0.00%
40 bps
Source: Bloomberg BVal
SEE PAGE 4 FOR IMPORTANT INFORMATION REGARDING CERTIFICATIONS, OUR RATINGS SYSTEM AS WELL AS OTHER DISCLAIMERS ALAN SCHANKEL, MANAGING DIRECTOR
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Hartford’s Challenge Hartford’s (Caa3/CC/NR) fiscal distress has grown acute, clouded further by uncertainty surrounding the state budget, including the amount of aid carved out for Hartford. It’s unclear whether the city has sufficient liquidity to make payment on $20 million of tax anticipation notes maturing October 31st. Bankruptcy consultants have been engaged by the city, which faces a budget gap of at least $50 million (about 8% of expenditures). In a recent conference call with Hartford bondholders, the mayor said that “Hartford has reached the end of the road on what tax increases and service or personnel reductions alone can achieve.” The mayor noted that more than half of Hartford’s property base is tax Connecticut’s 25 Largest Communities Have Varying Degrees exempt (state facilities and nonprofits), limiting the of Dependence on State Revenues city’s ability to provide “even an essential level of municipal services.” It remains to be seen if Hartford will end up going down the Chapter 9 bankruptcy path, which requires state (governor) approval, but as month end approaches with no state budget (and no aid to Hartford) the likelihood of default grows. Bond insurer Assured Guaranty noted in a press release that it was working with the city to develop a refinancing solution (debt maturity extension to lower annual debt service payments in next 15 years) that would avoid a Chapter 9 bankruptcy filing, but the mayor clarified on the conference call that such debt restructuring must be part of a multi-part plan for achieving sustainability outside of Chapter 9, a key element to include “a substantial and sustained increase in revenue from the State of Connecticut.” Other Connecticut Towns and Cities Hartford is not the only Connecticut community closely watching state budget machinations for insight into future state aid amounts. The state’s other towns and cities are dependent on state aid to varying degrees as noted in the table. A state’s fiscal stress tends to flow downstream to local governments and Connecticut is no exception. The governor’s proposed budget required locals to begin paying a portion of teacher retirement contributions hitherto picked up entirely by the state, which, if enacted, would further pressure local government budgets.
ALAN SCHANKEL, MANAGING DIRECTOR
Ratings
State Aid %
Bridgeport
A2(N)/A(NW)/NR
41%
145,936
1.2%
$41,801
New Haven
Baa1(S)/A-(NW)/A-(S)
45%
129,934
0.1%
$37,192
Stamford
Aa1(S)/AAA(S)/AAA(S)
9%
129,113
5.3%
$79,359
Hartford
Caa3(N)/CC(NW)/NR
50%
123,243
-1.2%
$30,630
Waterbury
A1(S)/AA-(NW)/A+(P)
38%
108,272
-1.9%
$40,467
Norwalk
Aaa(S)/AAA(S)/AAA(S)
12%
88,438
3.3%
$76,987
Danbury
Aa1/AA+(S)/AAA(S)
18%
84,992
5.1%
$66,676
New Britain
Baa1(S)/A+(S)/NR
44%
72,558
-0.9%
$40,457
West Hartford
Aaa(S)/AAA(S)/NR
16%
62,903
-0.6%
$86,569
Aaa(S)/NR/NR
7%
62,359
1.9%
$83,824
Fairfield
Aaa(S)/AAA(S)/AAA(S)
9%
61,160
3.0%
$122,306
Hamden
Baa1(S)/A+(NW)/NR
20%
61,125
0.3%
$70,791
Aa2/AA+(S)/AAA(S)
32%
60,147
-0.5%
$61,478
Town/City
Greenwich
Bristol Meriden
Population 2016 Change 2010 Population to 2016
Median Household Income
A1/AA(S)/AA-(S)
38%
59,622
-2.0%
$54,588
Manchester
Aa1/AA+(S)/AAA(S)
25%
57,873
-0.6%
$63,158
West Haven
Baa2(S)/BBB(NW)/NR
44%
54,516
-1.9%
$50,846
Stratford
A1(N)/AA(NW)/NR
35%
52,148
1.5%
$66,886
Milford
Aa1/AA+(S)/AA(S)
12%
52,536
2.5%
$80,156
East Hartford
Aa3/NR/NR
33%
50,237
-2.0%
$48,369
Middletown
Aa2/AAA(S)/NR
25%
46,544
-2.3%
$63,691
Wallingford
Aaa(S)/NR/NR
23%
44,660
-1.1%
$74,060
Enfield
Aa2/AA(S)/NR
32%
44,368
-0.6%
$67,377
Southington
Aa2/AA+(S)/NR
22%
43,685
1.4%
$82,704
Shelton
Aa2(S)/AA+(S)/NR
13%
41,334
4.5%
$86,870
Groton
Aa3(S)/AA-(S)/NR
29%
39,261
-2.1%
$62,137
Ratings are Moody's/S&P/Fitch. Outlooks - S=stable, N=negative, P=positive, NW = negative watch; population and household income data from US Census Bureau; state aide % is amount of intergovernmental general fund revenues (state) as percent of total general fund revenues
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Although virtually all municipal bond issuers in the state are impacted by Connecticut’s sluggish economy and population declines, the issuers on the list below have minimal dependence on the state itself for revenue support. Connecticut Investors seeking to diversify portfolios within the state should consider issuers below as well as the many highly rated towns and cities that are less dependent on state aid. Issuer Connecticut Special Tax Obligations
Rating A1/AA/A+
Comments Issued to finance transportation infrastructure. Secured by pledged revenues including various transportation related taxes and fees as well as portion of statewide sales tax collections deposited into Special Transportation Fund, which can be used only for transportation purposes, including debt service. Cash funded debt service reserve fund. Funds for debt service are deemed appropriated so no nonappropriation risk. Connecticut Housing Aaa/AAA/NR Most underlying loans are single family housing mortgages with 19% Finance Agency multi-family finance. Asset to debt ratio is 124%. 85% of single family loans backed by federal insurance (FHA, VA, RD) or securitization (GNMA, FHLMC, FNMA) CT Health and Ed Fac Auth - Aaa/AAA/NR Premier US university with spendable cash and investments of $23 Yale University billion covering debt by 6.5x Connecticut State Revolving Aaa/AAA/AAA Finances local government clean water and wastewater pollution Fund Revenue control projects. Security is loan repayments from borrowers (103 unique borrowers making GO or revenue pledge) plus income and principal of other investments. Over-collateralization with assets (loans, investments, cash) equal to 2.8x debt. CT Health and Ed Fac Auth - Aa3/AA-/AA- Academic medical center closely affiliated with Yale University and its Yale New Haven Health medical school. $3.8 billion annual revenue. Largest market share in state and 46% share in primary service area. South Central Connecticut Aa3/AA-/NR Provides water to 15 communities in south central Connecticut, New Regional Water Authority Haven being the largest. SCCRWA bills customers directly (70% residential). Yale University is largest user (3%). Bonds are revenue backed with 2016 debt service coverage of 1.49x CT Health and Ed Fac Auth - Aa3/AA-/AA- In 2015, Trinity Health, 3rd largest US nonprofit health system with 93 Trinity Health Credit Group acute care hospitals in 22 states, acquired St Francis Hopsital in Hartford, CT. A $550 million 2016 issue included a CT. Moody's has a negative outlook while S&P and Fitch have stable outlook.
Bond Debt $5,200 mln
$4,100 mln
$2,900 mln $990 mln
$983 mln
$544 mln
$220 mln
Source: Moody's, S&P, Fitch; Issuer financial statements
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[email protected] 215.665.6088
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Analyst Certification I, Alan Schankel, the Primarily Responsible Analyst for this report, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject sectors, industries, securities, and issuers. No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. Janney Montgomery Scott LLC (“Janney”) may seek compensation for investment banking services for any issuer in this report in the next 3 months. The research analyst is compensated based on, in part, Janney’s profitability, which includes its investment banking revenues. Additional information available upon request Disclaimer Janney or its affiliates may from time to time have a proprietary position in the various debt obligations of the issuers mentioned in this publication. Unless otherwise noted, market data is from Bloomberg, Barclays, and Janney Investment Strategy Group. This report is the intellectual property of Janney Montgomery Scott LLC (Janney) and may not be reproduced, distributed, or published by any person for any purpose without Janney’s express prior written consent. This report has been prepared by Janney and is to be used for informational purposes only. In no event should it be construed as a solicitation or offer to purchase or sell a security. The information presented herein is taken from sources believed to be reliable, but is not guaranteed by Janney as to accuracy or completeness. Any issue named or rates mentioned are used for illustrative purposes only, and may not represent the specific features or securities available at a given time. Preliminary Official Statements, Final Official Statements, or Prospectuses for any new issues mentioned herein are available upon request. The value of and income from investments may vary because of changes in interest rates, foreign exchange rates, securities prices, market indexes, as well as operational or financial conditions of issuers or other factors. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. We have no obligation to tell you when opinions or information contained in Janney ISG publications change. Janney Investment Strategy Group does not provide individually tailored investment advice and this document has been prepared without regard to the circumstances and objectives of those who receive it. The appropriateness of an investment or strategy will depend on an investor’s circumstances and objectives. For investment advice specific to your individual situation, or for additional information on this or other topics, please contact your Janney Financial Advisor and/or your tax or legal advisor. Definition of Outlooks Positive: Janney ISG believes there are apparent factors which point towards improving issuer or sector credit quality which may result in potential credit ratings upgrades Stable: Janney ISG believes there are factors which point towards stable issuer or sector credit quality which are unlikely to result in either potential credit ratings upgrades or downgrades. Cautious: Janney ISG believes there are factors which introduce the potential for declines in issuer or sector credit quality that may result in potential credit ratings downgrades. Negative: Janney ISG believes there are factors which point towards weakening in issuer credit quality that will likely result in credit ratings downgrade
ALAN SCHANKEL, MANAGING DIRECTOR
[email protected] 215.665.6088
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