Connecticut's treasurer has decided to sell a mixture of fixed- and variable-rate bonds to finance the state's accumulation deficit of nearly $1 billion because of uncertainties over just how much money the state's new income tax will yield.
Sources in the government say the blend will allow Connecticut to hedge against the possibility that its recently enacted 4.5% tax on wages will not generate as much revenue as expected.
"The reason for the variable rate is that it's difficult with a new tax structure to estimate what the revenues will be," said Benson R. Cohn, Connecticut's assistant treasurer in charge of debt management.
Issuing a significant chunk of the debt with variable-rate coupons, Mr. Cohn said, "will give us some flexibility in maturing more bonds if the revenues come in better than expected and maturing fewer if they come in worse than expected."
Edward C. Balda, assistant excecutive budget officer, said "the variable rate allows us to be flexible in case we're higher or lower than the original estimates."
He added that the variable-rate debt would help Connecticut adjust to other unforeseen fiscal fluctuations, such as a higher than anticipated demand for tax refunds.
A Bear, Stearns & Co. syndicate will price Connecticut's $691 million of fixed-rate deficit notes on Sept. 16, Mr. Cohn said. To finance the rest of its deficit, Connecticut will sell $275 million of variable-rate debt next month.
The co-senior managers include Artemis BT Securities Corp.; Dillon Read & Co.; Donaldson, Lufkin & Jenrette Securities Corp.; Goldman, Sachs & Co; J.P. Morgan Securities Inc.; Lehman Brothers; Merrill Lynch & Co.; Prudential Securities Inc.; U.S. Securities; and Dean Witter Reynolds Inc.
The bonds carry the backing of the state's general revenues, and therefore would carry the same ratings as the state's outstanding GO debt: AA by Standard & Poor's Corp., Aa by Moody's Investors Service, and AA-plus by Fitch Investors Service.
As early as today, the state could request bids from large foreign banks that could provide a liquidity facility and possibly letter of credit enhancement for the variable-rate debt, which would probably be seven-day demand bonds, Mr. Cohn said.
Further complicating the structuring of Connecticut's largest deficit financing ever is the possibility that the state's legislature would not finish its business quickly enough. Yesterday, as Mr. Cohn and attorneys at bond counsel Hawkins, Delafield & Wood labored to put together a preliminary official statement, the connecticut General Assembly began a session in which it was expected to vote on its still unapproved transportation fund budget for the current fiscal year.
That budget, like the general fund, requires more revenue. Most of it is expected to come in the form of increased fees related to automobiles, such as for drivers' licenses. The fund and its revenues back the state's special tax obligation bonds, which are part of a 10-year, $7 billion rehabilitation of state roads.
If the lawmakers in the general assembly do not approve the fee increases soon, it could delay the next special tax obligation bond deal, a $265 million offering now slated for the week of Sept. 23.
Part of the state's recent budget balancing act transferred the operating costs of the Connecticut Department of Motor Vehicles from the general fund to the transportation fund.
Without $51 million in new revenues, the $701 million transportation budget for this year, which backs the state's special tax obligation bonds, would fall out of balance. "It's not a situation we can permit to continue. It has to be fixed one way or another," Mr. Cohn said.
As it stands, the state cannot issue new special tax obligation bonds without putting its transportation budget back in the black. "It would be difficult, not to mention foolhardy," he said.
As of late yesterday, lawmakers in the state's General Assembly had not voted on how to raise the new revenues for the fund.
If the delay continues, the state may consider selling its variable-rate deficit bonds this month rather than next, Mr. Cohn said, to avoid drowning investors with a flood of Connecticut official statements.