Connecticut financial officials yesterday chose senior and co-senior managers for between $800 million and 1 billion of special tax obligation bonds, a portion, could be sold as early as late July.
Goldman, Sachs & Co. and Morgan Stanley & CO. Will be the senior managers on different portions of the deal, while Lehman Brothers and Innova Securities, a Boston-based minority-owned firm, will handle a swap transaction.
Proceeds from the sale would be used to bail out the state's bankrupt unemployment benefits pool.
By the end of the year, Connecticut analysts expect that the state will have borrowed approximately $838 million from the federal government to provide benefits for Connecticut's unemployed.
Connecticut has been borrowing for unemployment benefits since the end of 1990, according to Avice Meehan, spokeswoman for Gov. Lowell P. Weicker.
The federal loans are interest-free if repaid before Sept. 30.
However, a weak economy over the last three years has precluded Connecticut from repaying the loans.
The prospect of settling the state's debt by issuing tax-exempt bonds will provide the state with at least $100 million to $130 million in present value savings, sources involved with the transaction said. The federal government is currently charging 7.45% interest on the loan for benefits, and it is believed a lower rate will be achieved through the sale of tax-exempt bonds.
By settling the bond sale before Sept. 30, the state will avoid paying interest on moneys borrowed since Oct. 1, 1992.
The preliminary structure of the deal would authorize the state to sell a fixed-rate portion, a variable-rate portion, and a portion in which variable-rate bonds would be swapped for synthetic fixed-rate bonds.
The fixed-rate portion would total between $400 million and $500 million, with Goldman Sachs as the senior manager. Serving as co-managers will be PaineWebber Inc.; U.S. Securities Inc., a Connecticut firm based in Hartford; and Pryor, McClendon, Counts & Co., a minority-owned firm.
The variable-rate portion and swap will total between $350 million and $450 million.
Morgan Stanley will be the senior manager for the variable-rate portion. Artemis Capital Group Inc., a woman-owned firm, will serve as co-senior manager, and Smith Barney, Harris Upham & Co. will serve as the remarketing agent.
"The goal of the treasurer's office was to get the best qualified firms as well as providing for a diverse group of investors," said Benson R. Cohn, debt management director for Connecticut's treasurer's office.
"If we can get our act together, then we may be able to get the fixed-rate bonds sold by late July. But more than likely, that section will be priced in August."
Cohn said the final structure of the deal and the timing of the sale will be determined after the state meets with all of its senior managers.
The state will use two financial advisers on the offering, Lamont Financial Services Corp. and P.G. Corbin & Co.
Robert A. Lamb, president of Lamont Financial Services, said a great deal of work will need to be done if the bonds are to be sold before August.
A meeting was held this week between state finance officials and representatives of the three major rating agencies to explain the timing and the need for the sale.
Connecticut is rated AA-minus by Fitch Investors Service, AA by Moody's Investors Service, and AA-plus by Standard & Poor's Corp. Since the bonds will be backed by the revenues from special taxes, they will not exert pressure on the state's general obligation rating.
Two rating officials said the offering may strengthen the state's rating.
"Selling these bonds makes a lot of sense for the state," said Claire G. Cohen, executive vice president at Fitch. "The plan is a good one because it's not Just about selling the bonds and funding the deficit."
"If the state does not take this step, it will get hit harder and harder by the federal government's rising interest rates,' said Steven Hochman, vice president of state ratings at Moody's.
The debt service from the bonds will be provided by revenues gained by the state's wage-based unemployment taxes. Currently, taxes are assessed on the first $7,100 of income earned.
The legislation authorizing the bonds includes a clause that would gradually increase the floor amount of taxable income to $15,000 over a four-year period.
This is not exactly what the governor wanted when the legislation was first proposed [by him]," Meehan said. "We wanted the rate to increase a little more, but we're willing to compromise."
The governor's spokeswoman said she expects the measure to be signed by Weicker sometime next week.
As part of the legislation, the state would increase two waged-based taxes and use the proceeds to refill the unemployment benefits pool.
Since 1990, the state has had in place a 1% solvency tax. The tax will be increased to 1.4%.
A firm that has an employee earning $7,100 a year currently pays $71 per employee. The assessment would increase to $99.40.
Also, revenues from the state's so-called experience tax will increase because of the higher floor. The experience tax is a 0.5% to 5.5% assessment on companies that have laid off workers. The more workers a company has laid off, the higher rate of taxes it pays per employee.
"If the taxable floor level were higher initially, then the deficit may have been lessened," Cohen of Fitch said.
A similar financing was attempted last fall by the Massachusetts Industrial Finance Agency, which wanted to sell as much as $800 million of revenue bonds to bail out the state's unemployment benefits pool. The bonds were never brought to market because political wrangling and questions about the savings, estimated by the agency at $40 million, held up the sale.
Massachusetts has been forced to borrow from the federal government since late 1991 because the statewide recession drained the unemployment benefits pool.
Like Connecticut, the benefits pool in Massachusetts had been funded by the state's industries.