Fitch Rates Univ of Connecticut's GO Bonds 'AA-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings assigns 'AA-' ratings to the following University of Connecticut (UConn) general obligation (GO) bonds:

--$200 million GO bonds (2011 series A);

--$19.1 million GO refunding bonds (2011 series A).

The par amount for the refunding series may change upon final sale, expected via negotiated sale on Nov. 22.

In addition, Fitch affirms the following ratings:

--$804 million in outstanding UConn GO bonds, 'AA-'.

The Rating Outlook is Stable.

KEY RATING DRIVERS

--UConn GO bonds are rated one notch below the GO bond rating of the State of Connecticut (the state) based on the state's debt service commitment equal to principal and interest and appropriated without further legislative approval. Higher education is a constitutional state priority, and legal protections are strong.

--State finances benefit from conservative revenue estimating, with surplus revenues during economic growth periods set aside for the rainy day fund or to repay past budgetary borrowing. The state managed recessionary revenue weakness primarily by relying on one-time resources, including depleting reserves and federal aid.

--The state is the nation's wealthiest as measured by per capita personal income.

--Tax-supported debt levels are high compared to other states. Most GO bonds of the state, excluding GO bonds issued to fund the teachers' retirement system, amortize rapidly.

--Unfunded liabilities for employees are significant, including for state employee and teacher pensions and for other post-employment benefits.

SECURITY

The bonds are general obligations of the University of Connecticut, additionally secured by a pledge of and lien on a State of Connecticut debt service commitment for principal and interest, appropriated from the state's general fund without further legislative approval. The bonds are not general obligations of the state, and its full faith and credit are not pledged.

CREDIT PROFILE

The UConn GO bonds are issued by and carry the GO pledge of UConn, but their security rests with the debt service commitment of the state. Principal and interest are paid annually from the state's general fund, appropriated and obligated for payment by the State Treasurer without requiring further legislative approval. Fitch rates the state's own GO bonds 'AA' with a Stable Outlook. General fund obligations, with the strength of continuing appropriations, are seen as slightly less well secured, and the UConn bonds fall within this category. The UConn GO bonds have been issued as part of the state's UConn 2000 program, first enacted in 1995 and currently authorized through 2018, for UConn capital expansion. Prior to this issue, approximately $1.4 billion in debt service commitment bonds will have been sold for University capital projects.

The state's 'AA' GO rating reflects its vast wealth and income resources, tempered by a relatively high burden of debt and retirement liabilities. The state faced significant recessionary fiscal challenges in recent years despite a demonstrated history of setting aside substantial budgetary reserves. Steep and persistent revenue underperformance and the resulting budgetary gaps were addressed primarily through one-time resources, including budgetary reserves, federal funds and borrowing. Economic growth has resumed, albeit slowly, and tax revenue collections have stabilized. The enacted budget for the fiscal 2012-2013 biennium, which began July 1, 2011, achieved balance through a combination of tax rate increases, spending cuts and labor savings.

The state has a history of conservative revenue forecasting and accumulating excess revenues in its budget reserve fund (BRF). Prior to the onset of the downturn, the BRF balance had risen to $1.38 billion in fiscal 2007, equal to 8.5% of appropriations; the statutory maximum is 10%. Revenues slowed in fiscal 2008 and declined steadily through fiscal 2009, with fiscal 2009 state tax receipts falling 14.5%, to $10.7 billion. Balancing actions included transfers, spending cuts and use of federal stimulus, with a year-end, $947.6 million deficit closed through issuance of GO economic recovery notes (ERNs).

The fiscal 2010-2011 biennium enacted budget was balanced through one-time resources, including a planned securitization of utility revenues ($1.3 billion), federal stimulus ($1.4 billion) and depletion of the BRF balance, as well as spending cuts and tax increases. After revenue weakness and higher Medicaid needs reopened gaps, the state responded with further spending cuts, transfers, and use of extended federal stimulus aid.

Revenue stabilization late in fiscal 2010 resulted in a $449 million surplus balance at fiscal year-end, which was applied to lowering the expected fiscal 2011 gap (by $140 million) and the planned securitization (by $309 million, to $647 million). Fiscal 2011 revenues continued to overperform, ultimately enabling the state to cancel the planned securitization transaction. The fiscal year ended with a fund balance of $236.9 million, most of which is dedicated to early repayment of ERNs.

The enacted budget for the fiscal 2012-2013 biennium, which began July 1, 2011, closed gaps of approximately $3 billion in each year, equivalent to 19.3% and 17% of baseline projected revenues, respectively. Projected gaps were addressed primarily through recurring actions, including new tax revenues ($1.5 billion annually), labor concessions ($1 billion annually), and spending cuts ($758 million). Tax revenue increases included three new income tax brackets to the personal income tax, a sales tax increase, and the extension of a temporary corporation income tax surcharge.

Ultimately, labor concessions yielded $1.6 billion in savings, below the $2 billion biennial target in the budget, with the shortfall addressed through additional savings measures. The ending fund balance is currently forecast to be $76 million in fiscal 2012 and $442 million in fiscal 2013. Tax revenue performance year to date has been roughly on budget. Under statutes enacted both in the last biennium and in the current budget, general fund surpluses will be directed toward repayment of ERNs and the state's GAAP deficit. The BRF is projected to remain unfunded through the biennium.

The state's fixed debt burden is high compared to other states, with net tax-supported debt as of Oct. 1, 2011 at almost $19 billion, or 9.7% of 2010 personal income. Three-quarters of net tax-supported debt is GO, a large share of which is issued for local school capital needs.

Funding levels for the state's major pension systems remain a concern. As of June 30, 2010, the state employees' retirement system (SERS) was funded at 44%, and the TRF was funded at 61%, with the latter having benefited from the 2008 issuance of pension bonds. Using Fitch's more conservative 7% investment return assumption (instead of the 8.25% rate assumed by SERS and the 8.5% rate assumed by TRF) reduces funding levels to 39% and 53%, respectively. The state fully funds an actuarially required contribution (ARC) to TRF under a covenant linked to the pension bonds. Full ARC funding for SERS resumed in fiscal 2012 after three years of underfunding.

The state has a wealthy, diverse economy anchored by a large finance sector and important manufacturing, education and health sectors. The state entered the recession later than the U.S. as a whole, with employment growth stalling in 2008 before falling 4.3% in 2009 and 1.1% in 2010. Economic growth resumed in late 2010, although it has remained uneven since then. September 2011 employment rose 0.4% over September 2010, well below the 1.1% growth rate recorded nationally. Unemployment remains elevated, at 8.9% in September 2011, below the 9.1% rate reported nationally. The state remains the wealthiest as measured by personal income per capita, at 137% of the national average in 2010. After falling sharply in the recession, personal income is rebounding, with the second quarter 2011 up 4.9% year-over-year.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 15, 2011);

--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 15, 2011).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648897

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