Governing

Fresh Off Another Downgrade, Connecticut Has a Plan to Lower Borrowing Costs

Nappier wants the state to start offering investors revenue bonds that are paid back directly from the state’s income tax revenues. Called tax-secured revenue bonds, these new bonds would be offered in place of general obligation bonds, which are backed by the state’s general revenue collections. Nappier’s office believes the dedicated income stream would mean the bonds would fetch ratings as high as AAA, resulting in a better interest rate and lower debt service costs.

The idea has received mixed reviews.While some observers call it a product that will offer comfort to bondholders wary of Connecticut’s troubles, others say it’s a “financial engineering gamble” designed to game the market. “To create something out of nothing -- they’re not being more fiscally responsible by doing it this way,” says Municipal Market Analytics’ Lisa Washburn.

Belle Haven Investments’ Tamara Lowin says Nappier’s proposal is simply another way to assure investors they’ll get their money back with interest. “This market loves the transparency of being able to see a direct revenue stream,” she says. “It’s a way to offer a credit designed with the ratings agencies in mind.”

But Washburn isn’t so sure that potential investors will be reassured by the new bonds and be willing to take a lower interest rate on the debt. “The likelihood that Connecticut will ever default and be in a situation where you have to test the structural provisions is really, really low,” she says. “But would I want to give it a pricing benefit as an investor? It’s definitely questionable.”