Fitch Rates Connecticut's $550MM Special Tax Obligation Bonds 'AA-'; Outlook Stable.

NEW YORK -- Fitch Ratings assigns an 'AA-' rating to approximately $550 million in State of Connecticut special tax obligation (STO) bonds, transportation infrastructure purposes, expected to consist of:

--$193.8 million 2009 series A;

--$306.2 million 2009 series B (taxable Build America Bonds-direct pay);

--$51 million 2009 series C (refunding).

The bonds will sell via negotiation on or about Oct. 28, 2009, with final par amounts to be determined at sale. Series A bonds will mature Dec. 1, 2010-2019; series B bonds will mature Dec. 1, 2020-2029; series C refunding bonds will mature Dec. 1, 2010-2014. Optional redemption provisions will be determined upon final negotiation. Fitch also affirms the 'AA-' rating on approximately $2.6 billion in outstanding senior lien and second lien STO bonds. The Rating Outlook is Stable.

Connecticut's STO bonds are issued under a senior and second lien, and are secured by pledged revenues deposited to the state transportation fund. Pledged revenues include taxes and fees on motor vehicle fuel, used vehicle sales, licenses, a fixed share of tax on oil companies' gross earnings and other transportation-related revenues as well as statutory transfers from the state's general fund. The 'AA-' rating for bonds on both liens reflects an additional bonds test on each requiring 2 times (x) coverage of principal and interest. Moreover, the state covenants under the second lien that any senior issuance must meet all second lien requirements, both senior and second lien bonds are subject to an annual 2x debt service coverage test, and the bonds are backed by an aggregate debt service reserve funded at maximum annual debt service.

At present, $2.1 billion in senior lien bonds and approximately $556 million in second lien bonds are outstanding. Senior lien bonds have been issued periodically under a 1984 indenture to fund statewide transportation capital, with second lien bonds issued since 1990 primarily to refund outstanding senior lien bonds.

The STO bond program features conservative forecasting and budgeting, 20 year final maturity and flexibility to slow capital projects as necessary. Offsetting these strengths are debt service growth generally has grown faster than pledged revenues, interdependence with the state's general fund that has led to revenue or cost shifts during periods of general fund fiscal stress, and large needs for transportation capital spending. Fiscal year (FY) 2009 unaudited pledged revenues cover combined senior and second lien debt service by 2.5x. After funding senior lien debt service and reserves, followed by second lien debt service and reserves, funds are available for transportation-related general obligation bonds and operating expenses for the departments of transportation and motor vehicles.

Although the special transportation fund built a large fund balance in this decade, the economic downturn and rising needs has led more recently to annual deficits and a declining fund balance. FY 2009 is estimated to have ended with a deficit of $84.8 million, or 8.1% of net revenues; the fund balance fell to $93.6 million, or 9% of net revenues, from $178.4 million, or 16.5% of net revenues, the year before. Actions taken in the state's FY 2010-2011 biennium budget, including general fund transfers of $81.2 million in FY 2010 rising to $178.2 million in FY 2013 and thereafter, are expected to offset slower tax collections and augment forecast balances. Collections of motor fuels tax in FY 2009 are estimated to have been flat compared to FY 2008, with declining unit sales offset by a statutory rise in the per-gallon rate for diesel and other special fuels; average growth in collections in the 10 years through FY 2008 had been 1.8%. The state forecasts no growth in the tax in FY 2010, and slow growth of 1% in FY 2011 and beyond. With additional planned transfers, fund balance in the current forecast is expected to end the biennium at $102 million, or 8.6% of forecast revenues.

Additional information is available at www.fitchratings.com.

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