TAX NEWS - JUNE 2010

Connecticut Tax: Connecticut to Sell $600 Million Bonds After Tax Rate Increase

by Allison Bennett and Brendan A. McGrail, 02 June 2010 (Bloomberg) -- Connecticut, the state that raised its income-tax rate on top earners by 30 percent, plans to offer $600 million in tax-exempt bonds next week.

The offering will be split, with $200 million for capital improvements and $400 million to refinance existing debt, and save the state $16 million without extending maturities, Moody's Investors Service said.

Connecticut, whose per-person income of $54,117 ranked highest in 2007 U.S. Census data, boosted the personal income- tax rate in September to 6.5 percent from 5 percent on couples making more than $1 million and single filers earning $500,000 a year.

"Any state that talks about a tax increase, or that does it, is going to continue to have strong demand for its in-state bonds," said John Flahive, who helps manage $22 billion in municipal holdings for BNY Wealth Management in Boston. "A tax increase makes municipals look even more attractive."

Top-rated, 10-year tax-exempts were unchanged yesterday at 3.12 percent, up 3 basis points from a nine-week low of 3.09 percent on May 26, according to a daily survey by Concord, Massachusetts-based Municipal Market Advisors. A basis point is 0.01 percentage point.

Connecticut 10-year general-obligation bonds traded at 3.22 percent yesterday, 2 basis points above an almost eight-month low on May 26, according to Bloomberg fair-market value data.

The state's net tax-supported debt is $4,490 per person, according to Moody's, which rates it third-highest, at Aa2. Standard & Poor's rates Connecticut AA, also third-highest.


High-Income Earners

"Connecticut is more dependent than most states on high- income earners," Nicole Johnson and Kimberly Lyons, New York- based analysts for Moody's, wrote in a report. The financial markets have "an exaggerated impact on the state's personal income-tax receipts, which accounted for about 40 percent of the general fund's resources in fiscal 2009."

Moody's estimated the state would end fiscal 2010 with a budget gap of $514 million. Yesterday, Comptroller Nancy Wyman said the state will have a $166.9 million surplus, after tax revenue exceeded projections. The excess balance was aided by federal stimulus funds, deferral of state pension payments and one-time transfers from accounts such as the Rainy Day Fund, she said.

Christine Shaw, a spokeswoman for the state treasurer's office, declined to comment on the bond sale. JPMorgan Chase & Co. is leading underwriters marketing the securities to investors.


Previous Sale

Connecticut sold about $915.8 million in tax-exempt debt on Nov. 10, with 5-year bonds priced to yield 2 percent, or 14 basis points above AAA rated general obligations of similar maturity at the time, according to Municipal Market Advisors.

The securities traded May 14 at an average yield of 1.51 percent, according to Municipal Securities Rulemaking Board data, 8 basis points above the MMA index of four-year, top-rated debt.

"There are some weaknesses, but many market participants still like the GO credit of the country's wealthiest state," Tom Kozlik, a municipal credit analyst for Philadelphia-based Janney Montgomery Scott, said in an e-mail, referring to general-obligation bonds.

General obligation bonds for the state due in 10 years have traded in a range of about 10 to 25 basis points over an MMA index of top-rated similar maturities since March.

Connecticut plans to issue about $956 million in economic- recovery bonds backed by existing charges on electric bills later this year, according to Moody's.

Following are descriptions of pending sales of municipal debt in the U.S.:

ARKANSAS will offer its largest issue of municipal bonds since at least 2000 today with a $257 million tax-exempt issue to refinance debt. The general obligations will mature serially from 2011 through 2014 and will be backed primarily by fuel taxes, preliminary offering documents show. Stephens Inc., a Little Rock-based investment bank, will market the sale for Arkansas, which is rated Aa1 by Moody's and AA by S&P, second- and third-highest, respectively.

NASHVILLE AND DAVIDSON COUNTY, Tennessee, the home of country music's Grand Ole Opry, plans to sell $575 million in general-obligation debt tomorrow. The offer will be split three ways, with $250 million in Build America Bonds, $275 million of tax-exempts and $50 million in taxable refunding bonds, preliminary offering documents show. Proceeds will help retire and refinance outstanding debt and pay for capital projects. Goldman Sachs Group Inc. will lead the marketing of the securities.

MONTGOMERY COUNTY in Pennsylvania, the home of Bryn Mawr College outside Philadelphia, plans to sell $313.8 million in tax-exempt mortgage revenue bonds through its Industrial Development Authority this week. Income from the sale will finance the building of a hospital on a former golf course. The securities, marketed by Goldman Sachs, will mature serially from 2013 through 2020 and in 2025, 2030 and 2038.

ARIZONA, where lawmakers are trying to close a $2.6 billion budget gap for the fiscal year that begins July 1, is selling $300 million of tax-exempt securities as early as this week through investment banks led by Morgan Stanley to generate operating cash. The debt will be secured by lease payments subject to legislative appropriation for prisons, state office buildings and other facilities being sold to investors in a so- called leaseback deal. The debt, known as certificates of participation, will be insured by Assured Guaranty Municipal Corp., a unit of Bermuda-based Assured Guaranty Ltd. The debt carries underlying ratings of Aa3 from Moody's and A+ from S&P, fourth- and fifth-highest, respectively.

ILLINOIS, the lowest-rated U.S. state after California, plans to offer $500 million in tax-exempt refunding bonds as early as June 14. The securities, backed by the state's 80 percent portion of sales tax revenue, will go toward refunding Build Illinois Bonds. Chicago-based Cabrera Capital Markets LLC will lead the group marketing the debt.