Connecticut’s drive to issue more transportation bonds

Connecticut is poised to ramp up transportation borrowing in the coming years, according to its most recent fiscal accountability report.

“What we want to do is take advantage of the federal resources that are available to make some long-term, important investments in our transportation infrastructure,” said Representative Maria Horn, D-Salisbury, co-chair of the Connecticut House Finance, Revenue, and Bonding Committee. She said red tape and staffing problems have put Connecticut’s Department of Transportation behind its borrowing targets in recent years, though the state had capacity for more bonding.

The fiscal accountability report, published Nov. 20, projected that Connecticut will issue $1.3 billion of Special Tax Obligation bonds to fund transportation in fiscal year 2026, and $1.4 billion in the next two fiscal years. In FY 2025, the state plans to issue $1 billion.

The report is prepared annually by the governor’s Office of Policy and Management, although it’s distinct from the governor’s budget, which will be released in early February. 

Connecticut’s transportation bonds are issued from a Special Tax Obligation lockbox. Its most recent transportation deal, for $768.78 million of new money bonds, priced on Wednesday.

That followed the Nov. 20 pricing of $606 million of special tax obligation bonds for the same credit. That deal included $375 million of refunding.

Goldman Sachs was lead manager for both pricings, with 20 co-managers. Estrada Hinojosa and PFM were co-municipal advisors, and Pullman & Comly and Bryant Rabbino were co-counsels. The deal was rated Aa3 by Moody’s Ratings, AA by S&P Global Ratings, AA-minus by Fitch Ratings and AAA by Kroll Bond Rating Agency. 

This week’s pricing produced yields of 2.78% for a 2032 maturity and 3.58% for 2045s, both with 5% coupons.

For years, the state’s transportation borrowing has lagged behind both the legislature’s authorizations and the governor’s borrowing targets. 

When Lamont took office in 2019, there was a $3.8 billion backlog of bonding approved but not issued, according to the CT Mirror. That backlog has grown to $6.3 billion. 

“It is our hope — we have had many meetings over the last couple of years — that we could see our transportation bonding spending go up,” Horn said. 

The state’s roads are in need of more investments, Horn said. 

“Our poor infrastructure has a real drag effect on the economy,” Horn said. The congestion is “slowing people’s commute to get to work, which affects all kinds of things. It affects housing… it affects people’s health. Because of slower traffic, you have more transportation pollution.”

When Lamont took office in 2019, his plans for the Special Tax Fund were light on borrowing, part of his aim for a statewide “debt diet.” In recent years, his administration hasn’t followed through on its higher bonding projections. The administration anticipated borrowing $1.2 billion in FY 2023, but only issued $830 million. Last fiscal year, it set a $1 billion target but issued only $875 million. 

It’s not unusual for states to issue less than the legislature allocates, said Bryan Quevedo, Fitch’s primary analyst for Connecticut. The Department of Transportation doesn’t want to issue more than it can spend, he said, especially given the unpredictability of construction projects. 

Part of the problem, DOT Commissioner Garrett Eucalitto told the CT Mirror, is staffing shortages. The department had 2,900 employees when Eucalitto took over two years ago, and has expanded to 3,265 employees with 300 vacancies. 

Governments across the country have experienced labor problems, Quevedo said, and they can drive up costs on any part of a project. 

In Connecticut, the problem has been compounded by limited benefits and bureaucratic barriers to hiring — Eucalitto said it takes between three and a half and eight months to hire new staff. 

Horn said the legislature has been frustrated with the role of bureaucracy in the staffing shortage and hopes to address it, and she’s optimistic about DOT’s efforts on the problem. 

Horn also thinks there may be too many “bureaucratic hurdles” on the bonding end. 

“We state our intent to spend this money, and it’s in the package, because the governor also agrees that the money ought to be spent on these investments. And then there’s a big lag,” Horn said. “We are really going to be focusing on trying to do what we can to diminish that.”

Horn said she’s seen the red tape stymie bonding in the Department of Housing and the Department of Energy and Environmental Protection as well.

If the DOT can clear the hurdles to issuing, the Special Tax Obligation fund is in a good position to take on more debt, Quevedo said. 

The fund’s revenue comes from both gas taxes and sales taxes, giving it a broader base than most states’ transportation funding, Quevedo said. In his first term, Lamont tried to add tolls to the revenue base, to no avail. The revenue in the fund has been volatile in recent years, but it’s also been very high. 

The state also benefited from higher federal infrastructure spending, receiving $1.4 billion last fiscal year. The limited borrowing has corresponded with more pay-as-you-go spending, Quevedo said, which means the fund is saving money on debt service costs. 

All of these factors mean the fund has had a surplus, the CT Mirror reported, of around 10% or more for the past three fiscal years. Some of the surplus goes into a reserve within the lockbox, but the state has used the rest of it to defease and prepay outstanding transportation bonds. The state also structures its bonds with short amortization schedules. 

“The state has structures that are conducive to ramping up near term borrowing,” Quevedo said.

Eucalitto expressed confidence that the DOT would be able to increase its capital projects to meet the higher bonding projections. He referenced the recent staffing increases and several major construction projects underway.

The state may have to contribute more to its infrastructure when President-elect Donald Trump takes office. The incoming administration’s attitudes toward infrastructure are uncertain, but Horn said lawmakers are considering what the worst-case scenario could be. 

“We’re having a lot of conversations trying to think about protecting ourselves and trying to get ahead of what things might be coming our way from the new federal administration,” Horn said. “I think we’ll be in a position to do it, but it will be challenging.”