Connecticut treasurer highlights pension strength, baby bond program


From baby bonds to pension funding, 2023 was a year for progress in Connecticut, according to the annual report released Wednesday by State Treasurer Erick Russell.

“The work done by our agency often focuses on the long-term — sustained investment success, low-cost infrastructure funding, helping families save for college, and now our landmark ‘CT Baby Bonds’ program,” Russell said.

“This report offers a reminder that the future we’re building is constructed through the daily work of our talented and dedicated team. I’m excited for this marker of our progress and eager to continue that work in the new year,” he said.

“I’m confident we can help shape a future for our state that is inclusive, equitable, and economically strong,” said Connecticut State Treasurer Erick Russell, shown accepting The Bond Buyer Innovative Financing Deal of the Year award in December.

Donna Alberico

One focus of the treasurer’s report is the strong investment returns in the state’s pension funds.

The portfolio of funds and trusts administered by the Office of the Treasurer, including those for retired state workers and teachers, saw returns of 8.5%, adding an estimated $1.1 billion in plan assets, according to Russell.

A series of reforms to investment strategy and workforce development, including legislation passed in 2023, were put in place to strengthen the state’s long-term investment success, Russell said.

Among the 68 public pension funds tracked by the publication Pensions and Investments, Connecticut had the highest outperformance of its investment benchmark in fiscal 2023, Russell said. 

The state made supplemental contributions of $1.9 billion above the actuarially determined contribution to its pension funds resulting from the capture of volatile revenue and a year-end budget surplus. The state achieved a historic high cash position, the treasurer said.

The state has come a long way in improving its finances, according to John Hallacy, founder of John Hallacy Consulting LLC.

“The continuous improvement in pension funding reduces the negative consideration of pensions in the overall credit assessment,” Hallacy said.

“We know that one year’s sound performance is not automatically replicated,” Hallacy said. “But it does appear that the state has made some long term changes for the better in this critical area.”

In December, the state sold $826 million of general obligation bonds.

The deal, which was all tax-exempt, was comprised of Series 2024A GOs, Series 2024B social GOs. It included $250 million of new money social bonds to reimburse school construction projects and $176 million of Series 2024C social refunding GOs, which refinance 2014 bonds that funded school construction.

The two social bonds were Connecticut’s fifth and sixth issuances with a social designation. The state has also issued five series of green bonds.

The state received $883 million of retail orders and $2.26 billion of retail orders, according to Russell.

The state’s policy is to combine new money sales with refunding sales when the call date for the refunding series aligns with a scheduled new money issuance.

“The State’s bond pricing spread on this sale for the 20-year bond relative to the benchmark index was the lowest level in at least ten years, which will save taxpayers money in the long-term,” the Office of the Treasurer said in a news release.

The bonds were rated Aa3 by Moody’s Investors Service, AA-minus by S&P Global Ratings and Fitch Ratings and AA-plus by Kroll Bond Rating Agency. All four rating agencies assign stable outlooks to the state.

Connecticut has about $17 billion of GO debt outstanding.

Russell noted that recent bond rating upgrades have lowered the cost of borrowing to fund long-term projects for the state.

In May, KBRA raised its rating on the state’s GOs, following upgrades by S&P in 2022 and by Moody’s and Fitch in 2021.

In affirming the AA-plus rating before the December deal, KBRA said its rating on the GOs reflected “the state’s strong credit profile and significant and continuing progress in improving its financial position since fiscal 2017.”

S&P credit analyst Thomas Zemetis said in a report that the state’s long-term rating “is supported by Connecticut’s strong economic metrics, including the state’s high per capita income and gross state product levels compared with those of the nation, and its strong financial management, with robust financial controls and long-term financial forecasting that incorporates conservative revenue-growth assumptions and identification of potential out-year budget gaps.”

However, he noted that the state “has historically exhibited slow economic recoveries following recessions that have resulted in large structural budget gaps, and when coupled with its very high debt, pension, and other postemployment benefits liabilities, we believe managing these challenges could reduce future budgetary flexibility should the credit cycle turn.”

Connecticut has more debt than most states, because it often sells bonds on behalf of municipalities. Its liability burden is still considered moderate compared to personal income, according to Fitch.

The state earlier this year extended “fiscal guardrails” that enforce responsible spending. 

“These ‘fiscal guardrails’ are designed to capture volatile revenues and use them to build reserves and pay down pension liabilities,” Russell said. “Since their enactment, Connecticut has filled its Rainy Day Fund to capacity and generated nearly $8 billion in additional pension contributions.”

The guardrails also restrict how Connecticut can issue debt and use the proceeds. This year, the state’s annual debt issuance has been capped at $2.4 billion, as well as the state Bond Commission’s allocations and the allotment of previously allocated funds. 

The law also directs funds from the Rainy Day Fund to its unfunded pension liabilities. In 2018, the state’s aggregate funding ratio for pensions was 41% — well below the national average of 71%. Now, the state meets actuarially determined contributions and directs the surplus funds toward its pension obligations. 

“While the work of the Treasurer’s Office may not typically be at the forefront of people’s thoughts, this report shows how our efforts can have a real impact on people’s lives and the state’s economy,” Russell said.

During 2023, funding was secured for Connecticut’s “CT Baby Bonds” program in the biennial state budget.

A solution to end the stalemate over the cost of the plan was reached in May by Gov. Ned Lamont, the Legislature and Russell that reduced the overall expense of the program by more than $200 million and avoided $600 million in new state borrowing by funding the program upfront.

It used a debt service reserve fund insurance from Build America Mutual to transfer on-hand reserves of $381 million, raised through general obligation bond sale in 2008 and set aside in 2019 during a restructuring of the Teachers’ Retirement Fund, into the newly formed baby bond trust, replacing it with the insurance policy

Connecticut became the first state in the nation to implement a baby bonds initiative, which is aimed at fighting poverty while generating economic opportunity. 

Babies born under Connecticut’s Medicaid program, Husky, are automatically enrolled in CT Baby Bonds and credited with $3,200 deposit that will be invested on their behalf. As adults they will be able to use the investment that has grown over time for purposes that include buying a home in Connecticut, starting or investing in a Connecticut business, paying for education or job training, or saving for retirement.

At the Bond Buyer’s Deal of the Year ceremony in December, Russell accepted the award for best Innovative Financing for the program.

“This was an initiative that was politically charged and challenging, and took a lot of creativity and resolve to get done,” he said at the ceremony.

The Office of the Treasurer’s Annual Report provides updates on the work of the agency during the past fiscal year.  State law requires the filing of the annual report to the governor; the report includes details from each division within the Office of the Treasurer as well as programs and funds maintained by the agency.

“Our entire agency feels a sincere obligation to our constituents across Connecticut and a strong commitment to public service,” Russell said. “Through those efforts, I’m confident we can help shape a future for our state that is inclusive, equitable, and economically strong.”

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