State of Connecticut

Notes to the Financial Statements

June 30, 2008

Note 18 Bonded Debt

a. Primary Government - Governmental Activities
General Obligation Bonds
General Obligation bonds are those bonds that are paid out of the revenues of the General Fund and that are supported by the full faith and credit of the State. General obligation bonds outstanding and bonds authorized but unissued at June 30, 2008, were as follows (amounts in thousands):

Purpose of Bonds Dates Rates Outstanding Unissued
Capital Improvements 2009-2027 2.25-7.513% $ 2,000,090 $ 499,842
School Construction 2009-2028 2.2-6.777% 3,371,020 16,001
Municipal & Other
Grants & Loans 2009-2022 2.2-7.513% 1,234,534 592,891
Elderly Housing 2009-2027 3.85-6.795% 63,888 91,613
Elimination of Water
Pollution 2009-2023 3-7.312% 195,718 695,282
General Obligation
Refunding 2009-2022 2.5-6.06% 3,512,542 -
Pension Obligation 2009-2032 4.2-6.27% 2,276,578
Miscellaneous 2009-2036 2.25-6.75% 92,730 541,576
12,747,100 $ 2,437,205
Accretion-Various Capital Appreciation Bonds 345,470
Total $ 13,092,570

Future amounts needed to pay principal and interest on general obligation bonds outstanding at June 30, 2008, were as follows (amounts in thousands):

Year Ending
June 30, Principal Interest Total
2009 $ 885,204 $ 710,366 $ 1,595,570
2010 887,816 686,473 1,574,289
2011 873,593 587,780 1,461,373
2012 813,954 526,410 1,340,364
2013 740,866 470,215 1,211,081
2014-2018 3,233,592 1,752,034 4,985,626
2019-2023 2,418,783 1,174,847 3,593,630
2024-2028 1,668,612 762,357 2,430,969
2029-2033 1,220,155 189,950 1,410,105
2034-2038 4,525 466 4,991
Total $ 12,747,100 $ 6,860,898 $ 19,607,998

Transportation Related Bonds
Transportation related bonds include special tax obligation bonds and general obligation bonds that are paid out of revenues pledged or earned in the Transportation Fund. The revenue pledged or earned in the Transportation Fund to pay special tax obligation bonds is transferred to the Debt Service Fund for retirement of principal and interest.

Transportation related bonds outstanding and bonds authorized but unissued at June 30, 2008, were as follows (amounts in thousands):

Final Original Authorized
Maturity Interest Amount But
Purpose of Bonds Dates Rates Outstanding Unissued
Specific Highways 2009 4.80% $ 532 $ 4,065
Infrastructure
Improvements 2009-2027 2.5-7.125% 2,789,345 1,439,124
General Obligation
Other 2009 7.513% 191 -
2,790,068 $ 1,443,189
Accretion-Various Capital Appreciation Bonds 614
Total $ 2,790,682

Future amounts required to pay principal and interest on transportation related bonds outstanding at June 30, 2008, were as follows (amounts in thousands):

Year Ending
June 30, Principal Interest Total
2009 $ 282,978 $ 128,714 $ 411,692
2010 276,860 113,677 390,537
2011 247,070 99,432 346,502
2012 229,020 87,139 316,159
2013 261,555 74,713 336,268
2014-2018 808,000 240,991 1,048,991
2019-2023 499,095 101,587 600,682
2024-2028 185,490 17,102 202,592
$ 2,790,068 $ 863,355 $ 3,653,423

Variable-Rate Demand Bonds
As of June 30, 2008, variable-rate demand bonds included in bonded debt were as follows (amounts in thousands).

Outstanding Issuance Maturity
Bond Type Principal Year Year
Special Tax Obligation $ 62,500 1990 2010
General Obligation 60,000 1997 2014
Special Tax Obligation 100,000 2000 2020
General Obligation 100,000 2001 2021
Special Tax Obligation 406,285 2003 2022
General Obligation 280,000 2005 2023
Total $ 1,008,785

The State entered into various remarketing and standby bond purchase agreements with certain brokerage firms and banks upon the issuance of the bonds.

The bonds were issued bearing a weekly interest rate, which is determined by the State's remarketing agents. The State has the option of changing at any time the weekly interest rate on the bonds to another interest rate, such as a flexible rate or a daily rate. Bonds bearing interest at the weekly rate are subject to purchase at the option of the bondholder at a purchase price equal to principal plus accrued interest, if any, on a minimum seven days' notice of tender to the State's agent. In addition, the bonds are subject to mandatory purchase upon (1) conversion from the weekly interest rate to another interest rate and (2) substitution or expiration of the standby bond purchase agreements. The State's remarketing agent is responsible for using its best efforts to remarket bonds properly tendered for purchase by bondholders from time to time. The State is required to pay the remarketing agents a quarterly fee of .05 percent per annum of the outstanding principal amount of the bonds.

The standby bond purchase agreements require the banks to purchase any unremarketed bonds bearing the weekly interest rate for a price not to exceed the amount of bond principal and accrued interest, if any. The State is required to pay the banks a quarterly fee ranging from .11 percent to .15 percent per annum of the outstanding principal amount of the bonds plus interest. These fees would be increased if the credit rating for the bond insurers were to be downgraded, suspended, or withdrawn. The standby bond purchase agreements expire as follows:

1990 STO expires in the year 2010,
1997 GO expires in the year 2014,
2000 STO expires in the year 2017 and could be extended for another seven years,
2001 GO expires in the year 2015,
2003 STO expires in the year 2015 and could be extended for another five years, and
2005 GO expires in the year 2015.

These agreements could be terminated at an earlier date if certain termination events described in the agreements were to occur.

In connection with the 2000 and 2003 STO bonds, $298,195,000 of bonds tendered and not remarketed plus accrued interest of $1,096,194 was purchased in accordance with the standby bond purchase agreement with banks as of June 30, 2008, the balance of which was subject to an interest rate equaling the banks prime rate (5.00% at June 30, 2008) per the terms of the agreement.

Interest Rate Swaps
Objective of the swaps
As a means to lower its borrowing costs, when compared against fixed-rate bonds at the time of issuance, the State has entered into eleven separate pay-fixed, receive-variable interest rate swaps at a cost less than what the State would have paid to issue fixed-rate debt. Two of the swaps were executed in December 1990, one was executed in June 2001, three were executed in January 2003, and five were executed in March and April of 2005.

Terms, fair values, and credit risk
The terms, including the fair values and credit ratings of the outstanding swaps as of June 30, 2008, are as follows. The notional amount of the swaps matches the principal amount of the associated debt. The State's swap agreements, except for the Consumer Price Index (CPI) related swaps, contain scheduled reductions to outstanding notional amounts that are expected to approximately follow scheduled or anticipated reductions in the associated debt. For the CPI swaps, the swap agreements and associated debt are non-amortizing and mature on the same date.

Notional SWAP
Associated Amounts Effective Fixed Rate Variable Rate Fair Values Termination Counterparty
Bond Issue (000's) Date Paid Received (000's) Date Credit Rating
1990 STO $ 37,500 12/19/1990 5.746% 65% of LIBOR $ (1,846) 12/1/2010 Aa3/AA-/AA-
1990 STO 25,000 12/19/1990 5.709% 65% of LIBOR (1,246) 12/1/2010 Aa2/A+/A+
2001 GO 20,000 6/28/2001 4.330% CPI plus 1.43% 318 6/15/2012 Aa3/AA-/nr
2003 STO 115,795 1/23/2003 3.293% 55% LIBOR plus 50 bp (2,858) 2/1/2022 Aaa/AA+/AA
2003 STO 96,310 1/23/2003 3.288% 55% LIBOR plus 50 bp (2,248) 2/1/2022 Aa1/AA/AA-
2003 STO 194,180 1/23/2003 3.284% 55% LIBOR plus 50 bp (4,765) 2/1/2022 Aa1/AA-/AA-
2005 GO 140,000 3/24/2005 3.392% 60% of LIBOR plus 30bp (2,055) 3/1/2023 Aaa/AAA/nr
2005 GO 140,000 3/24/2005 3.401% 60% of LIBOR plus 30bp (2,080) 3/1/2023 Aaa/AA+/nr
2005 GO 15,620 4/27/2005 3.990% CPI plus .65% (47) 6/1/2016 Aa3/AA-/nr
2005 GO 20,000 4/27/2005 5.070% CPI plus 1.73% (153) 6/1/2017 Aa3/AA-/nr
2005 GO 20,000 4/27/2005 5.200% CPI plus 1.79% (373) 6/1/2020 Aaa/nr/nr
Total $ 824,405 $ (17,353)

Fair value
As of June 30, 2008, the swap dated in 2001 had positive fair value because interest rates have increased since the time when this swap was undertaken; all of the other swaps had negative fair values because interest rates had similarly declined. The negative fair values may be countered by reductions in total interest payments required under the variable-rate bonds, creating lower synthetic interest rates. Because the coupons on the State's variable-rate bonds adjust to changing interest rates, the bonds do not have corresponding fair value increases. The fair values were estimated using the zero-coupon method. This method calculates the future net settlement payment required under the swaps, assuming that the current forward rates implied by the yield curve correctly anticipate future spot interest rates. These payments are then discounted using the spot rates implied by the current yield curve for hypothetical zero-coupon bonds due on the date each future net settlement on the swaps.

Credit Risk
As of June 30, 2008, the State had credit risk exposure relating to the relationship between the variable interest rate on the bonds and the rate that it receives under the swap agreement undertaken in 2001. The State had no credit risk exposure on any of the other swaps because the swaps had negative fair value. However, should interest rates change and the fair values of the swaps become positive, the State would be exposed to credit risk in the amount of the swaps' fair value.

The swap agreements contain varying collateral agreements with the counterparties. With the exception of the 2005 swap with a credit rating of Aaa/AAA/nr, the 2003 and 2005 swap agreements require collateralization of the fair value of the swap in cash or government securities should the counterparty's credit rating fall below Aa3 as issued by Moody's Investors Service or AA- as issued by Standard & Poor's Ratings or Fitch Ratings. One of the swaps executed in 1990 requires collateral of cash or securities if the counterparty credit rating falls below A1/A+. The other 1990 swap agreement and the 2001 swap agreement do not have collateral provisions. Accordingly no collateral was required to be posted for any of the swaps at June 30, 2008. The State is not required to post collateral for any of the swaps.

Approximately 24 percent of the notional amount of swaps outstanding is held with one counterparty, rated Aa1/AA-/AA-. Three swaps or approximately 7% of the notional amount of the swaps outstanding are held by one of the lowest rated counterparties, rated Aa3/AA-/nr, while another 3% is held by a separate counter party who is rated Aa2/A+/A+. All other swaps are held by separate counterparties who are rated Aa3/AA-/AA- or better.

Basis Risk
The State's variable-rate bond coupon payments are equivalent to the Securities Industry and Financial Markets Association Municipal Swap (SIFMA) index rate, or the CPI floating rate. For those swaps for which the State receives a variable-rate payment other than CPI, the State is exposed to basis risk should the relationship between the London Interbank Offered Rate (LIBOR) and SIFMA converge. If a change occurs that results in the rates moving to convergence, the synthetic rate on the bonds would change, and the expected cost savings may not be realized. As of June 30, 2008, the SIFMA rate was 1.55 percent, whereas 65 percent and 60 percent plus 30bp of LIBOR were 1.60 and 1.78 percent, respectively. The State recognizes this basis risk by including an amount for basis risk in its debt service budget. For fiscal year 2008, the budgeted amount for basis risk was $1,500,000.

Termination Risk
The State or the counterparty may terminate any of the swaps if the other party fails to perform under the terms of the contract. If any swap is terminated, the associated variable-rate bonds would no longer carry synthetic interest rates. Also, if at the time of termination the swap has a negative fair value, the State would be liable to the counterparty for a payment equal to the swap's fair value. Under the 2003 and 2005 swap agreements, the State has up to 270 days to fund any required termination payment. Under the 1990 swap agreements, the State may fund any required termination payment over a five-year period.

Rollover Risk
Because all of the swap agreements terminate when the associated debt is fully paid, the State is only exposed to rollover risk if an early termination occurs. Upon an early termination, the State will not realize the synthetic rate offered by the swaps on the underlying debt issues.

Swap Payments and Associated Debt
Using rates as of June 30, 2008, debt service requirements of the State's outstanding variable-rate bonds and net swap payments are as follows (amounts in thousands). As rates vary, variable-rate bond interest payments and net swap payments will vary.

Fiscal Year Variable-Rate Bonds Interest Rate
Ending June 30, Principal Interest SWAP, Net Total
2009 22,985 43,923 12,288 79,196
2010 24,410 43,311 11,401 79,122
2011 25,940 42,668 10,455 79,063
2012 29,125 41,995 9,988 81,108
2013 37,640 38,776 10,150 86,566
2014-2018 437,085 115,386 36,342 588,813
2019-2023 247,220 13,234 7,214 267,668
Total $ 824,405 $ 339,293 $ 97,838 $ 1,261,536

b. Primary Government - Business-Type Activities
Revenue Bonds
Revenue bonds are those bonds that are paid out of resources pledged in the enterprise funds and component units.

Enterprise funds' revenue bonds outstanding at June 30, 2008, were as follows (amounts in thousands):

Final Original Amount
Maturity Interest Outstanding
Funds Dates Rates (000's)
Uconn 2009-2033 3.5-6.5% $ 183,204
State Universities 2009-2036 2-6.0% 314,530
Bradley International Airport 2009-2033 2.5-5.25% 208,535
Clean Water 2009-2028 2-5.% 463,481
Bradley Parking Garage 2009-2024 6.125-6.6% 46,205
Drinking Water 2009-2028 2-5.% 31,139
Rate Reduction Bonds 2009-2011 3-5% 110,990
Total Revenue Bonds 1,358,084
Plus/(Less) premiums, discounts
and deferred amounts:
Uconn (4,566)
State Universities 1,806
Bradley International Airport (41)
Clean Water 16,447
Other 6,133
Revenue Bonds, net $ 1,377,863

The University of Connecticut has issued Student fee revenue bonds to finance the costs of buildings, improvements and renovations to certain revenue-generating capital projects. Revenues used for payments on the bonds are derived from various fees charged to students.

The Connecticut State University System has issued revenue bonds that finance the costs of auxiliary enterprise buildings, improvements and renovations to certain student housing related facilities. Revenues used for payments on the bonds are derived from various fees charged to students.

Bradley Airport has issued various revenue bonds to finance costs of improvements to the airport. As of June 30, 2008, the following bonds were outstanding:

a) 2004 Airport Revenue Refunding Bonds in the amount of $15.6 million. These bonds were issued in July, 2004, to redeem the 1992 Airport Revenue Refunding Bonds, and are secured by and payable solely from the gross operating revenues generated by the State from the operations of the airport and other receipts, funds or monies pledged in the bond indenture.
 
b) 2001 Bradley International Airport Revenue Bonds in the amount of $175.3 million and 2001 Bradley International Airport Refunding Bonds in the amount of $17.6 million. Both bond series are secured by and payable solely from the gross operating revenues generated by the state from the operation of the airport and other receipts, funds or monies pledged in the bond indenture.

As of June 30, 2008, Bradley airport has entered into interest rate swap agreements for $152.4 million of its variable rate bonds. Details on these agreements are disclosed under the separately issued audited financial statements of the fund.

In 1994, the State of Connecticut began issuing Clean Water Fund revenue bonds. The proceeds of these bonds are to be used to provide funds to make loans to Connecticut municipalities for use in connection with the financing or refinancing of wastewater treatment projects. As of June 30, 2008, the Clean Water Fund has entered into interest rate swap agreements for $121.4 million of its variable rate bonds. Details on these agreements are disclosed under the separately issued audited financial statements of the fund.

In 2000, Bradley Parking Garage bonds were issued in the amount of $53.8 million to build a parking garage at the airport.

In 2004, the State of Connecticut issued $205.3 million of Special Obligation Rate Reduction Bonds. These bonds were issued to sustain for two years the funding of energy conservation and load management and renewable energy investment programs by providing money to the State's General Fund.

Future amounts needed to pay principal and interest on revenue bonds outstanding at June 30, 2008, were as follows (amounts in thousands):

Year Ending
June 30, Principal Interest Total
2009 $ 91,743 $ 61,596 $ 153,339
2010 95,078 57,554 152,632
2011 110,856 58,284 169,140
2012 57,237 50,448 107,685
2013 63,298 47,376 110,674
2014-2018 315,157 190,682 505,839
2019-2023 316,060 110,989 427,049
2024-2028 196,875 48,170 245,045
2029-2033 101,020 11,272 112,292
2034-2038 10,760 303 11,063
Total $ 1,358,084 $ 636,674 $ 1,994,758

c. Component Units
Component units' revenue bonds outstanding at June 30, 2008, were as follows (amounts in thousands):

  Final Amount
Maturity Interest Outstanding
Component Unit Date Rates (000's)
CT Development Authority 2009-2020 3.25-6% $ 25,875
CT Housing Finance Authority 2009-2049 1.5-9.36% 3,526,926
CT Resources Recovery Authority 2009-2016 4-5.5% 23,346
CT Higher Education
Supplemental Loan Authority 2009-2028 1.7-6% 153,880
Capital City Economic
Development Authority 2009-2033 3.1-5% 84,265
UConn Foundation 2009-2029 3.875-5.% 7,165
Total Revenue Bonds 3,821,457
Plus/(Less) premiums, discounts, and deferred amounts:
CDA 16
CRRA (478)
CCEDA 139
CHESLA (816)
Revenue Bonds, net $ 3,820,318

Revenue bonds issued by the component units do not constitute a liability or debt of the State. The State is only contingently liable for those bonds as discussed below.

Connecticut Development Authority's revenue bonds are issued to finance such projects as the acquisition of land or the construction of buildings, and the purchase and installation of machinery, equipment, and pollution control facilities. The Authority finances these projects through its Self-Sustaining Bond Program and Umbrella Program. As of June 30, 2008 no bonds were outstanding under the Umbrella Program. Bonds issued under the Self-Sustaining Bond Program are discussed in the no-commitment debt section of this note. In addition, the Authority had $25.9 million in general obligation bonds outstanding at year-end. These bonds were issued to finance the lease of an entertainment/sports facility and the purchase of a hockey team.

Connecticut Housing Finance Authority's revenue bonds are issued to finance the purchase, development and construction of housing for low and moderate-income families and persons throughout the State. The Authority has issued bonds under a bond resolution dated 9/27/72 and an indenture dated 9/25/95. As of December 31, 2007, bonds outstanding under the bond resolution and the indenture were $3,464.0 million and $62.9 million, respectively. According to the bond resolution, the following assets of the Authority are pledged for the payment of the bond principal and interest (1) the proceeds from the sale of bonds, (2) all mortgage repayments with respect to long-term mortgage and construction loans financed from the Authority's general fund, and (3) all monies and securities of the Authority's general and capital reserve funds. The capital reserve fund is required to be maintained at an amount at least equal to the amount of principal, sinking fund installments, and interest maturing and becoming due in the next succeeding calendar year ($262.3 million at 12/31/07) on all outstanding bonds. As of December 31, 2007, the Authority has entered into interest rate swap agreements for $903.3 million of its variable rate bonds. Details on these agreements are disclosed under the separately issued audited financial statements of the Authority.

Connecticut Resources Recovery Authority's revenue bonds are issued to finance the design, development and construction of resources recovery and recycling facilities and landfills throughout the State. These bonds are paid solely from the revenues generated from the operations of the projects and other receipts, accounts and monies pledged in the bond indentures.

Connecticut Higher Education Supplemental Loan Authority's revenue bonds are issued to provide loans to students, their parents, and institutions of higher education to assist in the financing of the cost of higher education. These loans are issued through the Authority's Bond fund. According to the bond resolutions, the Authority internally accounts for each bond issue in separate funds, and additionally, the Bond fund includes individual funds and accounts as defined by each bond resolution.

Each Authority has established special capital reserve funds that secure all the outstanding bonds of the Authority at year-end, except as discussed next. These funds are usually maintained at an amount equal to next year's bond debt service requirements. The State may be contingently liable to restore any deficiencies that may exist in the funds in any one year in the event that the Authority is unable to do so. For the Connecticut Resources Recovery Authority, the amount of bonds outstanding at year-end that were secured by the special capital reserve funds was $20.9 million.

The Capital City Economic Development Authority revenue bonds are issued to provide sufficient funds for carrying out its purposes. The bonds are not debt of the State of Connecticut. However, the Authority and the State have entered into a contract for financial assistance, pursuant to which the State will be obligated to pay principal and interest on the bonds in an amount not to exceed $6.7 million in any calendar year. The bonds are secured by energy fees from the central utility plant and by parking fees subject to the Travelers Indemnity Company parking agreement.

Future amounts needed to pay principal and interest on revenue bonds outstanding at June 30, 2008, were as follows (amounts in thousands):

Year Ending
June 30, Principal Interest Total
2009 $ 111,791 $ 163,941 $ 275,732
2010 118,824 159,397 278,221
2011 123,127 154,447 277,574
2012 125,139 149,134 274,273
2013 122,885 164,428 287,313
2014-2018 652,472 656,189 1,308,661
2019-2023 715,384 502,659 1,218,043
2024-2028 734,285 338,355 1,072,640
2029-2033 674,000 180,305 854,305
2034-2038 416,950 48,321 465,271
2039-2043 23,250 3,472 26,722
2044-2048 3,350 272 3,622
Total $ 3,821,457 $ 2,520,920 $ 6,342,377

No-commitment debt
Under the Self-Sustaining Bond program, the Connecticut Development Authority issues revenue bonds to finance such projects as described previously in the component unit section of this note. These bonds are paid solely from payments received from participating companies (or from proceeds of the sale of the specific projects in the event of default) and do not constitute a debt or liability of the Authority or the State. Thus, the balances are not included in the Authority's financial statements. Total bonds outstanding for the year ended June 30, 2008 were $337.1 million.

The Connecticut Resources Recovery Authority has issued several bonds to fund the construction of waste processing facilities by independent contractors/operators. These bonds are payable from a pledge of revenues derived primarily under lease or loan arrangements between the Authority and the operators. Letters of credit secure some of these bonds. The Authority does not become involved in the construction activities or the repayment of the debt (other than the portion allocable to Authority purposes). In the event of a default, neither the authority nor the State guarantees payment of the debt, except for the State contingent liability discussed below. Thus, the assets and liabilities that relate to these bond issues are not included in the Authority's financial statements. Total bonds outstanding at June 30, 2008 were $105.2 million. Of this amount, $45.0 million was secured by a special capital reserve fund.

The Connecticut Health and Educational Facilities Authority has issued special obligation bonds for which the principal and interest are payable solely from the revenues of the institutions. Starting in 1999, the Authority elected to remove these bonds and related restricted assets from its financial statements, except for restricted assets for which the Authority has a fiduciary responsibility. Total special obligation bonds outstanding at June 30, 2008, were $6,817.5 million, of which $312.1 million was secured by special capital reserve funds.

The State may be contingently liable for those bonds that are secured by special capital reserve funds as discussed previously in this section.

e. Debt Refundings
During the year, the State issued $181.1 million of general obligation bonds with an average interest rate of 4.93% to advance refund $187.1 million of general obligation bonds with an average interest rate of 5.16%. The proceeds of the refunding bonds were used to purchase U.S. Government securities, which were deposited in an irrevocable trust with an escrow agent to provide for all future payments on the refunded bonds. Thus, the refunded bonds are considered defeased and the liability for those bonds have been removed from the statement of net assets. The reacquisition price exceeded the carrying amount of the old debt by $4.1 million. This amount is being netted against the new debt and amortized over the life of the new or old debt, whichever is shorter.

The State advance refunded these bonds to reduce its total debt service payments over the next fifteen years by $9.3 million and to obtain an economic gain (difference between the present values of the debt service payments of the old and new bonds) of $8.1 million. As of June 30, 2008, $2,899.5 million of outstanding general obligation, special tax obligation, and revenue bonds had been advanced refunded and are, accordingly, considered defeased.

In addition, $50 million of variable-rate general obligation bonds were advance refunded during the year.