Notes to the Financial Statements

June 30, 2016

Note 17 Long-Term Notes and Bonded Debt

a. Economic Recovery Notes

In December 2009, Public Act 09-2 authorized the issuance $915.8 million of General Obligation Economic Recovery Notes which were used to fund a major portion of the State's General Fund deficit at that time. In October 2013, a portion of these notes were refunded when the State issued $314.3 million of General Obligation Refunding Notes which were issued in four series as variable-rate remarketed obligations (VRO) that ultimately mature on January 1, 2018. Any series of these notes may be converted by the State at any time from the VRO rate, which is determined by the remarketing agent on a daily basis, to another interest rate mode - such as an adjusted SIFMA rate mode.

If the State decides to convert the interest rate mode, each holder is required to tender their notes for conversion while the State has agreed to make available supplementary information describing the notes following the conversion. If any tendered VRO's of a series are not successfully remarketed they may continue to be owned by their respective holders until the VRO Special Mandatory Redemption Date. That series of notes in that case would bear interest at a higher stepped-up rate. The liquidity available to purchase tendered notes is only provided by remarketing resources and the State's general fund. In the opinion of management, the higher cost precludes the likelihood of conversion by the State. The original VRO interest rate modes remain in effect at the end of the fiscal year.

Total Economic Recovery and VRO Notes outstanding at June 30, 2016 were $352.6 million. The notes mature on various dates through 2018 and bear interest rates from 3.0 to 3.2 percent. Future amounts needed to pay principal and interest on these notes outstanding at June 30, 2016 were as follows (amounts in thousands):

Year Ending          
June 30,    Principal    Interest    Total
2017 $175,465 $9,360 $184,825
2018 177,120 3,958 181,078
Total $352,585 $13,318 $365,903

b. 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, 2016, were as follows (amounts in thousands):

   Final    Original       Authorized
   Final    Original       But
Purpose of Bonds    Dates    Rates    Outstanding    Unissued
Capital Improvements 2016-2036 2.00-5.632% $3,454,977 $850,880
School Construction 2016-2035 2.00-5.750% 4,528,256 203,000
Municipal & Other
Grants & Loans 2016-2036 1.00-5.632% 2,033,367 1,021,736
Housing Assistance 2016-2035 0.65-5.460% 424,915 185,228
Elimination of Water
Pollution 2016-2035 2.00-5.09% 261,509 406,208
General Obligation
Refunding 2016-2038 1.75-5.50% 3,782,363 -
GAAP Conversion 2016-2027 1.00-5.00% 527,975 151,500
Pension Obligation 2016-2032 4.65-6.27% 2,217,693 -
Miscellaneous 2016-2034 3.50-5.100% 51,750 38,461
17,282,805 $2,857,013
Accretion-Various Capital Appreciation Bonds 111,817
Total $17,394,622

Future amounts needed to pay principal and interest on as General Obligation bonds outstanding at June 30, 2016, were as follows (amounts in thousands):

Year Ending   
June 30,    Principal    Interest    Total
2017 $1,291,350 $774,230 $2,065,580
2018 1,276,865 729,943 2,006,808
2019 1,227,316 674,216 1,901,532
2020 1,171,271 623,055 1,794,326
2021 1,150,151 572,524 1,722,675
2022-2026 5,272,787 2,409,921 7,682,708
2027-2031 4,212,730 982,470 5,195,200
2032-2036 1,676,110 146,823 1,822,933
2037-2041 4,225 212 4,437
Total $17,282,805 $6,913,394 $24,196,199

Transportation Related Bonds

Transportation Related bonds include special tax 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, 2016, were as follows (amounts in thousands):

   Final    Original      Authorized
  Maturity    Interest    Amount    But
Purpose of Bonds    Dates    Rates    Outstanding    Unissued
Infrastructure
Improvements 2016-2035 2.00-5.740% $4,519,690 $3,225,919
4,519,690 $3,225,919
Accretion-Various Capital Appreciation Bonds -
Total $4,519,690

Future amounts required to pay principal and interest on transportation related bonds outstanding at June 30, 2016, were as follows (amounts in thousands):

Year Ending   
June 30,    Principal    Interest    Total
2017 $270,550 $217,138 $487,688
2018 276,950 204,862 481,812
2019 269,800 192,108 461,908
2020 269,785 178,972 448,757
2021 277,285 166,159 443,444
2022-2026 1,318,490 633,678 1,952,168
2027-2031 1,212,015 306,156 1,518,171
2032-2036 624,815 62,100 686,915
$4,519,690 $1,961,173 $6,480,863

c. 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, 2016, were as follows (amounts in thousands):

   Final    Original    Amount
   Maturity    Interest    Outstanding
Funds    Dates    Rates    (000's)
UConn 2016-2030 1.5-5.5% $112,685
State Universities 2016-2036 2.0-6.0% 302,381
Clean Water 2016-2035 2.0-5.0% 726,129
Drinking Water 2016-2035 2.0-5.0.% 74,891
Bradley Parking Garage 2016-2024 6.5-6.6% 30,595
Total Revenue Bonds 1,246,681
Plus/(Less) premiums and discounts:
UConn 19,340
Clean Water 73,928
Other 8,776
Revenue Bonds, net $1,348,725

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.

In 2000, Bradley Parking Garage bonds were issued in the amount of $53.8 million to build a parking garage at the airport. As of June 30, 2016, $30.6 million of these bonds are outstanding.

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. Details on these agreements are disclosed under the separately issued audited financial statements of the fund.

Future amounts needed to pay principal and interest on revenue bonds outstanding at June 30, 2016, were as follows (amounts in thousands):

Year Ending          
June 30,    Principal    Interest    Total
2016 $97,442 $56,680 $154,122
2017 87,539 52,662 140,201
2018 87,325 48,908 136,233
2019 93,299 44,889 138,188
2020 82,220 40,586 122,806
2021-2025 383,175 146,330 529,505
2026-2030 301,595 63,347 364,942
2031-2035 133,270 11,395 144,665
2036-2040 1,065 21 1,086
- - -
$1,266,930 $464,818 $1,731,748

d. Component Units
Component Units' revenue bonds outstanding at June 30, 2016, were as follows (amounts in thousands):

   Final       Amount
   Maturity    Interest    Outstanding
Component Unit    Date    Rates    (000's)
CT Housing Finance Authority 2016-2055 0.15-6.625% $3,808,922
CT Student Loan Foundation 2034-2046 0.00-1.934% 274,800
CT Higher Education
Supplemental Loan Authority 2017-2036 0.40-5.25% 152,785
CT Airport Authority 2017-2032 %/1 mth libor 122,980
CT Regional
Development Authority 2016-2034 1.00-7.00% 85,920
UConn Foundation 2016-2029 1.90-5.00% 22,740
CT Innovations Inc. 2016-2020 2.37-5.25% 2,260
Total Revenue Bonds 4,470,407
Plus/(Less) premiums and discounts:
CHFA 20,105
CSLF (710)
CHESLA 2,195
Uconn Foundation (441)
CRDA (322)
Revenue Bonds, net $4,491,234

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.

Following the merger of the operations of the Connecticut Development Authority, Connecticut Innovations, Incorporated (CII) assumed responsibility for the former authority's Special Obligation Industrial revenue bonds. The bonds were issued to finance such projects as the acquisition of land, the construction of buildings, the purchase and installation of machinery, equipment, and pollution control facilities. These activities are financed under its Self-Sustaining Bond Program which is described in the no-commitment debt section of this note. In addition, CII has $2.3 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; a special needs indenture dated 9/25/95, and other bond resolutions dated October 2009. As of December 31, 2015, bonds outstanding under the bond resolution, the indenture, and other bond resolutions were $3,401.4 million, $58.6 million, and $369.1 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 resolution and indenture Capital Reserve funds are 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 any succeeding calendar year on all outstanding bonds. The required reserves are $247.7 million per the resolution and $4.6 million per the indenture at 12/31/15. As of December 31, 2015, the Authority has entered into interest rate swap agreements for $830.1 million of its outstanding variable rate bonds. Details on these agreements are disclosed under the separately issued audited financial statements of the Authority.

Materials, Innovation, and Recycling 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.

Capital Reserves
Each Authority has established Special Capital Reserve funds that secure all the outstanding bonds of the Authority at year-end. 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.

The Capital Region 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 $9.0 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 Component Unit revenue bonds outstanding at June 30, 2016, were as follows (amounts in thousands):

Year Ending          
June 30,    Principal    Interest    Total
2017 $142,063 $100,443 $242,506
2018 146,533 101,173 247,706
2019 153,492 97,434 250,926
2020 157,850 94,096 251,946
2021 160,949 90,622 251,571
2022-2026 840,357 392,311 1,232,668
2027-2031 895,903 283,782 1,179,685
2032-2036 847,271 183,232 1,030,503
2037-2041 618,543 98,208 716,751
2042-2046 246,600 84,547 331,147
2047-2051 231,002 15,942 246,944
2052-2056 29,844 6,804 36,648
- - -
$4,470,407 $1,548,594 $6,019,001

No-commitment debt
Under the Self-Sustaining Bond program, acquired from its combination with the Connecticut Development Authority, Connecticut Innovations, Inc., 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, 2016 were $441.4 million.

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, 2016, were $8,314.8 million, of which $302.8 million was secured by Special Capital Reserve funds.

The Materials, Innovation, and Recycling Authority has served as a conduit issuer for debt to fund the construction of waste processing facilities by independent contractor-operators. The outstanding debt is secured by loan agreements, between the authority and independent contractor-operators, which have been assigned to the trustee for the debt, and through additional corporate guarantee agreements between the trustee and third party guarantors. The payment of the debt is not guaranteed by the Authority or the State. Thus the assets and liabilities related to the debt are not included in the Authority’s financial statements. The amount of the debt outstanding at June 30, 2016 is $30.0 million.

e. Debt Refundings
During the fiscal year the State issued General Obligation and Special Tax Obligation bonds of $721.6 million at an average coupon interest rate of 4.86 percent to advance refund $808.3 million of General Obligation and Special Tax Obligation bonds with an average coupon interest rate of 4.66 percent. Although the advance refunding resulted in a $17.6 million accounting loss, the State in effect reduced its aggregate fund level debt service payments by $102.4 million over the next 8 years. The present value of these savings represents an economic gain (difference between the present values of the debt service payments of the old and the new bonds) of $95.6 million.

The proceeds of the refunding bonds were used to purchase U.S. Government securities which were deposited into irrevocable trust accounts with an escrow agent to provide for all future payments on the refunded bonds. Thus, the refunded bonds were removed from the State's financial statements as they are considered defeased.

In prior years, the State placed the proceeds of refunding bonds in irrevocable trust accounts to provide for all future debt service payments on defeased bonds. The assets of the trust accounts and the liability for defeased bonds are not included in the State's financial statements. As of June 30, 2016, the outstanding balance of bonds defeased in prior years was approximately $980.7 million.