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Delaware retains AAA bond ratings in $255M sale

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WILMINGTON – Delaware recently sold $255 million in general obligation bonds while retaining its top AAA bond rating.

The Feb. 17 sale saw $32.5 million in bonds sold to refinance 2014 debt at lower interest rates, saving taxpayers more than $7.8 million in total debt service over the next 12 years, according to Finance Secretary Rick Geisenberger. Over the last two years, Delaware has sold $875 million in bonds at a low, average interest cost of 1.76%.

Delaware is one of only 15 states to hold the highest AAA bond rating, as of Jan. 28, according to S&P Global, one of the major rating agencies. Joining S&P in assigning the top mark was Fitch and Moody’s, or the Big 3 agencies.

The ratings are important because higher grades translate into lower interest costs in repayment of the bonds. The agencies look at a variety of criteria, including a state’s economy, government’s financial performance and management, debt load, long-term costs and political structure. States that analysts believe could better weather recessions or economic downturns are in turn seen as safer risks and awarded higher ratings.

“I again thank state employees and the General Assembly,” Gov. John Carney said in a statement announcing the bond sales. “Working together over the past five years, we have successfully managed the state’s finances through the turbulence of a major budget deficit, a pre-pandemic recovery, and the COVID emergency. Now through the resilience of all Delawareans and our business community, we’re emerging from the pandemic stronger than ever. This confidence is reflected in the public markets by this very successful bond sale.”

Bond proceeds will fund numerous capital projects previously authorized by the General Assembly-including close to $200 million in school construction projects plus funding for housing and community development, National Guard training facilities, the Delaware Public Health Lab, library construction, court facilities, higher education campus improvements, and the rehabilitation of park and wildlife areas.

“Delaware has a well-earned reputation for strong fiscal governance and controls that has been built over many decades,” State Treasurer Colleen Davis added in a statement. “The state’s liquidity has never been stronger and with the guidance of the Cash Management Policy Board, my office will continue its work to build the confidence that underlies the state’s AAA bond ratings.”

Delaware has held its top mark through the COVID-19 pandemic due in part to its cautious budgeting over prior years that led to a healthy savings balance heading into the crisis. In the end, the First State has weathered the economic storm just fine, with an extraordinary spending authority of more than $800 million next fiscal year.

“The stable outlook reflects Delaware’s strong fiscal management that has allowed the state to proactively manage its budgets through the pandemic and has been key to the state’s long-term credit stability,” S&P Global Ratings credit analyst Geoff Buswick said in his report.

While analysts appreciated Delaware’s budgeting, some lingering concerns remain outlying.

S&P once again noted the growing credit pressure stemming from the state’s unfunded other post-employment benefits (OPEB) liabilities, including health care, which it considers “significant.” 

“While Fitch views the OPEB liability as a more flexible obligation compared with pensions, and also more uncertain because of the complex assumptions used to calculate it, the magnitude of the liability given Delaware’s already above-average long-term liabilities is a concern,” Fitch analysts added in their separate review.

Delaware is beginning to address the $9.4 billion liability in the governor’s Fiscal Year 2023 recommended budget by allocating 1% of the previous year’s extraordinary revenues into the OPEB trust fund – or about $47.7 million next year. The Retirement Benefit Study Committee formed to develop options to address OPEB liabilities has also issued an initial report that proposes transitioning OPEB from pay-go- to pre-funding to reduce the liability over time, as well as modifying the plan and benefits to reduce future liabilities. These recommendations may be taken up by the General Assembly this year.

S&P also noted the state’s environmental risks are elevated for the sector, given its geographical exposure to ocean storms and Delaware and Christina River flooding, which could increase infrastructure costs and particularly affect coastline communities, some of which are also economically dependent on tourism. In response, Delaware adopted a climate action plan last year that focuses on reducing greenhouse gases and maximizing resilience to climate change.

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