Delaware keeps AAA rating ahead of bond sale

WILMINGTON – The state received the perfect AAA bond rating in recent reviews as it prepares for a nearly $400 million general obligation bond sale next week.

The top three U.S. bond rating agencies – Fitch, Moody’s and S&P Global – all retained Delaware’s highest possible ratings, marking the 23rd consecutive year that it was able to receive unanimous confidence. Delaware is one of only 15 states to hold the highest AAA bond rating, as of April 14, according to S&P Global.

The state government is preparing to issue $364.395 million in an annual Series A bond to fund its capital improvement program, with another $34.305 million being issued in a Series B bond to refinance pre-existing debt at a lower rate. The bond sale is scheduled for April 26.

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.

“The rating signifies Delaware’s ability to meet its financial obligations,” State Treasurer Colleen Davis said in a statement announcing the ratings. “It reflects our creditworthiness and allows the state to repay bonds at a lower cost and is a representation of our financial health and management practices.”

In its evaluation, Moody’s commented, “The State of Delaware maintains a strong credit position supported by healthy and stable finances, and strong management and governance. The state’s well-established process for monitoring revenue and its statutory limits on annual spending growth are important tools that aid financial management year after year. These tools and the state’s continued growth in reserves provide a cushion should unforeseen fiscal challenges arise or persist.”

S&P Global Ratings credit analyst Geoff Buswick wrote that “Delaware’s demonstrated history of proactive fiscal management and well-embedded strong financial policies underpin the rating.”

Among the highlights of the evaluations were the state’s healthy budget reserves, liquidity, and generally accepted accounting principles (GAAP); recent strong growth allowing the state to fully fund two reserves to a combined 12% of revenues; strong financial management and governance indicated by frequent revenue forecasting and a statutory limit on spending; and; lower business costs and the cost of living relative to neighboring states that could continue to attract new residents.

Among the greatest risks noted by analysts that could lower Delaware’s bond rating were softening revenues, perhaps due to litigation surrounding unclaimed property, and elevated retiree health care liabilities.

The latter is a risk factor that has been cited for several years now as the state grapples with how to address the health care costs of retirees who are living longer, getting new treatments and seeking to restrict changes to the health plan.

In January, Delaware Finance Secretary Rick Geisenberger said the state’s current OPEB liability is calculated at about $8.9 billion, and that is expected to double in the next 20 years.

The proposed Fiscal Year 2024 budget invests $143.2 million to address the state’s group health insurance plan shortfall as well as $51 million to address some future OPEB liabilities – a funding commitment the Carney administration plans to make annually.

Last summer, retirees fought back against a state plan to change their insurance to a Medicare Advantage plan, which they fear could limit coverage. An advocacy group has sued the state over the move, and plans were protected for this benefit year, but future changes are still likely.

Carney, who served three terms in Congress, noted that the issue is similar to the federal debate over how to address the solvency concerns of Medicare or Social Security.

Unlike pensions, where the state funds 89% of future liabilities before an employee is vested, post-employment health benefits are pay-as-you-go. Health care premiums fund about 1% of the state’s total health care costs for retired employees and about 20% for active employees, Carney said.

“We’ve got benefits that have been promised without the funding to go with it,” he told reporters during a budget briefing. “That’s a financial model that doesn’t work. So, we’ve got to find ways that are not punitive, that are fair.”