Delaware keeps top bond ratings, saves $5M in refinancing

WILMINGTON – The state’s top bond ratings were recently reaffirmed by three of the four rating agencies, as it also refinanced bonds to save on a lower interest rate.

State finance officials reported that $33.1 million in general obligation (GO) bonds were refinanced at a record low interest rate of 0.79%, saving the state $5.2 million over the bonds’ decade-long term. The savings were structured to help the state address the fiscal year 2021 budget challenges brought on by the COVID-19 pandemic and the state-mandated shutdown of commerce to stem its transmission.

Fitch, Moody’s and KBRA all reaffirmed Delaware’s Triple A rating in June reviews – Standard & Poor’s did not review the 2020B GO bond offering, which refunded old debt at the new lower rate – and credited the state with preparing for economic downturns through building reserves. All four agencies had last evaluated the state’s financial position in January, before the pandemic began.

In a statement announcing the reaffirmed ratings, Gov. John Carney said, “The COVID-19 emergency presents enormous financial challenges for every state, including Delaware. But I think all Delawareans can be proud of the work we’ve done with the General Assembly to boost the state’s finances prior to this unanticipated event, so our state is better prepared to weather the storm.”

Delaware Finance Secretary Rick Geisenberger added that the state’s refunding “shows the market’s confidence in Delaware despite the near-term challenges faced by every state.”

The agencies all highlighted the state’s budget cushions, including its $252 million reserve “rainy day” account and its $126.3 million Budget Stabilization Fund, as a big reason for its top ratings. They also complimented the state’s use of the independent, non-partisan Delaware Economic and Financial Advisory Council (DEFAC) to forecast revenue estimates.

The reviews did warn the state about drawing too much upon its reserves to help plug deficits in the FY 2021 budget though.

“Prudent use of reserves is anticipated, but a sustained deterioration in reserve levels would be a credit negative,” KBRA wrote in its review.

The General Assembly’s Joint Finance Committee recently reviewed a revised budget proposal from Carney’s administration that sought to utilize $76.3 million from the Budget Stabilization Fund, which was created under Carney’s tenure to plug smaller budgetary gaps through an annual savings program. The proposal does not use any of the state’s reserve fund, which is filled by unspent funds each year and capped at 5% of state revenue. States typically try to leave such savings funds untouched to boost credit ratings, and Delaware has never drawn from the reserve account since it was created in 1980.

To further meet the estimated $455.5 million deficit for FY 2021, the administration is proposing to eliminate a planned 2% pay increase and step increases for state employees, the annual bond bill, and earmarks for land preservation and other programs.

“Delaware’s history of exceptional financial resilience and strong budget management may be tested by the depth and duration of this downturn,” Fitch said in its review.

The agency estimated that Delaware’s revenues will fall 20.8% in 2020, followed by a 9.1% increase in 2021, resulting in a cumulative result over a three-year period of a 10.1% decline. That would be a slightly worse downturn than its estimated state median decline of 16.6% in the first year and negative 5.7% over the three-year scenario, Fitch reported.

By Jacob Owens

jowens@delawarebusinesstimes.com