WILMINGTON — Delaware recently sold $255 million in general notes while maintaining its prime AAA bond rating.
In the Feb. 17 sale, $32.5 million in bonds were sold to refinance 2014 debt at lower interest rates, giving taxpayers more than $7.8 million in total debt service over the next 12 years years, according to Treasury Secretary Rick Geisenberger. Over the past two years, Delaware has sold $875 million worth of bonds at a low average cost of interest of 1.76%.
Delaware is one of only 15 states that hold the highest AAA credit rating, according to data as of Jan. 28 S&P Global, one of the major rating agencies. Together with S&P in awarding the top grade Fitch and Moody’sor the Big 3 agencies.
The ratings are important because higher ratings result in lower interest costs when paying back the bonds. The agencies examine a variety of criteria, including a state’s economy, government financial performance and management, debt burden, long-term costs, and political structure. In turn, states that analysts believe may be better able to weather recessions or economic downturns are viewed as safer risks and receive higher ratings.
“Once again, I thank state officials and the General Assembly,” Gov. John Carney said in a statement announcing the bond sales. “By working together over the past five years, we have successfully guided the state’s finances through the turmoil of a large budget deficit, a pre-pandemic recovery and the COVID emergency. We are now emerging from the pandemic stronger than ever, thanks to the resilience of all Delawareans and our business community. This confidence is reflected in the public markets through this very successful bond sale.”
Proceeds from the bond will fund numerous capital projects previously approved by the General Assembly, including nearly $200 million in school construction projects, as well as funds for housing and community development, National Guard training facilities, the Delaware Public Health Lab, construction libraries, courts and higher education, campus improvements and the rehabilitation of parks and wildlife areas.
“Delaware has a well-deserved reputation for strong tax administration and control, built over many decades,” added State Treasurer Colleen Davis in a statement. “The state’s liquidity has never been higher, and with the guidance of the Cash Management Policy Board, my office will continue to work to build the confidence that underpins the state’s AAA bond ratings.”
Delaware has held his record by the COVID-19 pandemic, due in part to prudent budgeting in previous years that resulted in a healthy savings balance heading into the crisis. In the end, the First State weathered the economic storm well and still has exceptional spending power of more than $800 million in the next fiscal year.
“The stable outlook reflects Delaware’s strong financial management, which has enabled the state to proactively manage its budgets during the pandemic and has been key to the state’s long-term credit stability,” said Geoff Buswick, credit analyst at S&P Global Ratings, in his report .
While analysts appreciated Delaware’s budgeting, some lingering concerns remain untouched.
S&P pointed out again the growing credit pressures stemming from the state’s unfunded liabilities for other post-employment benefits (OPEB), including health care, which it says are “significant”.
“While Fitch views the OPEB liability as a more flexible liability compared to annuities and also more uncertain due to the complex assumptions used to calculate it, the size of the liability is of concern given Delaware’s already above-average long-term debt,” analysts from Fitch added in their separate review.
Delaware is beginning to address the $9.4 billion liability in the governor’s recommended fiscal 2023 budget by paying 1% of last year’s extraordinary income into the OPEB trust fund — or about $47.7 million dollars next year. The Retirement Benefit Study Committee, formed to develop options for treating OPEB liabilities, has also issued an initial report proposing moving OPEB from pay-go to pre-funded to reduce liabilities over time , as well as modifying the plan and benefits to reduce future liabilities. These recommendations can be taken up by the General Assembly this year.
S&P also noted that the state’s environmental risks to the sector are heightened due to its geographical exposure to ocean storms and Delaware and Christiana River flooding, which could increase infrastructure costs and particularly affect coastal communities, some of which are also economically dependent on tourism are. In response, Delaware last year adopted a climate action plan focused on reducing greenhouse gases and maximizing resilience to climate change.
