Wall Street gives new state budget mixed reviews

Wall Street’s four major credit rating agencies gave Connecticut mixed views since its new two-year budget was enacted.

All agencies retained the current ratings, which are used to determine the interest rates state government must face when it borrows to build roads, schools and other capital initiatives.

But Fitch Ratings Service changed its outlook for Connecticut from “stable” to “negative,” citing one-time revenues, refinancing, borrowing and other gimmicks that increase the state’s “budget vulnerability.”

And while Gov. Dannel P. Malloy and state Treasurer Denise L. Nappier, both Democrats, hailed the overall outcome as positive, minority Republicans in the House and Senate called it a sign that state finances are headed for more deficits.

“The administration’s commitment to responsible financial management and gradual resolution of our long-term liabilities remains strong,” said Malloy’s budget director, Office of Policy and Management Secretary Benjamin Barnes. “We look forward to the opportunity to incorporate the guidance and criticisms of all the rating agencies in our policy recommendations in the coming year.”

Three of those agencies –- Standard & Poor’s, Moody’s Investors Service and Kroll Inc. — all affirmed their existing ratings for Connecticut.

Fitch retained the state’s AA rating – a favorable score – yet revised the outlook that accompanies it.

“The negative outlook reflects the state’s reduced fiscal flexibility at a time of lingering economic and revenue uncertainty,” Fitch analysts wrote in their report. “The enacted budget for the new biennium delays repayment of deficit borrowing, adds to an already high debt load and fails to rebuild the state’s financial cushion.”

Fitch also said the state officials’ expectations for revenues to support the new budget are “reasonable” and the plan is balanced.

But the chief reasons for sustaining the current rating, according to Fitch analysts, are Connecticut’s continued status as the nation’s wealthiest state and its past track record of repaying its debts and amassing a budget reserve.

Malloy and his fellow Democrats in the legislature’s majority adopted a $37.6 billion plan for this fiscal year and next, describing it as a responsible package that meets a rising demand for social services, preserves municipal aid and builds on the education reforms approved last year  — all while avoiding increased taxes.

“While I am disappointed with Fitch’s negative outlook, I don’t foresee this opinion by one agency impacting our upcoming bond sales,” Nappier said, adding that a negative outlook generally means the state’s credit rating will be under review for one to two years. “With that said, our State does have a way to go to achieve full, sustainable recovery over the long haul. That means, among other things, coming to grips with the state’s long-term unfunded obligations while honoring its commitments to our most vulnerable citizens. I remain optimistic that we will get there in due course. Simply put, we have no choice -– we can’t afford to do otherwise.”

Republicans countered that the new, two-year budget is riddled with gimmicks that will produce another fiscal crisis in the near future, including:

  • Expiring taxes would be extended and new limits placed on tax credits, costing taxpayers an extra $220 million over the biennium.
  • Relying upon about $550 million in raids, account sweeps and other one-time gimmicks like amnesty for tax delinquents to balance the new plan — leaving a $712 million deficit projected for the first full budget after the 2014 gubernatorial election.
  • And using a new interpretation of Medicaid spending that shifted more than $6 billion off the books to bring the budget under the spending cap.

“The facts speak for themselves,” said Senate Minority Leader John P. McKinney, R-Fairfield, who is weighing a bid for governor in 2014. “Connecticut’s bond ratings are worse than they were when Governor Malloy took office, they have not recovered, and they are heading in the wrong direction.”

House Minority Leader Lawrence F. Cafero, R-Norwalk, said “the Fitch rating is a disgrace to the Malloy administration, adding that past ratings reviews criticized many of the controversial budget practices outlined again in the latest report. “They gave us warnings. We did not heed them.”

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