New CT budget contributes to credit downgrades from Wall Street

The new state budget’s ability to mitigate longstanding fiscal problems got poor marks Thursday on Wall Street as two of the four major rating agencies downgraded Connecticut’s credit ranking — probably boosting borrowing costs in the future.

Fitch Ratings Inc. and Standard & Poor’s both lowered their bond ratings in response to the $19.76 billion budget Gov. Dannel P. Malloy and the legislature’s Democratic majority crafted for the fiscal year beginning July 1.

The other two firms, Kroll and Moody’s Investors Service, didn’t change their ratings, but did maintain a “negative outlook.” This represents a warning that they intend to monitor state finances closely over the next year, and sometimes is a precursor to a formal downgrade.

“The message from the credit rating agencies couldn’t be any clearer: It is high time for a sustained commitment to fortify the state’s financial footing, in the midst of persistent economic uncertainty,” state Treasurer Denise L. Nappier wrote Thursday in a statement announcing the downgrades.

The treasurer isn’t anticipating “a significant impact” on borrowing costs, noting that three of the four agencies first established negative outlooks on Connecticut’s finances last summer, and investors already adjusted bond prices somewhat to reflect that.

State Treasurer Denise L. Nappier

Keith M. Phaneuf / CTMirror.org

State Treasurer Denise L. Nappier

Nappier’s office expects to issue about $500 million in general obligation bonds next week. General obligation bonds, which are repaid with income and sales tax receipts and other revenues assigned to the budget’s General Fund, are used to finance municipal school construction, capital projects at public colleges and universities, school building repairs, and various smaller projects.

Nappier added that the new budget has “positioned the state in the right direction.” With the 2017 mid-term budget adjustments, spending levels will be below 2016 levels even with increased fixed costs. And on the revenue side, there are no tax increases or use of significant one-shot revenue sources. The rating agencies took note of these structurally sound budget actions, as well as other credit positives including the state’s high per capita income and strong governance.”

But two of the major credit rating agencies aren’t as confident about Connecticut’s fiscal future.

“In our opinion, Connecticut has less flexibility to meet unanticipated revenue shortfalls, such as those that occurred in fiscal 2016, and may be poorly positioned should there be a national economic downturn in the next several years,” Standard & Poor’s credit analyst David Hitchcock wrote.

Even though the new budget cuts overall spending more than $630 million below levels in the preliminary 2016-17 budget, nonpartisan state analysts still say Connecticut finances, unless adjusted, are on pace to run about $1.3 billion in the red, or about 6 percent, in 2017-18.

The state also is expected to finish the current fiscal year between $259 million and $280 million in deficit — its second year-end deficit in as many years. And this would leave Connecticut with less than $150 million in its emergency reserve — an amount which wouldn’t cover even 1 percent of annual operating costs.

“It remains unclear whether the state has succeeded in fully aligning its budget to potential future economic and revenue performance,” Fitch wrote in its downgrade report.

The new budget does not raise taxes nor raid the state’s emergency reserve.

And Fitch did note in its report that “spending is expected to be in line with to marginally above expected revenue growth without ongoing state action to control costs.”

Fitch added that, “The state retains solid ability to cut spending despite several rounds of budgetary adjustment during the current and last” budget cycles.

Republican legislators argued the new budget failed to include sufficient structural changes to control costs over the long-term, particularly involving worker benefits and overtime costs.

Many of these changes would require concessions from employee unions, and labor leaders have said workers, who granted concessions in 2009 and 2011, would not do so again.

“The Democrats tried to spin the GE decision as something other than disastrous news, but the markets did not buy it last January and they are not buying it today,” House Minority Leader Themis Klarides, R-Derby, said, referring to last January’s announcement by General Electric that it would move its global headquarters from Fairfield to Boston. “This downgrade is just more evidence that our finances have been mismanaged for too long and now taxpayers will again pay the price for higher borrowing costs in the future.”

“By building budgets for elections and not generations, Connecticut hasn’t made the structural changes needed to ease the minds of credit rating agencies,” Senate Minority Leader Len Fasano, R-North Haven, said. “The Democrat majority has failed to mitigate higher debt in future budgets – budgets that will fall onto the backs of our children and our grandchildren.”

Benjamin Barnes, Malloy’s budget director, said the administration is glad Kroll and Moody’s maintained their ratings for Connecticut. “We have worked hard to strengthen the state’s fiscal picture as Connecticut adjusts to the new economic reality. …The agencies recognize we have begun to make necessary structural changes. But we all know, and are reminded today, that there is much more difficult work to be done.”

Though the new budget does scale back municipal aid for 2016-17 from previously approved levels, Moody’s praised Connecticut officials for minimizing the budget’s impact on cities and towns.

But Moody’s also noted that the state continues to struggle with:

  • An economic recovery that lags the nation’s and correspondingly “muted state income tax revenue;”
  • Per capita debt and retirement benefit obligations that are among the highest of any state’s;
  • And major cities like Hartford, Bridgeport and New Haven that remain heavily reliant on state funding.

Kroll’s released its credit rating but not its detailed rating report as of mid-afternoon Thursday.

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