State government’s standing on Wall Street took a hit today when one of the three major credit rating agencies lowered Connecticut’s bond rating, citing the state’s repeated efforts to close budget deficits through borrowing, rather than spending cuts or tax hikes.

But the downgrade by Fitch Ratings Services should not have much of an effect on state borrowing costs, since it comes just two months after Fitch had upgraded Connecticut’s bond rating. The net effect leaves Connecticut with the same rating it has held for most of the fiscal year.

The downgrade report quickly sparked a slew of criticism of Republican Gov. M. Jodi Rell – who is not seeking re-election –  and of the Democrat-controlled General Assembly by several candidates for statewide office.

And one of those critics was Rell’s lieutenant governor, Michael Fedele, who is waging his own bid for the Republican gubernatorial nomination.

“The downgrade reflects the state’s reduced financial flexibility, illustrated by its reliance on sizable debt issuances during the current biennium to close operating gaps,” the agency wrote, explaining its decision to lower the rating from AA+ to AA. “The state faces large structural imbalances beyond the current biennium.

Rell and the legislature agreed one year ago to borrow about $1 billion to close a deficit in the 2008-09 fiscal year, despite state government still holding nearly $1.4 billion at the time in its emergency reserve, commonly known as the Rainy Day Fund. The governor and legislature instead used the reserve funds to support the 2009-10 and 2010-11 budgets.

The latter spending plan, a $19.01 billion package, also depends on nearly $1 billion in additional borrowing, specifically revenue bonds that would be paid off largely through a new monthly surcharge, ranging between $2 and $3, on most electricity consumer bills.

Fitch also noted Connecticut has seen “significant revenue declines” since the recession began in March 2008. And while it is the wealthiest state, per capita, in the nation, it also has one of the highest-levels of bonded debt, and has failed to save adequately for pension programs for state employees and municipal school teachers.

State Treasurer Denise L. Nappier, a Hartford Democrat whose office oversees state government borrowing, said that “while Fitch’s decision is disappointing, we do not anticipate that it will have much of an impact, if any, on the state’s cost of debt.”

About one-tenth of the annual budget is devoted to paying off principal and interest on bonded debt.

Connecticut’s rating, which had stood at AA for much of the past fiscal year, had been upgraded to AA+ about eight weeks ago by Fitch as it recalibrated credit ratings for all state and local governments.

The downgrading sparked plenty of reactions on the political front, though, particularly among the 2010 gubernatorial contenders.

“It’s the cumulative result of long-term spending increases, under-funded liabilities and borrowing, plus a state government that is top-heavy and too top-down,” former Stamford Mayor Dan Malloy, who won the Democratic State Convention’s gubernatorial endorsement last month, said today.  “In other words, it’s the result of a lot of bad decisions that were made over a long period of time by both parties, who chose to build structural deficits into our budgets rather than make tough choices.”

“Connecticut’s budget crisis is the result of decades of gimmick-laden budgets and irresponsible management in Hartford, and all of this has culminated in a downgraded bond rating that will make government more expensive,” said Greenwich businessman Ned Lamont, who is challenging Malloy in the Democratic gubernatorial primary.

Fedele, who finished second at the GOP State Convention but is embroiled in a three-way primary fight for his party’s gubernatorial nomination, offered similar criticism, but aimed it exclusively at Democratic legislative leadership – and away from Rell.

“The decision by Fitch Ratings to downgrade the credit rating on the State’s bonds should be a wake-up call for state officials –  and for the taxpayers who pay the bills,” Fedele said. “For too long the State has failed to take meaningful action to address its growing fiscal crisis. … In order to avoid making hard decisions the Democratically-controlled General Assembly has resorted to borrowing and fiscal gimmicks to supposedly close the budget gap.”

Greenwich Republican Tom Foley, who won his party’s state convention endorsement for governor, issued a statement calling for the legislature to come into special session to cut spending $1 billion and cancel the planned $1 billion in borrowing for 2010-11.

Rell said Friday that while the state’s rating was lowered, the legislature did accept her proposal to dedicate future state budget surpluses to help pay off this year and last year’s borrowing early, if possible. The prospect of the next governor and legislature enjoying any surplus right away is questionable, though, since nonpartisan fiscal analysts say the 2011-12 budget, which officials must begin crafting in February, faces a built-in shortfall of $3.37 billion.

Newington Mayor Jeff Wright, a Republican who is challenging Nappier for the treasurer’s post this year, accused the incumbent of not working hard enough to stop the legislature from turning to borrowing to balance the budget.

“Where has Nappier been as the red ink has risen to tsunami proportions?” he said.

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Keith M. PhaneufState Budget Reporter

Keith has spent most of his 31 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut’s transportation and social services networks. He has been the state finances reporter at CT Mirror since it launched in 2010. Prior to joining CT Mirror Keith was State Capitol bureau chief for The Journal Inquirer of Manchester, a reporter for the Day of New London, and a former contributing writer to The New York Times. Keith is a graduate of and a former journalism instructor at the University of Connecticut.

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