One of the leading Wall Street credit rating agencies downgraded Connecticut’s rating Friday, citing a heavily loaded state credit card, huge debts in pension and retiree health care programs, and a depleted emergency reserve.

The decision by Moody’s Investors Service to lower state government’s bond rating from Aa3 to Aa2, opens the door for Connecticut to pay higher interest charges on future capital projects, even though its rating remains relatively high.

Moody’s cited “pension funded ratios that are among the lowest in the country and likely to remain well below average,” referring to retirement programs that serve state employees and Connecticut’s public school teachers.

The state employees’ fund, which had enough assets to cover just 44 percent of its obligations in June 2010, had climbed to nearly 48 percent by mid-2011, based on a new report filed earlier this month with the comptroller’s office. But fund analysts typically cite a funded ratio of 80 percent as a healthy level.

The teachers’ pension fund is in somewhat better shape, with enough assets to cover 61 percent of its obligations. But it was in much worse shape nearly four years ago until state government borrowed $2 billion to shore up that pension program, another debt Connecticut will be repaying for about two more decades.

The health care program for retired state workers is in far worse shape than either pension fund. According to Gov. Dannel P. Malloy’s budget staff, the state’s long-term obligation in this area is $26.6 billion.

State government traditionally has followed a pay-as-you-go system, allocating money each year to fund retiree health care, a cost that continues to grow rapidly with no investment earnings to offset it.

That first changed in 2007 when $10 million from that year’s budget surplus was used to open a savings account. A 2009 deal with unions required new employees and those with less than five years of experience to contribute up to 3 percent of their pay toward their retirement health care.

Malloy’s concessions deal with the unions, ratified in 2011, requires all workers to contribute 3 percent of their pay, and state government will have to match that contribution starting in the 2017-18 fiscal year.

And Connecticut also ranks as the most indebted state in the nation in terms of bonds issued to finance capital projects.

The state entered the fiscal year with close to $19.5 billion in debt owed to investors who purchased state bonds to finance municipal school construction, capital programs at public colleges and universities, road and bridge upgrades, repairs to state buildings and other projects. That’s according to fiscal projection reports filed in November with the legislature both by Malloy’s budget staff and by the legislature’s nonpartisan Office of Fiscal Analysis.

Another way to look at that debt, according to Malloy’s budget staff, is that it represents more than $5,569 for every man, woman and child in Connecticut, based on U.S. Census population numbers. That is the highest debt level of any state in the nation.

Set against all of these debts, state government has nothing in its emergency reserve, commonly known as the Rainy Day Fund. Malloy’s predecessor, M. Jodi Rell, and the legislature emptied a nearly $1.4 billion reserve in 2009 and 2010 to mitigate the need for tax hikes or spending cuts during the last recession.

Moody’s announcement drew sharp criticism Friday both from Malloy’s budget chief, Office of Policy and Management Secretary Benjamin Barnes, and state Treasurer Denise L. Nappier.

“The decision is certainly disappointing, but not totally unexpected given the negative outlook placed on the State’s rating by Moody’s last June,” Nappier said in a news release.

“In many ways, Moody’s action is going in the wrong direction, particularly since Connecticut has made tough decisions to bring structural balance to its operating budget and set in motion a clear path to improve financial stability,” Nappier said.

Malloy, who inherited a built-in budget deficit approaching $3.67 billion for 2011-12 when he took office last January, worked with legislators to close that gap with $1.5 billion in new state taxes, a major union concessions plan and several state agency consolidations.

“Despite these steps forward, this rating agency appears to be judging the State’s creditworthiness through the rearview mirror,” Nappier said She added that Moody’s gave scant consideration to Malloy and the legislature’s commitment to convert state finances to generally accepted accounting principles, a series of fiscal standards that emphasize transparency and accountability.

“Moody’s is caught up in a labyrinth of mathematical ratios that loses sight of the essential question: How likely is it that Connecticut would ever default on its debt?” Nappier added. “The answer is, never in a million years!”

Barnes said that “Moody’s is wrong in its analysis of the state’s finances, and wrong to change Connecticut’s credit rating. Connecticut has done all the right things to shore up our finances, and Moody’s has responded with a downgrade intended to satisfy their internal corporate need to deflect attention from their historic lack of credibility.”

Malloy’s senior policy adviser, Roy Occhiogrosso, added that “unemployment is at its lowest point in more than two years and is headed down. Governor Malloy’s first year in office resulted in the state experiencing net job growth for the first time in four years.

Citing business lobby estimates that the economy could grow by as much as 4 percent next year, Occhiogrosso said “most of this is happening because the governor — supported by some very courageous legislators — had the guts to do what was necessary to stabilize the state’s finances.

But House Minority Leader Lawrence F. Cafero, R-Norwalk, said the downgrade is just more evidence that state government’s fiscal house is not in order.

“We have to hope for the best but prepare for the worst possible financial scenario,”Cafero said. “The marketplace — the credit rating agencies — is the final arbiter when it comes to assessing the fiscal health of the State of Connecticut. And the marketplace is signaling that we have a problem.”

“Those comments are ridiculous, even for Representative Cafero. Representative Cafero sat idly and voted for budgets year after year in which money was borrowed to pay for operating expenses, and that pawned off the state’s obligations on future taxpayers,” Occhiogrosso said.

“This governor has played no gimmicks whatsoever with the state’s finances. None,” he said. “Thanks to Governor Malloy, the state is keeping its books honestly, for the first time ever, and meeting its obligations completely – you know, the obligations Governor Malloy inherited from Representative Cafero and the past two Republican governors.”

Cafero also chastised the Malloy administration this week after fiscal analysts for the executive and legislative branches agreed on a consensus revenue report that pushes the current budget to the brink of a deficit.

The governor and his fellow Democrats in the legislature’s majority took considerable heat from the GOP after adopting a biennial budget last June with nearly $600 million in projected operating surpluses.

The $20.14 billion plan approved for the current fiscal year was projected to finish with a general fund surplus of $88 million, and a preliminary $20.4 billion budget for 2012-13 with a $496 million cushion built in.

But latest consensus numbers now show general fund revenues down nearly $95 million this fiscal year from the level anticipated in the adopted budget. And that overall drop would be much greater had not a $169 million shortfall in income tax revenues been partially offset by gains in sales and wholesale fuel tax receipts.

Before this latest revenue change, the administration and OFA had estimated small surpluses of $83 million and $101 million, respectively, in this year’s budget. After the new revenue numbers are considered, the forecasts drop to either a $12 million deficit or a $6 million surplus.

And for 2012-13, revenues now are down $139 million from the level anticipated in the adopted budget. Combine that with administration estimates released in mid-November that showed spending on pace to run $104 million above forecast, and next year’s cushion is below $250 million.

“Moody’s downgrade is a fair and honest failing grade for the Malloy administration and Democrat legislators who have not made the necessary fiscal reforms Republicans have advocated,” Senate Minority Leader John P. McKinney, R-Fairfield, said. “It is also a rebuke of the failed concession package the governor agreed to with state employee unions, which will not yield the savings claimed by the administration and only further tie the state’s hands.”

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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