The state’s new biennial budget is getting mixed reviews from Wall Street’s credit rating agencies.

The four organizations that rate Connecticut’s creditworthiness praised Gov. Dannel P. Malloy and the legislature for adopting a $40.3 billion, two-year plan that is balanced – albeit “narrowly” – with few one-time revenues.

But the agencies also noted that Connecticut continues to struggle with “tepid” revenue growth and a small reserve that leaves the state vulnerable to “future fiscal shocks.”

The agencies all reaffirmed their respective, healthy bond ratings for Connecticut.

And while Fitch Ratings upgraded its outlook for Connecticut from negative to stable – matching stable outlooks offered by Kroll and by Moody’s Investors Service – Standard & Poor’s maintained the negative outlook it first placed on Connecticut back in March.

“The recently adopted biennial budget is based on conservative revenue assumptions, appears structurally balanced, and avoids large non-recurring measures,” the Fitch analysis states, adding this is a departure from the budget Malloy and lawmakers approved just two years ago.

Though the new budget – designed to finish less than 1 percent in the black in the first year – is “narrowly balanced,” state government demonstrated its ability to survive an underperforming economic recovery and build a small budget reserve, the Fitch report added.

“The Governor’s commitment to funding our state’s long-term liabilities is paying off as key bond rating agencies are confirming that the state is moving in the right direction,” Malloy spokesman Mark Bergman said shortly after the ratings were released. He added that in July “we saw our unemployment rate drop to the lowest levels since 2008, and each year we are making progress at chipping away at our state’s long-term debt obligations.”

“The commitment to fully funding long-term liabilities and to a structurally balanced budget is paying off,” Treasurer Denise L. Nappier said.

Kroll acknowledged state officials have made “significant reductions from current service levels” in costly Medicaid and social service programs while fully funding the state’s obligations in pension and other retirement programs that were often under-funded during previous administrations.

And Kroll noted that there are some reasons for economic optimism for Connecticut on the horizon.

“Although the state lags the New England region and the United States on various employment indicators, recent improvement in overall employment and a notable decline in the unemployment rate suggest a strengthening economic environment statewide.”

All four rating agencies noted that Connecticut still has a strong wealth base, particularly centered in its financial services sector in Fairfield County.

But they also were unanimous in adding that this portion of Connecticut’s economy, though improved in recent years, still hasn’t regained the strength it enjoyed before what many economists call “The Great Recession.”

And this wasn’t the only issue ratings agencies cited as cause for caution.

The new budget does increase taxes about $1.3 billion over the coming biennium while canceling close to $500 million in previously approved tax cuts. These tax hikes are “further narrowing the state’s favorable tax-rate gap” with neighboring New York and New Jersey, Fitch wrote.

Starting in 2016-17 and building from there, the new budget dedicates more funding – chiefly from sales tax receipts – to transportation and municipal aid. And both Malloy and his fellow Democrats in legislative leadership have hailed these commitments as “historic” and “transformative.”

But the legislature’s nonpartisan Office of Fiscal Analysis estimates a $927 million deficit is built into the 2017-18 fiscal year – a shortfall bigger than that year’s extra investments in transportation and municipal aid combined.

And Standard & Poor’s, which maintained its negative outlook, said Connecticut’s budget – despite being balanced on paper – is under considerable pressure.

State officials raised taxes significantly both this year and in 2011. If another shortfall arises in the near future, there is a “potential difficulty in raising tax rates further after already increasing them multiple times in recent years,” S&P wrote.

“It’s certainly clear to Wall Street that this budget is very vulnerable,” said Rep. Chris Davis of Ellington, ranking Republican representative on the Finance, Revenue and Bonding Committee. “There is still the threat of another deficit, and that sends a very negative message.”

And the state’s Rainy Day Fund, or emergency reserve, of about $520 million is expected to fall to around $450 million after a small deficit, now estimated at $70.9 million, from the 2014-15 fiscal year is resolved. That reserve represents only about6 2.5 percent of the state’s general fund.

Connecticut still faces big annual increases in the coming decade to meet its obligations to worker retirement benefits, and its bonded debt – used to finance major capital projects, but also sometimes to support operating budget costs – also was cited as a growing concern in several reports.

“Connecticut is a frequent borrower, and the state’s debt per capita and debt-to-personal income ranked first and second, respectively, among the 50 states.” Moody’s wrote.

And Connecticut’s net taxpayer support debt of $5,491 per person, or 9 percent of personal income, is well over the national median of $1,054 per capita and 2.6 percent of personal income, according to Moody’s.

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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