Connecticut’s longstanding fiscal problems continued to raise concerns on Wall Street Tuesday as a third major rating agency downgraded the state’s credit ranking.

Kroll Bond Rating Agency announced its downgrade Tuesday, citing Connecticut’s high debt, low reserves, eroding income tax receipts and lack of wage growth.

Kroll joins Fitch Ratings Inc. and Standard & Poor’s, which cited similar concerns in mid-May when they lowered their bond ratings.

The fourth rating agency, Moody’s Investors Service, hasn’t changed its rating this year. But it does maintain a “negative outlook” on Connecticut. 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.

Kroll’s decision to lower Connecticut’s rating “is based on the state’s inability over the last two years to maintain balanced financial operations without significantly reducing its Budget Reserve Fund,” the agency wrote Tuesday.

Kroll’s findings “demonstrate what we have been saying and continue to say: We are in a new economic reality, and we must continue to align state government to that reality,” Malloy spokesman Chris McClure said. “As the world changes, we must change with it. We must keep adjusting.”

“This action by Kroll reinforces Connecticut’s need to address its current and long-term fiscal challenges with precision and in a manner that has positive, sustainable impact,” said state Treasurer Denise L. Nappier.   “Kroll’s rating is now in line with those of the other three rating agencies, and it should not significantly affect our $500 million General Obligation bond sale scheduled for August 3.”

Connecticut continues to struggle to accurately project receipts from the state income tax, its single-largest revenue source. Kroll analysts noted this stems both from “volatile financial markets” and “continued lack of significant growth in wage levels across the state.”

The agency did note that Gov. Dannel P. Malloy and the legislature have taken regular actions to eliminate budget deficits in recent years. But it added that during the past two fiscal years, problems with income tax receipts were recognized near the end of the fiscal year, when options to cut spending were limited.

Connecticut closed its books $113 million in deficit two fiscal years ago, and finances in the last fiscal year ran about $315.8 million in the red.

The state is projected to have only about $90 million in its emergency reserve, equal to roughly one-half of 1 percent of annual operating expenses. Comptroller Kevin P. Lembo recommends a reserve of 15 percent.

Senate Minority Leader Len Fasano, R-North Haven, who predicted likely bond rating downgrades last May when Malloy and the legislature’s Democratic majority crafted the new state budget, said the failure to include more long-term reductions in government’s size was a crucial missing component.

“By building budgets for elections and not generations, Connecticut hasn’t made the structural changes needed to ease the minds of credit-rating agencies,” Fasano said after the May downgrades. “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.”

Republican legislators specifically 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.

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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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