For the fifth time in the past year — and for the second in two business days — a Wall Street credit rating agency has downgraded Connecticut’s status, potentially raising the cost of borrowing.
Moody’s Investors Service, the only rating group not to downgrade Connecticut in the past year, joined the club on Monday, lowering the state’s General Obligation bond rating from Aa3 to A1.
Moody’s also lowered the credit rating for Special Tax Obligation bonds for transportation, capital projects at the University of Connecticut and other state bond programs.
And just as Fitch Ratings Inc. noted on Friday when it downgraded its rating for Connecticut, Moody’s cited eroding state income tax receipts, the impending depletion of the state budget reserve, and huge unfunded liabilities expected to drive public-sector retirement benefit costs up for the next 15 to 20 years.
“The downgrades reflect continuing erosion of Connecticut’s finances, evidenced by the pending elimination of its rainy day fund, growing budget gaps and rising debt levels,” Moody’s wrote. “The pressures created by growing fixed costs, coupled with weak economic performance, are unlikely to relent and will raise the risk of credit-negative actions such as deficit borrowing or backloaded financings.”
Monday’s announcement marked the first time Moody’s has downgraded Connecticut since 2012, but just the latest in a string of downgrades over the past 12 months.
Fitch and S&P Global Ratings downgraded the state in May of 2016, while Kroll Bond Rating Agency did so just two months later.
Both state Treasurer Denise L. Nappier and Gov. Dannel P. Malloy both called Monday for the legislature to take immediate steps to shore up Connecticut’s status on Wall Street.
“Today’s announcement from Moody’s Investor Service, on top of the news from Fitch Ratings on Friday, underscores the serious challenge that the state faces,” Nappier said. “Clearly, a course correction is necessary, and that more disciplined path must lead in the direction of responsibly addressing our long-term liabilities.”
“This is yet another call to action from a credit rating agency who clearly have their eyes on us,” said Chris McClure, a spokesman for Malloy’s budget office. “We must immediately take the necessary steps to mitigate the current year deficit and then balance the biennial budget with recurring measures to reduce spending and structural solutions to our long term problems. The governor has proposed specific ways to do exactly these things and we hope to see swift action to avoid further harm to our credit rating.”
“This underscores the severity of the economic crisis our state is facing,” Senate Republican leader Len Fasano of North Haven said. “It also makes it clear that any budget moving forward cannot look like the budgets of past years. There needs to be a bipartisan effort to pursue significant long-term structural changes so that we can restore confidence in our state today, and build a better future for tomorrow.”
Nappier asked lawmakers earlier this spring to consider a new approach to borrowing through which the state would pledge a portion of its income tax receipts.
The sale of general obligation bonds to investors is one of the principal means state government uses to finance municipal school construction, building programs at public colleges and universities, maintenance of state facilities and other capital projects.
The bonds are termed “general obligation” because the state pledges to repay them using resources from the General Fund within the state budget.
In turn, the General Fund draws resources from most state taxes — including its largest ones, like the income, sales and corporation levies — fees and fines, lottery and casino proceeds, and federal grants.
But Nappier says that by issuing “new credit bonds,” through which Connecticut would commit a specific portion of its income-tax stream to repay the debt, the state could avoid future downgrades and the higher interest costs that often come with them.
This would be a temporary measure, she says, until state government’s fiscal outlook improves.