For the first time in 20 years, a Wall Street credit rating agency has formally upgraded its rating of Connecticut’s finances.
Moody’s Investors Service upgraded its ranking for two types of state bonds, a move that could generate — but doesn’t guarantee — reduced borrowing costs going forward.
“This rating upgrade is exceptional news for Connecticut and sends a clear signal that its improved long-term financial sustainability will contribute toward a strong economic recovery,” state Treasurer Shawn T. Wooden said Wednesday.
“We are a national leader in combating the COVID-19 pandemic, and due to our wise investments, robust savings, better than anticipated revenues and generous federal support, we are emerging as a financial leader among the states,” said Gov. Ned Lamont. “Our state has many challenges ahead, and there is much more work to be done, but it is essential we continue down this path and foster additional growth to best position us for the long term.”
Wooden called the upgrade “a direct result of our smart fiscal policies practiced during the past few years” that have left state government with a record-high $3 billion emergency budget reserve.
“Connecticut will now have the ability to access funding for critical infrastructure investments at even more attractive interest rates,” he added.
Moody’s raised Connecticut’s bond rating from A1 to Aa3 — from its fifth-highest ranking to its fourth-highest. The Aa3 rating also places Connecticut in the “high quality” bond category rather than “upper medium” grade.
The state borrows billions of dollars annually by selling bonds on Wall Street, using the funds for municipal school construction, highway and bridge upgrades, capital projects at state colleges and universities, economic development programs, state building renovations, clean water projects and other initiatives.
Wall Street’s assessment of Connecticut remained largely unchanged during the 2000s and the first half of the next decade. Agencies periodically would change their “outlook” for the state, an early indicator of a possible rating change. For a long time, though, that’s as far as things went.
But a combination of huge pension debt, frequent budget deficits and a lack of reserves eventually took their toll.
Between 2016 and 2017, Moody’s and the other three services — S&P Global, Fitch Ratings Inc., and Kroll Bond Rating Agency — all downgraded Connecticut.
But two big changes took place immediately after that.
In October 2017, following a nine-month-long struggle, legislators produced a bipartisan budget that included several fiscal reforms. Key among them were new restrictions of the state’s ability to spend income tax receipts tied to investment earnings — traditionally one of its most volatile revenue sources.
That move was followed by several relatively robust years on the stock market.
Connecticut’s budget reserves were a meager $213 million at the end of the 2016-17 fiscal year — a level barely beyond 1% of General Fund spending.
Three-and-a-half years later, the rainy day fund is at its legal maximum of 15%, a little more than $3 billion.
The Lamont administration also projects the state will end the current fiscal year, which wraps June 30, with $800 million left over. Because the reserve is maxed out, those funds would be transferred into one or both of the state’s two major pension funds.
Moody’s new rating applies to $17.7 billion in General Obligation bonds — borrowing repaid out of the budget’s General Fund, including $1.7 billion in financing for projects at the University of Connecticut. It also applies to $6 billion in Special Tax Obligation bonds, which generally support highway and bridge work and are repaid using fuel and sales tax receipts drawn from the budget’s Special Transportation Fund.