Rating Agency Says Outlook For CT Bonds Still ‘Negative’
Fitch Ratings maintained its AA rating for Connecticut bonds in anticipation of the sale of $400 million in general obligation bonds later this month. That’s the good news. The bad news is that Fitch also maintained its negative outlook of the state based on “budget vulnerability.”
Fitch Ratings lowered the outlook for Connecticut’s bonds from stable to negative in July 2013.
In its recent report, Fitch stated that the negative outlook “reflects the state’s reduced fiscal flexibility at a time of lingering economic and revenue uncertainty.”
Andrew Doba, a spokesman for Gov. Dannel P. Malloy, stressed that the rating remains unchanged from last year and that the state is making progress putting money aside and paying down its debt.
“We have a surplus, and we are making payments to address the state’s long-term debt,” Doba said. “In fact, the governor has reduced the state’s overall debt by more than $11.5 billion. The fact that it takes a long time to fix what took a long time to create should be surprising to absolutely no one.”
House Minority Leader Lawrence Cafero, R-Norwalk, called the report “troubling.”
“The negative outlook is troubling because, despite all the rhetoric, Connecticut continues to pile on debt and is failing to meet its obligations without borrowing and budgetary gimmicks,” Cafero said. “Fitch also warned that we are in danger of having our credit downgraded when the agency stated, ‘An inability to meet or exceed budgeted forecast expectations could lead to a downgrade.’’’
If the markets are concerned, then lawmakers should be concerned, Cafero said.
Fitch also pointed out that the state relied upon several one-time gimmicks in order to balance the two-year budget.
“The adopted budget for the current biennium relied on one-time items and anticipated little near-term progress in rebuilding fiscal flexibility,” Fitch states. “Recent revenue momentum, if it continues, may allow the state to materially improve its reserve position.”
The rating agency frowned upon one-time items such as a carry forward of $221 million from 2013 to 2014, restructuring the Economic Recovery Notes for $276 million in savings, shifting funds from the special transportation fund to the general fund, and a delayed start to amortizing the state’s Generally Accepted Accounting Principles deficit.
Fitch analysts state that Connecticut has been hampered by the slow economic recovery in building up its rainy day fund over the past two years. But the state has improved its fiscal flexibility in trying to improve its reserves.
State Treasurer Denise Nappier has said that a “negative outlook” generally means that a credit rating will be under review for one to two years, and “is less concerning than a credit watch.”
Fitch said Connecticut’s AA rating reflects “vast wealth and income resources, tempered by a comparatively high burden of debt, retirement liabilities, and other fixed costs.”
But Fitch didn’t completely ignore the progress the state has made.
“The governor’s proposed mid-biennium revision recognizes the recent, significantly improved revenue collections year-to-date but otherwise makes few significant changes to the adopted biennium plan,” Fitch said.
The report goes onto state that Connecticut’s debt burden and other liabilities are high compared to other states.
“Net tax-supported debt as of Dec. 2013 totals $20.2 billion, or 9.2 percent of 2012 personal income, including current bonds,” Fitch said. “Three-quarters of net tax-supported debt is GO, a large share of which has been issued for local school capital needs. Borrowing also includes $573 million in ERNs [Economic Recovery Notes].”
Still, Fitch said the Connecticut “has continued to demonstrate the ability and willingness to absorb the comparatively high fixed costs posed by its liabilities.”
It applauded the state’s effort to pay the actuarially required contribution to its state employees’ retirement system and the teachers retirement fund accounts even though the unfunded portion is among the highest for the states rated by Fitch.