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Wall Street Sends Connecticut A Warning

by | Oct 13, 2017 10:02pm () Comments | Commenting has expired | Share
Posted to: State Budget, Special Session, Pensions, Wall Street

shutterstock HARTFORD, CT — Without a budget for 105 days, Standard & Poor’s Global Ratings sent the state a message Friday when it downgraded its outlook for Connecticut’s general obligation bonds to “negative.”

It didn’t lower the bonding rating from A+, but it revised its outlook from stable to negative for the state’s $19 billion in general obligation debt.

“The outlook change reflects what we believe to be increasing constraints on Connecticut achieving long-term structural balance, highlighted by the state’s delay in enacting a fiscal 2018-2019 biennium budget for the period that began July 1, 2017,” S&P Global Ratings credit analyst David Hitchcock said. “These budget constraints include revenue weakness because of slow economic growth and recent population decline and reduced revenue-raising flexibility after substantial tax increases were instituted in the last two biennium budgets.”

State Treasurer Denise Nappier said the change “affirms how essential it is that the State swiftly adopt a biennial budget and demonstrate to the bond markets its commitment to fiscal stability.”

Nappier added, “The only way to halt the deterioration of our credit rating is to adopt structural and sustainable policies that, among other things, would rebuild our budget reserve fund and address our long-term obligations while continuing to fully fund our actuarially required contributions to our pension funds.”

But Hitchcock points out in his analysis that Connecticut is in a tough spot when it comes to figuring out the budget.

He said they believe several high-profile relocations of business headquarters have “reduced political willingness for further broad-based tax increases. At the same time we believe there is less expenditure flexibility following implementation of substantial reductions in state aid to localities.”

He said the recent labor agreement creates a fixed pay schedule and prohibits layoffs for the next four years while fixed debt service and pension costs are rising.

If the state departs from a structurally balanced budget, if revenues fall below expectations, and if there’s an increase in pension liabilities, “we could lower our rating on Connecticut,” he said.

At the same time, “We are concerned that state aid cuts could diminish Connecticut’s long-term economic attractiveness should there be significant disruption to municipal services, property tax rates, or the quality of local education,” Hitchcock said. “If economic growth is weaker-than-forecast during our two-year outlook horizon, we could also lower the rating. However, if economic growth above the state’s budget forecast occurred, fixed costs could conversely contribute to favorable operating surpluses that improve Connecticut’s fiscal posture and allow us to revise the outlook on the state to stable.”

Legislative leaders are hoping to finalize a budget deal next week.

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