Moody’s Drops Outlook on Connecticut Bonds, Governor Urges State Reps To Respond
[This story has been updated from its original posting to add remarks from state Sen. Bob Duff.]
The bond rating agency Moody’s Investors Service announced on Monday it has lowered its outlook for Connecticut’s general obligation bonds from stable to negative. At the same time, the agency said it held its rating for the state’s outstanding GO bonds — amounting to approximately $12 billion — at Aa3.
The agency released a report describing the factors it used to come up with its negative rating, which included the state’s need to issue deficit bonds to resolve this year’s budget shortfall, and the non-recurring solutions and deficit financing used to close revenue gaps in the state’s 2010 – 2011 biennial budget.
“Connecticut used one-time solutions to close slightly over half of the (biennial budget’s) shortfall,” the report says, and “these solutions create future structural budget gaps and leave the state with significantly reduced flexibility to address additional fiscal pressures that may arise due to a delayed and/or weaker than expected recovery from the worst economic recession since the depression.”
The state’s bond rating determines the amount of interest lenders are willing to pay to purchase its bonds. Moody’s defines Aa3 as ranking in the lower end of the rating for issuers who “demonstrate a very strong creditworthiness relative to other U.S. municipal or tax-exempt issuers or issues.”
Moody’s Aa rating falls within the top third of bonds it judges to be investment grade.
In their report, Moody’s analysts Nicole Johnson and Kimberly Lyons note the state’s general fund balance sheet will weaken as its Budget Reserve Fund (commonly known as the “rainy day fund”) is depleted due to the already sizeable unreserved, undesignated [debt] fund balance the state has carried since the early 1990s, “largely reflecting an accrued liability that has never been repaid.”
At the end of fiscal year 2008, the state’s unreserved, undesignated general fund balance was a negative $1.1 billion, the report says, while by the end of 2010, the Budget Reserve Fund is expected to be depleted.
In response to the report, Gov. M. Jodi Rell sent a letter to the leaders of the General Assembly saying, “Being forced to pay higher interest rates on our bonds would have serious and lasting financial effects in both the near- and long-term.”
Rell said the rating downgrade requires a swift and cooperative response from all branches of state government that must include “a willingness on all sides to make even deeper reductions in state spending than we have to date.”
Rell noted that a decisive factor in the lowered outlook from Moody’s is the excessive use of one-time fixes in the state’s next two-year budget, “especially borrowing and securitization of an as-yet unidentified future revenue stream.”
The two analysts said Connecticut compares unfavorably to other states on measures such as debt ratios “that are among the highest in the nation,” pension funding levels that were among the lowest in the country in 2008 “before the market turmoil is factored,” and other post employment benefit liabilities “that are larger than the size of the state’s annual operating budget.”
They said while Connecticut’s revenue trends should improve as it emerges from the recession, “as the wealthiest state in the nation, Connecticut is more dependent than most states on high-income earners.” Thus, the uncertain recovery of the nation’s financial markets, they said, has an “exaggerated impact” on the state’s personal income tax receipts, which account for almost half of the general fund’s resources.”
The report says Connecticut’s income tax revenue grew by an average annual rate of 12 percent over the 2004 through 2008 fiscal years, but dropped 15 percent in fiscal year 2009. Based on 2007 income year data, the report says, Connecticut’s millionaire residents (those earning at least $1 million) made up less than one percent of the state’s income tax filers, but accounted for 35 percent of the its income collection.
The report identifies Connecticut as being a frequent borrower, and says the state’s debt per capita and debt-to-personal income will likely remain among the highest in the country.
Commenting on Moody’s decision, Tuesday evening state Sen. Bob Duff, D-25th Dist., said, ”This letter from Moody’s should be a wake-up call to everyone in the executive and legislative branches, municipal leaders and special interests from around the state. We are going to have to continue to tighten our belt and restrain spending. It is a time for true leadership and all hands on deck.”
The entire Moody’s report is available on-line at: www.ct.gov/governorrell/lib/governorrell/moodys_report.doc.
