Fitch Ratings on Tuesday revised its outlook on its AA rating for Connecticut’s general obligation bonds to negative from stable, but the state’s budget director said he does not expect the change in outlook to increase borrowing costs.
“This is not a downgrade to the state’s ratings,” Office of Management and Budget Director Benjamin Barnes said in a statement. “Nonetheless, the state takes seriously changes in the outlook designation and views them as an opportunity to incorporate any guidance and criticisms in developing policy recommendations in the coming year.”
Fitch cited budgetary stress amid continued economic and revenue uncertainty, pointing out that the new biennial budget delayed repayment of deficit borrowing, adds debt and builds no financial cushion.
Fitch, Standard & Poor’s and Kroll Bond Rating Agency rate Connecticut’s GOs AA, while Moody’s Investors Service affirmed its Aa3 rating. Kroll entered the municipal market last year.
Connecticut has scheduled a $200 million competitive GO sale for the week of July 22.
“I am pleased to see that our double-A ratings have all been retained by the major rating agencies,” said Barnes. “Fitch’s concerns about our vulnerability to continued economic weakness are reasonable, but ultimately not so great as to change our high-quality rating.”
Gov. Dannel Malloy on June 19 signed Connecticut’s two-year, $44 billion budget. The spending plan authorized general obligation borrowing of up to $750 million to enable the state to budget under generally accepted accounting principles, a campaign pledge of Malloy in 2010.
Proceeds would augment state cash resources, according to Fitch, but would not be recorded as revenue and cannot be appropriated by the legislature based on a planned bond covenant. The GAAP bonds and the remaining $447 million in general fund GAAP deficit would amortize over the fiscal 2016 to 2028 period.
“Fitch recognizes the immediate cash-flow benefit of the GAAP borrowing, although notes that the use of bond proceeds essentially replaces the use of budgetary surpluses to make the transition,” the rating firm said. “The borrowing would have a limited impact on the state’s debt burden, already high in Fitch’s view.”
Barnes said slight variation among Northeast states relates primarily to pension funding. Fitch called funding levels “a longer-term concern” for Connecticut. As of June 30, 2012, the state employees’ retirement system was funded at 42.3% on a reported basis, while the teachers’ retirement fund was at 55.2%.
Pension bonds were issued for the latter in 2008.
“While Connecticut’s plans remain significantly underfunded, recently implemented changes in how we calculate annual payments will allow for significant progress toward full funding over the coming years,” Barnes said.
