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Moody’s Downgrades Connecticut to Aa3

JAN 20, 2012 12:01pm ET
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NEW YORK - Moody’s Investors Service on Friday downgraded Connecticut’s general obligation bond rating to Aa3 from Aa2, affecting about $14.6 billion in outstanding general obligation bonds.

Within minutes of the announcement, Benjamin Barnes, Gov. Dannel Malloy’s Office of Policy and Management secretary, disputed the decision.

“Moody’s is wrong in its analysis of the state’s finances, and wrong to change Connecticut’s credit rating,” he said in a statement.

Concurrently, Moody’s lowered the state’s general fund obligations to A1 from Aa3, bonds supported by a special capital reserve fund, or SCRF, make-up provision to Aa3 from Aa2, and the University of Connecticut GO bonds (state debt service commitment) to Aa3 from Aa2.

The outlook is stable, revised from negative.

Moody’s cited Connecticut’s high combined fixed costs for debt service and post employment benefits relative to the state’s budget; pension funded ratios that are among the lowest in the country and likely to remain well below average; and depleted reserves with slim prospects for near-term replenishment.

Connecticut’s state employees retirement system (SERS) and teachers retirement system (TRS) had funded ratios of 44% and 61%, respectively, as of June 30, 2010.

“In many ways, Moody’s action is going in the wrong direction, particularly since Connecticut has made tough decisions to bring structural balance to its operating budget and set in motion a clear path to improve financial stability," state Treasurer Denise Nappier said. "Despite these steps forward, this rating agency appears to be judging the state’s creditworthiness through the rearview mirror.”

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A recent phenomenon is the emergence of bonds with shorter call protection as funding alternatives for municipalities. However, the shorter call protection also dampens the potential upside for investors, which in turn reduces the price they are willing to pay.

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