Connecticut, which expects to empty most of its rainy-day fund as it struggles with its budget, received a downgrade Tuesday from Kroll Bond Rating Agency to AA-minus from AA.
"KBRA's decision … is based on the state's inability over the last two years to maintain balanced financial operations without significantly reducing its budget reserve fund," Kroll said in a report preceding the state's competitive $500 million sale scheduled for Aug. 3.
State officials plan an equal split between Series 2016D general obligation tax-exempt bonds and Series 2016A taxable variable rate demand bonds.
Kroll revised its outlook to stable from negative for the lower rating.
State officials project having to withdraw $316 million from its budget reserve, or rainy-day fund, to balance its biennial budget. That would leave Connecticut with $90 million in that account, or 0.5% of its fiscal 2016 general fund expenditures, with no plans to replenish it.
"Kroll considers [it] very low," said the rating agency.
In fiscal 2015, the state drew down on the fund from $519 million to $406 million.
Kroll also cited the state's recent difficulty in accurately projecting personal income tax levels affected by market volatility – notably for capital gains taxes – and continued lack of significant growth levels statewide.
"The state's highly progressive income tax structure and its reliance on capital gains taxes expose its general fund revenue base to the performance of the stock market," said Kroll. Roughly 15% of total income tax collections are capital gains taxes, which reflects Connecticut's high wealth levels.
Kroll also cited Connecticut's high debt burden and unfunded pension liability levels.
Moody's Investors Service rates Connecticut GOs Aa3 with a negative outlook. In May, S&P Global Ratings and Fitch Ratings both lowered the state's ratings one notch to AA-minus with stable outlooks.
"It comes as no surprise that KBRA is following suit," said state Sen. Scott Frantz, R-Greenwich. "We have been warning for many years that over-borrowing and running a poor fiscal house would jeopardize the state's overall bond rating and cause our debt service costs to rise to unaffordable levels."
A message seeking comment was left with state Treasurer Denise Nappier.
