Connecticut received its third downgrade within a week and sixth in 12 months Wednesday as S&P Global Ratings lowered the state's general obligation rating to A-plus from AA-minus.
S&P cited successive downward state revenue adjustments. It assigned a stable outlook at the new rating. The outlook was negative before the downgrade.
“For a second straight week, Connecticut’s credit challenges headline national municipal news,” said Alan Schankel, a managing director at Janney Capital Markets.
Last week, Fitch Ratings dropped Connecticut’s general obligation bonds to A-plus from AA-minus, while Moody's Investors Service lowered the GOs to A1 from Aa3. Connecticut joins Illinois and New Jersey as states below AA.
"The downgrade reflects our view of state economic weakness that has resulted in successive downward state revenue adjustments during a period of national economic growth," said S&P credit analyst David Hitchcock.
Kroll Bond Rating Agency assigns its AA-minus rating and stable outlook.
"This is the latest shoe to drop," said state Treasurer Denise Nappier in a statement.
"There is hard work ahead for all of us and, in particular, those in the midst of budget negotiations. Our decisions will impact on our State’s quality of life for its people and businesses alike. By doing the best we can in collaboration with one another, we can and will get through it.”
Malloy on Monday presented an updated $39.4 billion biennial budget in the face of widening projected deficits. It cuts general fund expenditures by an additional $241 million and other funds by $363 million in fiscal 2018.
“Connecticut’s underperforming economy is a drag on state revenues,” said Schankel.
Malloy’s plan also called for draining the state’s $237 million reserve fund. State budget secretary Benjamin Barnes on May 1 had reduced revenue projections by about $410 million, which created a $390 million general fund deficit.
“We believe the size of the budget gap will create continuing budget pressure consistent with our lower rating, particularly if additional revenue shortfalls occur,” said Hitchcock.
“In our view, the state will have limited remaining flexibility to respond to any further downward revenue adjustments due to the large expenditure cuts already made; the large and growing portion of the budget devoted to fixed costs for debt service, pension, and other postemployment benefits [OPEB)] and the lack of plans to rebuild a meaningful budget reserve fund through at least the end of fiscal 2019.”
Connecticut’s options are few, said Municipal Market Analytics.
“Connecticut’s budget gap has Governor Malloy looking to its local governments to shoulder a significant portion of the state’s structural imbalance,” MMA said in a commentary.
“For the state, this is clever way to tap the property tax for relief but would likely result in additional fiscal challenges for locals, particularly those at the weaker end of the credit spectrum. All things equal, if the governor’s budget or something similar is enacted, the ratings on Connecticut municipalities will reasonably be more volatile in the coming years.”
Malloy’s adjusted budget further cuts aid to municipalities. The governor also proposed in January to transfer teacher pension costs to cities and towns, a move that municipalities and state lawmakers oppose.
“One of the strongest elements of a state profile is the ability to push fiscal challenges downhill to municipal governments, which Connecticut is attempting to do in the coming biennial budget,” said Schankel. “During difficult times, a state also has the ability to restrain fiscal aid to local governments.”
On Monday, S&P downgraded Hartford to BBB-minus, energizing debate about whether Connecticut’s capital city would file for bankruptcy. Mayor Luke Bronin, facing a $50 million budget gap, has requested $40 million in additional state aid.
That could be a tall order, given the state’s struggles.
