S&P Global Ratings said it has lowered its ratings on the state of Connecticut's general obligation debt outstanding to AA-minus from AA, appropriation-secured debt to A-plus from AA-minus, and Connecticut's moral obligation debt to A-minus from A.
The outlook on all debt is stable.
At the same time S&P assigned its AA-minus rating and stable outlook to Connecticut's $510 million GO refunding bonds.
"The downgrade reflects our view of reduced state budgetary flexibility," said S&P credit analyst David Hitchcock. Substantial revenue shortfalls over the past year have left Connecticut with what it believes are low reserves and an increasing share of the budget devoted to fixed costs.
"In our opinion, Connecticut has less flexibility to meet unanticipated revenue shortfalls, such as those that occurred in fiscal 2016, and may be poorly positioned should there be a national economic downturn in the next several years," Hitchcock added.
The state is not budgeting to restore reserves in fiscal 2017, and projected out-year budget gaps in 2018 and beyond could prove troublesome in view of Connecticut's historically cyclical finances. Our stable outlook reflects that recent budget adjustments have been largely of an ongoing structural nature.
However, rising debt service, pension, and other postemployment benefit (OPEB) costs have pushed fixed costs to what we see as a significant portion of the overall budget and could potentially hamper the state's ability to make further budget cuts should new revenue shortfalls develop, S&P said. At the same time, tax increases enacted in the last two bienniums have constrained revenue-raising ability, in its view.
