Reeling from Connecticut's third bond-rating downgrade in six days, Gov. Dannel Malloy and top lawmakers scheduled talks for Thursday aimed at sealing the state’s projected $5 billion deficit for the fiscal 2018-19 biennium.
Speaking to reporters outside the state capitol in Hartford, Malloy called labor concessions essential.
“Without an agreement from labor, quite frankly, it will be hard to move forward in a timely fashion,” he said.
S&P Global Ratings on Wednesday lowered Connecticut’s general obligation bonds to A-plus from AA-minus, citing “economic weakness that has resulted in successive downward state revenue adjustments during a period of national growth.”
“S&P completed the downgrade trifecta,” said Alan Schankel, managing director of Janney Capital Markets.
Connecticut joins Illinois and New Jersey as states below double-A level.
“All three are examples of the costs of fiscal irresponsibility not only to finances but to state economies,” said Municipal Market Analytics.
Kroll Bond Rating Agency assigns its AA-minus rating and stable outlook.
According to S&P analyst David Hitchcock, Connecticut painted itself into a corner.
“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,” he said.
Hitchcock expects revenue growth to remain weak within Connecticut, given the loss of many high-paying financial sector jobs in the last recession.
Last year’s move by Fortune 500 behemoth General Electric Co. to Boston from Fairfield made national headlines and intensified political debate about the business climate within the state.
Faced with a sharp drop in revenue because of dwindling income tax receipts, Malloy on Monday presented an updated $39.4 billion biennial budget. It cut general fund expenditures by an additional $241 million and other funds by $363 million in fiscal 2018.
He also called for draining the state’s $237 million reserve fund.
The depletion, said Hitchcock, “has opened up what we view as very sizable budget gap Connecticut will need to close in the upcoming 2018-2019 biennium budget. We believe the size of the budget gap will create continuing budget pressure consistent with our lower rating, particularly if additional revenue shortfalls occur.”
House and Senate Republicans offered different versions of a plan they say contains no tax increases and minimizes cuts in school funding and aid to cities and towns. The GOP strongly opposes Malloy’s call to shift $400 million per year in teacher retirement costs to municipalities.
MMA expects more downward pressure on Connecticut’s rating over the next 12 to 18 months. According to MMA, a sluggish economy and a “relatively volatile” tax structure vulnerable to capital markets performance have hindered state efforts to outmaneuver “its sins of the past,” namely inadequate pension funding and rising debt.
“Connecticut’s attempts to resolve its structural deficit have been, over the past few years, fairly earnest and included the implementation of several meaningful tax increases, funding of its contribution to pensions [and] cost reductions,” said MMA.
“More recently, the state has resorted to questionable tactics such as recalculating its pension contribution for budget relief, drawn down its reserves, swept money from other funds and reneged on plans for increased infrastructure and municipal funding.”
Malloy’s latest budget adjustment calls for paying off the remaining $200 million of a $1 billion deficit-financing note it issued in 2009.