Connecticut's outlook revision boosts momentum for its new leaders
Connecticut's upward outlook revision from S&P Global Ratings — in time for its upcoming general obligation bond sale — is a momentum boost for the state's new leadership.
S&P on Tuesday changed the outlook to positive from stable on its A rating of Connecticut. It marks the first upward tweak to Connecticut's GO rating since 2001, according to state Treasurer Shawn Wooden's office.
The state next week intends to sell $850 million of GOs, including a $250 million taxable tranche.
"It's an outlook revision, not a rating upgrade, but I'm glad it's happening. I think it will help them sell their bonds and I hope they get a low interest rate," said Alan Schankel, a managing director at Janney Capital Markets.
Tuesday's development also provides a jump-start for Gov. Ned Lamont and Wooden, both of whom took office in January.
According to S&P analyst David Hitchcock, the outlook change reflects the increased likelihood that Connecticut will keep its recently replenished reserve "at what we view as strong levels," and the hope that Lamont's call for a "debt diet" materializes.
The move affects roughly $18.3 billion in GO debt. S&P also affirmed its A-minus rating on state appropriation-backed debt and its BBB rating on state moral obligation debt.
Additionally, S&P revised its outlook on Connecticut's special tax obligation transportation fund secured debt to positive from stable and affirmed its A-plus rating on the debt, which under its priority-lien criteria is limited to one notch above the GO rating.
S&P's announcement came after Lamont, Wooden and Office of Policy and Management Secretary Melissa McCaw made presentations to all four national credit rating agencies at the state Capitol in Hartford last Wednesday and Thursday.
The three highlighted the state’s improving economy, fiscal controls on bonding in the governor’s proposed budget, increases in the budget reserve fund and common cash pool, and Wooden's plan to restructure the underfunded Teachers’ Retirement Fund.
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“This positive change in Connecticut’s credit outlook is another significant step in the right direction that is drawing notice on a national level,” Wooden said. “The next step is to follow through on plans to address our current economic challenges.”
Connecticut received across-the-board downgrades in 2017. Moody’s Investors Service rates Connecticut GOs A1, while Fitch Ratings rates them A-plus. Kroll Bond Ratings Agency assigns its AA-minus rating. Kroll assigns a negative outlook, while outlooks from Moody's and Fitch are stable.
"I think some time's got to pass before I feel really good about Connecticut," Schankel added.
Moody's, also on Tuesday, struck a cautionary tone in its update on the state.
"Unfunded pension liabilities combined with debt outstanding are among the highest, relative to revenues, of any state in the country," Moody's said. Fixed costs, according to Moody's consume one-third of the biennial budget.
S&P warned about a "potential cyclical peak" in the state. "Connecticut has reduced its flexibility to raise tax rates following tax increases in each of the last several biennium budgets, while high fixed costs limit the ability to reduce expenditures should another recession occur."
State GO bond covenants imposed last year require a set-aside into reserves for revenue above a volatility cap. Connecticut estimates that these one-time revenues will boost reserves to an estimated 10.4% of general fund expenditures at fiscal year-end 2019.
By contrast, Connecticut ended fiscal 2017 with a reserve of merely 1.2% of expenditures.
Bond covenants still allow reserve drawdowns with a declaration of an emergency or the existence of extraordinary circumstances by the governor and a supermajority, or three-fifths legislative vote.
"Our positive outlook anticipates at least a one-in-three possibility that Connecticut could retain high reserves through the upcoming biennium, despite weak revenue and demographic trends, or that future debt issuance could be substantially reduced," Hitchcock said.
Lamont last month submitted his $43.2 billion biennial spending plan to lawmakers. It includes a proposal by Wooden to shore up the wobbly state teachers' pension system.
Wooden's plan would establish a capital reserve fund; level pension payments to offset spikes in annualized contributions while honoring promises to bondholders; and abide by a bond covenant to a $2 billion pension borrowing in 2008.
S&P's new outlook assumes that while the plan may push out amortization of unfunded liabilities, Connecticut will continue to make full required payments while maintaining budget balance.
The governor has estimated that a 39% reduction in borrowing could save the state up to $2 billion over a decade.
The budget cycle will also feature intense debate over the resumption of tolling on Connecticut's interstate highways and state parkways and bridges. Lamont has presented a variety of options, including a truck-toll proposal similar to a move by neighboring Rhode Island.
In a setback to the trucking industry on Tuesday, Chief Judge William Smith of the U.S. District Court in Rhode Island nullified the American Trucking Association's lawsuit against Rhode Island, saying state court would have been the more appropriate venue.
ATA attorneys said they are reviewing the decision.