Connecticut’s rebuilt reserve levels have generated the state's first bond-rating upgrade in 20 years, as Moody’s Investors Service on Wednesday elevated $16 billion of general obligation debt one notch to Aa3 from A1.
Its last upgrade, also from Moody’s, came in February 2001. The state received an upward outlook revision from S&P two years ago, to positive from stable. By contrast, Connecticut received across-the-board downgrades in 2017.
“This rating upgrade is exceptional news for Connecticut and sends a clear signal that its improved long-term financial sustainability will contribute towards a strong economic recovery,” state Treasurer Shawn Wooden said.
The upgrade also affects $1.7 billion of University of Connecticut bonds and roughly $6 billion of special tax obligation bonds issued for transportation purposes — both also to Aa3 from A1. Moody’s also upgraded other state-backed bonds that quasi-public agencies issue.
Wooden expects more upgrades to follow. He and state budget Director Melissa McCaw made presentations to all four credit rating agencies late last fall.
"This is a very challenging time for ratings generally," Wooden told reporters at an impromptu late-afternoon news conference. "Absent the pandemic, we may have been on the verge of an upgrade last year. But with the pandemic, the rating agencies are more conservative."
S&P Global Ratings and Fitch Ratings rate the state’s GOs A and A-plus, respectively. Kroll Bond Rating Agency rates them AA-minus. All assign stable outlooks. State officials are preparing to sell up to $800 million of GO bonds in May and June.
According to Wooden, 13 states have received downgrades or lowered outlook revisions during the pandemic.
Connecticut is still below the Moody's median state rating of Aa1.
"What's important here is that we are moving in the right direction," Wooden said. "We have to be very smart and strategic. Connecticut has been very successful the last 18 months."
McCaw, who projects a $3.7 billion rainy-day fund balance for the end of the fiscal year, likened the Moody's report to "a financial and operational report card." Future bonding by Gov, Ned Lamont's administration, she said, will link to economic development initiatives. The governor chairs the State Bond Commission.
"We're in a position where we can leverage low interest rates," McCaw said. "We'll see jobs regained and it will lead to revenue improvements."
Lamont said the upgrade provides “outside validation” of Connecticut’s governance. “This report should build confidence in our business community and our residents,” he said. “Our state has many challenges ahead and there is much more work to be done, but it is essential we continue down this path and foster additional growth to best position us for the long term.”
The pandemic and its long-term credit implications remain fluid, Moody's said.
“Connecticut has high income levels, strong governance and strong liquidity, offset by high fixed costs for debt service, pension and post-employment benefits relative to the state's budget," Moody's said. Fixed costs in fiscal 2019 totaled 29.8% of own-source revenue, according to Moody's, which pegged the 50-state median for that year at 7.8%.
Long a study in contrasts, Connecticut is the wealthiest state with per-capita income at nearly 140% of the U.S. average.
But economic growth stagnated in recent years and trails the nation's recovery rate through the pandemic. Still, a population-loss trend may be reversing "as suburban living gains favor," Moody's said.
Unfinished business remains, according to Senate Republican Leader Kevin Kelly, R-Stratford, and Senate Republican Leader Pro Tempore Paul Formica, R-East Lyme.
"Connecticut must maintain our fiscal controls and discipline," they said in a joint statement. "While today’s news is positive, top state economists have also warned that Connecticut's economy remains the worst performing in the nation. We have much more work ahead and clearly the best results come from bringing all perspectives together.”
Lamont and Wooden are Democrats.
McCaw on Wednesday projected a current-year operating budget surplus at $180.6 million. The state automatically redirects budget surplus to the stabilization fund. Additionally, the General Assembly's nonpartisan
That adjustment, essentially a secondary savings program enacted with the 2017 budget agreement, prevents the state from spending quarterly tax receipts tied to investment earnings and certain business payments once they exceed $3.1 billion. Those revenue sources can fluctuate.
According to OFA, the extension of the tax payment deadline to May 17 will cloud some collection trends at least until the last week in May. “In particular, the estimates and finals portion of income tax and tax refunds will be impacted by the delay,” its report said.
