Fitch Ratings said it has downgraded the state of Connecticut's Issuer Default Rating and the rating on the state's general obligation bonds to AA-minus from AA.
Fitch assigned a AA-minus rating to the state's $510,820,000 GO refunding bonds (2016 series B).
The bonds are being offered via negotiated sale on or about May 24, 2016. The par amount is subject to change pending final sale.
The ratings on debt linked to the state's IDR also have been downgraded.
The rating outlook is stable.
The downgrade reflects both negative underlying credit trends and the application of Fitch's revised U.S. Tax-Supported Rating Criteria. The state has experienced chronic economic and fiscal challenges during the current expansion and consequently its scope of flexibility to address future cyclicality, in Fitch's view, has been reduced.
Despite repeated, and generally structural, responses to bring the current biennial budget into balance, it remains unclear whether the state has succeeded in fully aligning its budget to potential future economic and revenue performance.
The stable outlook reflects Fitch's view that, despite its high fixed cost burden and ongoing economic uncertainty, recent state corrective actions have primarily been structural in nature, and state managers continue to pursue fiscal management changes to improve the state's longer term prospects.
Connecticut has a mature and diverse economy anchored by a large finance sector and important manufacturing and education and health sectors, the rating agency said. The last downturn in the state was severe, and the recovery has been very slow compared to previous economic cycles.
Over the 2012-2015 period, employment in the state rose at roughly half of the pace enjoyed by the nation, and current employment remains below the pre-recession peak, Fitch said. The state is the wealthiest in the U.S. as measured by per capita personal income, although aggregate personal income gains have trailed the nation's and key finance and manufacturing sectors are experiencing only modest growth after the retrenchment of recent years.
Tax revenues are diverse, with the largest tax source, personal income tax (PIT), subject to considerable cyclicality, particularly the component derived from capital gains, Fitch said. Sales, corporate income, transportation and gaming taxes serve to further diversify the tax base. Baseline growth prospects for taxes are limited given the state's mature, slowly growing economy. The state has unlimited legal ability to levy taxes.
As with most states, Connecticut's pace of spending growth is expected to be higher than that of revenues in the absence of policy action given the prominence of Medicaid; other social services, education, municipal aid, debt service and pension contributions add further to spending pressure. The state has consistently demonstrated the ability to manage its high fixed cost burden, including making full actuarial contributions, according to the agency.
The burden of debt and unfunded pension liabilities in relation to resources is elevated and among the highest for a U.S. state, Fitch said. Net tax-supported debt consists primarily of GO and transportation borrowings, with much of GO borrowing undertaken on behalf of local schools. Unfunded pensions, including for local teachers, are more significant, with high discount rates suggesting that future funded ratio erosion and higher contribution needs are a risk, despite an otherwise very conservative amortization policy.
Frequent revenue reforecasting allows the state to identify revenue underperformance and quickly implement corrective actions. Gap-closing capacity remains strong but is less robust than during past expansions given that the state has been unable to quickly rebuild reserve balances and it already has implemented tax increases and spending cuts in the course of the current expansion, Fitch said. Further expenditure adjustments remain a source of additional flexibility, although high fixed costs limit the state's scope of action.
