Fitch Drops Connecticut’s GO Credit to AA

Fitch Ratings late Thursday downgraded Connecticut’s general obligation debt to AA from AA-plus, citing the state’s reduced financial flexibility, reliance on debt to close budget gaps, and structural imbalance. Fitch also revised its outlook on the state to stable from negative.

The action puts Fitch’s rating at the same level with Moody’s Investors Service and Standard & Poor’s. The rating action affects approximately $13.7 billion in outstanding GO debt.

The downgrade comes ahead of Connecticut’s plans to offer $200 million of new-money bonds and a $400 million refunding planned for next week.

The affluent state relies heavily on tax revenue from the economically sensitive financial and insurance sectors, which were hit hard by the recession.

“Although the state has taken other balancing actions to confront recession-related revenue weakness, including tax rate increases and spending cuts, it has relied primarily on one-time resources, including deficit borrowing, fund transfers, reserve fund transfers and pension contribution cuts to return to balance,” Fitch said in its rating report. “Such one-time actions further constrain the state’s operating flexibility in the near term as it seeks to address large projected imbalances beginning in fiscal 2012, even assuming revenue performance achieves current targets.”

Connecticut sold $916 million of deficit notes in fiscal 2010 to close a gap in fiscal 2009 and plans to market an additional $956 million to help close its fiscal 2011 deficit.

State Treasurer Denise Nappier said in a statement that the downgrade was unlikely to have much, if any, impact on the state’s cost of debt.

“The state’s general obligation bonds still carry three solid AA credit ratings—all with stable outlooks,” she said.

While Nappier said the downgrade was “inconsistent” with the state’s improved tax revenue and employment picture, it was “a veritable caution sign about the perils of relying too heavily on debt to balance the budget.”

Fitch also downgraded seven related credits, lowering each by one notch, affecting the following credits: University of Connecticut GO bonds; University of Connecticut student fee revenue bonds, Series 1998A; Connecticut Development Authority GO bonds, Series 1993A; Connecticut Development Authority GO and refunding bonds; Capital City Economic Development Authority parking and energy-fee revenue bonds; Connecticut Health and Educational Facilities Authority child care facilities program bonds; and Waterbury special capital reserve fund GOs.

Moody’s rates Connecticut GOs Aa2 and Standard & Poor’s rates them AA, both with stable outlooks.

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