Connecticut’s downgrade and Hartford’s upgrade – simultaneously from S&P Global Ratings late Friday – reflect a state and capital city whose fortunes are linked, as controversy simmers over a recent debt bailout.
S&P lowered Connecticut's general obligation rating to A from A-plus while elevating the capital city's GO debt to A from CCC.
S&P also raised Hartford's issuer credit rating to the highest junk rating, BB-plus, from CCC and removed Hartford from credit watch with positive implications after the city signed a contract assistance agreement with the state. The deal made the city’s $540 million of debt a general obligation of the state while putting the city under state oversight.
“The downgrades follow an increase in Connecticut's tax-backed debt ratios,” said S&P analyst David Hitchcock. “While we view Hartford as a unique situation and the city's debt as relatively small in relation to overall state resources, the assumption of debt, combined with other trends, leads us to conclude that Connecticut's debt burden is not likely to shrink in the near term.”
According to S&P. Connecticut has $23.6 billion in tax-backed debt, or about $6,700 per capita.
The rare-for-its-kind debt deal enables Hartford to refinance its debt using Connecticut’s full faith and credit backstop. It also puts Connecticut on the hook for Hartford’s GO debt through 2036.
The arrangement generated some angry responses in Connecticut, with officials in the state’s other large cities – Bridgeport, New Haven and Waterbury – also calling for more state aid. In addition, legislative leaders complained about the execution of the deal behind their backs.
“We believe that other distressed cities might apply for state assistance, additional transportation debt remains a possibility if the legislature increases transportation taxes, and debt could potentially be used to smooth a projected spike in annual teacher retirement system contributions,” said Hitchcock.
State Sen. Scott Frantz, R-Greenwich, who chairs the legislature’s finance, revenue and bonding committee, called the state-city deal “far from complete from a practical point of view.”
“The legislature can easily offset the irrational debt relief efforts from the administration by reducing the [payments in lieu of taxes] and other payments to the city of Hartford every year," said Frantz. “A deal was struck to send an incremental $40 million a year to the municipality for two years max. That was the extent of it.
“To interpret from the budget language that an unlimited amount of debt relief could be forthcoming is unrealistic, a stretch and, most importantly, impractical.”
Debt service, pension system contributions and other post-employment benefits account for $5.4 billion or 29% of budgeted general fund expenses -- the highest among states -- according to Alan Schankel, a managing director at Janney Capital Markets.
Mayor Luke Bronin expects to release Hartford’s fiscal 2019 budget on Monday afternoon.
Under the debt deal, the new state Municipal Accountability Review Board must approve the spending plan, and any new bonding and labor agreements. Additionally, city officials must report periodically to the state treasurer and budget director and craft a rolling three-year financial plan.
S&P on Friday also raised its long-term rating on the Hartford Stadium Authority's lease revenue bonds to BB from CCC.
S&P also assigned its A rating and stable outlook to Connecticut's $300 million Series 2017 C variable-rate GO bonds outstanding, which the state sold in a direct placement with Barclays Capital last June 28.
Additionally, S&P lowered its rating on Connecticut's appropriation-secured debt to A-minus from A and the state's moral obligation debt rating to BBB from BBB-plus, and its short-term bond anticipation notes rating to SP-1 from SP-1-plus on Series 2017A BANs.
Its outlook on all long-term ratings, including Hartford’s, is stable.
S&P calculates the state's total tax-backed debt at June 30, 2017, the end of the most recent audited year, at $23.6 billion, including combined GO bonds, transportation tax-supported debt and capital leases.
Under its state rating criteria, when a majority of debt ratios exceeds certain thresholds, S&P’s criteria add an extra one-notch downward adjustment to its overall indicative state rating score.
“With updated income statistics, the assumption of Hartford's debt and the possibility of other state tax-backed debt, we now believe that the majority of our debt ratios will remain at least one-third higher than our debt override threshold over our two-year outlook horizon, and as a result we are now lowering the state GO rating to our indicative rating score,” said Hitchcock.
State officials say the assumption of Hartford’s debt should keep the city of 123,000 out of bankruptcy court.
The state has received numerous downgrades over the past two years due to imbalanced budgets and heavy pension burden. Moody’s rates Connecticut GOs A1, while Fitch Ratings and Kroll Bond Rating Agency rate them A-plus and AA-minus, respectively.
Moody’s on April 4 boosted Hartford GO bonds 13 notches to A2 from Caa3, also citing the city-state agreement. Moody’s also concurrently assigned Hartford its B2 issuer rating, five notches away from investment grade.
Connecticut in 2001 placed Waterbury under oversight and established a control board with power to void and renegotiate union contracts. The city emerged from oversight five years later.
Speaking last fall at a University of Connecticut School of Law symposium on municipal distress, current Waterbury Mayor Neil O’Leary said the overseers’ most significant clout involved accepting or rejecting labor agreements.
“It was the most chaotic time I can remember, but we were at an absolute crisis,” said O’Leary, then a police captain and union member.