Moody's Changes $14B of Connecticut Debt to Negative

Moody’s Investors Service Tuesday revised its outlook to negative from stable on $14 billion of outstanding Connecticut debt as the state faces unfunded pension costs and shrinking reserves.

The rating is Aa2.

The state has used rainy-day funds, or budget reserve funds, to help balance operating budgets during the recession. Moody’s anticipates the budget reserve fund will continue to be unfunded for the next several years or longer. In addition, the state employees’ retirement system and the teachers’ retirement system are 44% and 61% funded, respectively. The SERS fund is one of the lowest-funded pension systems in the U.S., according to Moody’s.

“The negative outlook reflects Connecticut’s depleted reserves with slim prospects for near-term replenishment, pension funded ratios that are among the lowest in the country and likely to remain well below average, and high combined fixed costs for debt service and post-employment benefits relative to the state’s budget,” a Moody’s report read.

In addition, the agency said it may take further rating action if the state fails to replenish its rainy-day fund and strengthen its pension systems.

“In the absence of a clearly articulated plan to achieve meaningful improvement in the state’s pension funded ratios and reduce its fixed costs, as well as progress toward adequate reserve levels, Connecticut’s rating could be downgraded,” according to the report.

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