S&P Global Ratings said it revised its outlook on the state of Connecticut's approximately $19 billion general obligation debt outstanding to negative from stable. At the same time, S&P said it affirmed the A-plus rating on the state's GOs.
S&P also revised its outlook to negative from stable on the state's A rated appropriation-secured debt and BBB-plus rated state moral obligation debt.
"The outlook change reflects what we believe to be increasing constraints on Connecticut achieving long-term structural balance, highlighted by the state's delay in enacting a fiscal 2018-2019 biennium budget for the period that began July 1, 2017," said S&P Global Ratings credit analyst David Hitchcock. "These budget constraints include revenue weakness because of slow economic growth and recent population decline and reduced revenue-raising flexibility after substantial tax increases were instituted in the last two biennium budgets," Hitchcock added.
S&P said it believes several recent high profile relocations of various business headquarters out of state have reduced political willingness for further broad-based tax increases. At the same time, S&P said it believes there is less expenditure flexibility following implementation of substantial reductions in state aid to localities; implementation of a recent labor agreement that reduced costs, but also created fixed pay schedules and prohibited layoffs for the next four years; and rising fixed-debt service, pension, and other post-employment benefit (OPEB) expenditures.
Should the state enact a budget that significantly departs from structural balance, if new revenue weakness occurs during our two-year outlook horizon that further hampers state budget flexibility, or if increases in debt or pension liabilities trigger rating overrides under our state criteria, S&P said it could lower its rating on Connecticut.
Although the state has been operating with close-to-structural balance thanks to an executive budget order by the governor that significantly cut state aid to municipalities, S&P said it believes its magnitude and suddenness has led to disruption at the local level.
"We are concerned that state aid cuts could diminish Connecticut's long-term economic attractiveness should there be significant disruption to municipal services, property tax rates, or the quality of local education. If economic growth is weaker-than-forecast during our two-year outlook horizon, we could also lower the rating," S&P said. "However, if economic growth above the state's budget forecast occurred, fixed costs could conversely contribute to favorable operating surpluses that improve Connecticut's fiscal posture and allow us to revise the outlook on the state to stable."
S&P said the state's GO rating reflects its view of the following:
• High income levels;
• A diverse economy;
• Ongoing revenues that have nearly matched ongoing expenditures in recent years;
• Active monitoring of revenues and expenditures to identify and correct mid-fiscal year budget gaps, as exemplified by midyear budget adjustments made for fiscal years 2015, 2016, and 2017; and
• Adequate operating liquidity, despite low generally accepted accounting principles fund balances.
S&P cited offsetting factors including:
• Above-average debt, high unfunded pension liabilities, and large unfunded OPEB liabilities, all of which create what S&P believes are significant and growing fixed-cost pressures that restrain Connecticut's budgetary flexibility;
• Recent population decline and slow economic growth, with continued gradual job losses forecasted in the well-paying financial sector that S&P expects will contribute to weak revenue growth over the next several years and present difficult budget balancing decisions; and
• A history of cyclical budget performance, and a currently weak financial reserves cushion against the next economic downturn.
The state has been operating since July 1 under an executive budget order issued by Gov. Dannel Malloy in absence of an enacted fiscal 2018-2019 biennium budget. The delay in budget enactment reflects S&P's view of the significant budget stress the state has been under in recent years thanks to weak revenue growth and high and growing fixed costs.