NEW YORK - Moody's Investors Service said it has upgraded to Aa3 from A2 the Southeastern Connecticut Project 1998 Series A bonds of the Connecticut Resources Recovery Authority (CRRA) based on the state's obligation to make up deficiencies in the Special Capital Reserve Fund (SCRF) established for this series. The rating carries a negative outlook reflecting the negative outlook on the state's general obligation rating.
The SCRF program rating reflects the following credit considerations:
--Strength of the state's obligation to restore each SCRF to the level of maximum annual debt service (MADS) without the need for further legislative appropriation.
--SCRF funding requirement equal to MADS coming due in the succeeding calendar year.
--Satisfactory certification and timing mechanics to trigger SCRF make-up by the state.
--State commitment to the SCRF make-up underscored in its covenant not to revoke its statutory obligation.
Bonds supported by the SCRF make-up are not on par with the state's general obligation pledge. However, Moody's views these statutory obligations as stronger than state appropriation-backed debt. The lack of a rating distinction between the state's general obligation debt and the SCRF supported debt reflects the statutory authorizations, mechanics, and the state's oversight of the program through its review of the self-sufficiency documentation and required indenture provisions.
Given the state's pledge to make up any SCRF deficiency over the life of the bonds, Moody’s expects these ratings to move with the state's general obligation rating and outlook. Last month, Moody's affirmed Connecticut's Aa3 general obligation rating and revised the outlook to negative from stable. Thus, the outlook on the SCRF-supported bonds is also negative.
The state's Aa3 rating incorporates Moody’s expectation that Connecticut's revenue trends should improve as Connecticut emerges from the recession. Even so, as the wealthiest state in the nation, Connecticut is more dependent than most states on high income earners.
Thus, continued uncertainty in the recovery of the financial services sector has an exaggerated impact on the state's personal income tax receipts which account for almost half of the general fund's resources.
Once the recovery is underway, Moody’s expects that Connecticut will use its operating surpluses, as it has in the past, for the early retirement of the 2009 economic recovery notes (deficit bonds) and to begin rebuilding its budget reserve fund. However, given the magnitude of the recent one-time actions taken to balance its budget, Connecticut will likely struggle more than other states in the near term to achieve structural budget balance, especially once the federal stimulus funds are no longer available.
State credit strengths:
--Application of operating surpluses to BRF, which totaled nearly $1.4 billion at the end of fiscal years 2007 and 2008.
--Early repayment of economic recovery notes issued and other actions taken to cover operating deficits during the prior recession years, fiscal years 2002 and 2003.
--Wealthiest state in the nation with per capita personal income levels well above national levels.
State credit challenges:
--Use of one-time solutions to close the fiscal 2009 budget gap and balance the
2010-2011 biennial budget reduces financial flexibility and increases out year structural budget gaps.
--Vulnerability to financial market fluctuations due to effect on capital gains for very high wealth residents and employment in the financial services sector.
--Deterioration of already weak GAAP-basis balance sheet due to negative unreserved/undesignated general fund balance and depletion of BRF over near term.
--Debt ratios are among the highest in the nation.
--Very low funding ratios for pension systems (state employees and teachers) and high other post employment (OPEB) liability.
