Politics & Government

Moody's Downgrades Connecticut's Debt Rating

State officials say decision is "unfortunate"and unfounded.

Moody's Investors Service, the ratings agency, on Friday downgraded Connecticut's general obligation bond rating, citing depleted reserves, the state's heavy debt load, and unfunded pension liabilities.

The rating on $14.6 billion of Connecticut's outstanding general obligation bonds was lowered to Aa3 from Aa2, The Hartford Business Journal reports.

On its website, Moody's provided the following rationale for the move:

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"The rating downgrade is based on Connecticut's high combined fixed costs for debt service and post employment benefits relative to the state's budget; pension funded ratios that are among the lowest in the country and likely to remain well below average; and depleted reserves with slim prospects for near-term replenishment. Connecticut's state employees retirement system (SERS) and teachers retirement system (TRS) had funded ratios of 44% and 61%, respectively, as of June 30, 2010. The state has committed to paying the full actuarially determined annual required contribution (ARC) for both systems, and some pension and healthcare reforms were achieved in last year's round of union negotiations. A new valuation is expected to be published soon incorporating the reform measures. However, funded ratios are not likely to improve significantly until closer to the end of the remaining amortization periods -- 21 years for SERS and 25 years for TRS. Connecticut's combined fixed costs for debt service, pension, and other post employment benefits (OPEB) are already high and, absent significant further reforms, will continue to consume an increasingly larger portion of the state's budget.

Following the 2001 recession, Connecticut rebuilt its rainy day fund, the budget reserve fund (BRF), to a healthy $1.4 billion, although the unreserved, undesignated General Fund balance (UUFB) remained deeply negative on a GAAP basis due to decades-old liabilities that have never been repaid. Over the course of the recent recession, Connecticut depleted its BRF and issued deficit bonds to fill budget gaps. The state plans to use surplus funds to retire the deficit bonds two years ahead of schedule. However, this reduces the amount of funds that may be available to rebuild reserves in the near term. The current biennial budget includes funds to begin addressing the negative UUFB, and Connecticut plans to start budgeting on a GAAP basis in fiscal 2014.

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 The Aa3 rating with a stable outlook incorporates our expectation that Connecticut's revenue trends should improve as it emerges from the recession, and the state will maintain its new commitment to structural budget balance and addressing its negative GAAP basis unreserved undesignated General Fund balance (UUFB)."

State officials responded quickly, saying that Moody's was wrong to take that action and that "It reflects their continued reaction to their central involvement in the financial scandals that led to the deepest recession since the Great Depression." Here is the state's prepared statement:

Benjamin Barnes, Governor Dannel P. Malloy’s Secretary of the Office of Policy and Management, today released the following statement about the Moody’s change to the state’s bond rating:

"Moody’s is wrong in its analysis of the state’s finances, and wrong to change Connecticut’s credit rating. Connecticut has done all the right things to shore up our finances, and Moody’s has responded with a downgrade intended to satisfy their internal corporate need to deflect attention from their historic lack of credibility. 

Connecticut has always paid its debt, and remains an attractive issuer of public debt. Investors appreciate Connecticut’s strong income levels, conservative debt management practices, and fiscally conservative leadership.

Moody’s lowered the rating for Connecticut below where it has been since April 2010 even though Connecticut’s fiscal health has significantly improved during that period. Recall that in 2010 Connecticut faced looming multi-billion deficits into the future, had pension funding ratios in the low 40s, had spent the entire rainy day fund, and was in the middle of a series of budgetary gimmicks which Governor Malloy has spent his first year in office undoing.

Today, we have a structurally balance budget, have converted to GAAP, have fully funded our current pension obligations and seen their funding ratio rise, have negotiated significant pension benefit concessions from organized labor, have negotiated significant employee contributions to retiree health benefits, and have begun to add jobs to the state economy. 

Moody’s Investor Service decision today to lower their rating of Connecticut’s General Obligation debt from Aa2 (negative) to Aa3 (stable) is unfortunate.  It reflects their continued reaction to their central involvement in the financial scandals that led to the deepest recession since the Great Depression.  Coming on the eve of our budget release, without an imminent bond sale, suggests that the move is motivated by factors other than Connecticut’s creditworthiness.

Moody’s, which receives approximately $170,000 per year in fees from the State for their bond rating services, is one of three agencies that rate Connecticut debt. The others, Standard & Poor’s and Fitch, continue to rate Connecticut debt as AA (equivalent to Aa2 from Moody’s).


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