(Updated 5:28 p.m.) In a week of already disappointing fiscal news, one of the three Wall Street credit rating agencies downgraded its bond rating Friday citing pension fund ratios and the lack of a rainy day fund.
Moody’s Investor Services downgraded Connecticut’s rating from Aa2 to Aa3. The rating comes on the heels of news that the state may end the year nearly $95 million in the red if it fails to take corrective action.
“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,“ Moody’s wrote in an explanation of its decision.
Meanwhile, the state maintained its stable outlook and was even praised for the “positive steps the state is taking to address its long-standing balance sheet weakness and reduce its fixed post employment benefit costs through pension reforms.”
Office of Policy and Management Secretary Ben Barnes issued a statement disagreeing with the change in the bond rating, which hasn’t changed since April 2010.
“Moody’s is wrong in its analysis of the state’s finances, and wrong to change Connecticut’s credit rating,” Barnes said. “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.”
He argued Gov. Dannel P. Malloy’s administration has done everything it can, including fully funding its pension obligations for the first time in decades.
“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,” Barnes said.
He said the timing of the rating is suspect because it comes on the eve of a budget address and not at a time Connecticut is in the market to sell bonds.
“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,” Barnes said.
House Minority Leader Lawrence Cafero, R-Norwalk, defended the independent rating agency saying their ratings were like the “SAT of the financial world.”
The rating news is simply the third strike against the Malloy administration and its budget, he said.
On Jan. 3 the state Treasurer Denise Nappier issued a report saying the state’s cash flow level was dangerously low and used money the state had borrowed to fund capital projects for operating expenses. The Malloy administration has said the money has already been paid back and the state’s cash flow is stable.
The second strike, according to Cafero, was the consensus revenue estimates which showed the state on the precipice of a $95 million deficit this year. The downgraded bond rating from Moody’s is the third strike.
“I’ve heard a lot of excuses lately from the Malloy administration,” Cafero said. “First it was statements that we were trying to politicize the state’s cash flow issues when the letter acknowledging the borrowing was written by the state treasurer. Then, when the consensus revenue estimates were released, it was rich people were holding off on paying their taxes. Now we’re told Moody’s doesn’t know what they’re talking about.”
He said the three rating agencies are final arbiters when it comes to assessing the fiscal health of state.
“And the marketplace is signaling that we have a problem.”
Cafero said he has to wonder how come all these independent agencies are wrong and the Malloy administration is always right. He urged his colleagues in the legislature to reclaim the purse strings from the executive branch this year and make sure the budget is balanced.
He opined that if the budget hadn’t relied so heavily on taxes and instead cut more spending, then Moody’s would have maintained Connecticut’s bond rating.
Roy Occhiogrosso, Malloy’s senior communications adviser fired back at Cafero calling his comments “ridiculous.”
“Rep. Cafero sat idly and voted for budgets year after year in which money was borrowed to pay for operating expenses, and that pawned off the state’s obligations on future taxpayers,” Occhiogrosso said. “This Governor has played no gimmicks whatsoever with the state’s finances. None. Thanks to Gov. Malloy the state is keeping its books honestly, for the first time ever, and meeting its obligations completely – you know, the obligations Gov. Malloy inherited from Rep. Cafero and the past two Republican governors.”
“Unemployment is at its lowest point in more than two years, and is headed down. Governor Malloy’s first year in office resulted in the state experiencing net job growth for the first time in four years,” Occhiogrosso said. “And today, CBIA (the Connecticut Business and Industry Association) suggested the economy could grow by four percent next year.”
State Treasurer Denise Nappier said news was disappointing, but not surprising.
“The decision is certainly disappointing, but not totally unexpected given the negative outlook placed on the state’s rating by Moody’s last June,” Nappier said. “In many ways, Moody’s action is going in the wrong direction, particularly since Connecticut has made tough decisions to bring structural balance to its operating budget and set in motion a clear path to improve financial stability. Despite these steps forward, this rating agency appears to be judging the State’s creditworthiness through the rearview mirror.”
She said Moody’s didn’t give Connecticut enough consideration for its implementation of GAAP and efforts taken to address the state’s long-term pension obligations.
Sen. Minority Leader John McKinney said Moody’s laid out very succinctly its concerns about Connecticut’s pension system and the “other post employment benefits” which are part of the pension system and underfunded to the tune of $26 billion.
With the governor in charge of negotiating pension benefits directly with the unions, the General Assembly proved this summer that it can play a role in reforming the system, McKinney said.
Under Malloy’s proposal, which passed the Senate but never came up for a vote in the House, longevity payments would no longer be a negotiable item in any collective bargaining agreement and overtime would be excluded from pension calculations. McKinney said the General Assembly needs to understand it can do more to improve the state’s standing on this issue.
But what McKinney was even more upset about Friday was the tenor of Barnes’ statement and the accusation that Moody’s somehow lacked credibility.
McKinney said as head of the Office of Policy and Management Barnes is the one who meets with the bond rating agencies, so his relationship with them is important.
“What he has done is attack the credibility of the rating agency,” McKinney said Friday evening. “He needs to show he has evidence that it lacks credibility and if not offer an apology.“
“Ben’s supposed to apologize for what – telling the truth? Not happening,” Occhiogrosso said. “Sen. McKinney is defending an organization that gave subprime mortgages AAA ratings, right before those mortgages caused the financial meltdown of 2008. Talk about a credibility problem.”