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One of the four Wall Street rating agencies downgraded their outlook for Connecticut bonds Tuesday, citing “the state’s failure to return to more structurally sustainable budgeting.”

Fitch Ratings changed its outlook for Connecticut from stable to negative, but it maintained its AA rating for the state prior to the sale of $200 million in general obligation bonds. The other rating agencies, including Moody’s, Standard & Poors, and Kroll maintained their current ratings, all with stable outlooks, in anticipation of the sale.

“The Negative Outlook reflects the state’s reduced fiscal flexibility at a time of lingering economic and revenue uncertainty,” a Fitch analyst wrote. “The enacted budget for the new biennium delays repayment of deficit borrowing, adds to an already high debt load, and fails to rebuild the state’s financial cushion.”

Office of Policy and Management Secretary Ben Barnes said in a statement that he’s “pleased” with the ratings, including the one from Fitch.

“Fitch’s concerns about our vulnerability to continued economic weakness are reasonable, but ultimately not so great as to change our high-quality rating,” Barnes said. “They have affirmed that our revenue forecasts are reasonable, that our budget is balanced, and that our bonds continue to be an extremely safe investment in line with our AA rating.”

State Treasurer Denise Nappier said a “negative outlook” generally means that a credit rating will be under review for one to two years, and “is less concerning than a credit watch.” She said 15 states have negative outlooks from one or more of the credit rating agencies.

“We believe the nationwide economic recovery will continue to result in improved budget revenues and, in turn, will enable the state to address some of Fitch’s concerns,” Nappier said.

House Minority Leader Lawrence Cafero said he wants to know what Gov. Dannel P. Malloy’s administration is drinking because “obviously it makes you feel good when you’re not supposed to.”

The negative outlook means the state of Connecticut has failed to use responsible budgeting and failed to heed to warnings of Moody’s back in January 2012 when it downgraded its rating, Cafero said.

“We are going to pay the price for this,” Cafero said. “All the borrowing we do to balance the budget will have to be made at a higher interest rate.”

Sen. Minority Leader John McKinney, R-Fairfield, chimed in with a similar sentiment.

“Either the Malloy administration is looking at the negative impact of their fiscal mismanagement through rose colored glasses, or they’re just not being honest with the people of Connecticut,” he said. “The facts speak for themselves. Connecticut’s bond ratings are worse than they were when Gov. Malloy took office, they have not recovered, and they are heading in the wrong direction.” 

Fitch cited the state’s high debt burden and inability to rebuild its Rainy Day Fund as one of the reasons it changed its outlook from stable to negative. It said the budget reserve fund — which is also called the Rainy Day Fund — would remain modest through the fiscal year 2014-15 budget.

“In the event that budget performance fails to meet the state’s forecast, Fitch views the state as having reduced flexibility to respond effectively,” analysts found.

That wasn’t always the case during past economic recoveries, Fitch analysts pointed out.

“During past economic recoveries the state has demonstrated a willingness and ability to rapidly repay deficit borrowing and rebuild its rainy day balance. With the slow nature of the current recovery, the state does not expect this to happen until after the end of the current biennium in 2015.”

Barnes remained confident that Fitch Ratings would changes its tune in the near future.

“I am optimistic that continued progress on economic recovery, coupled with continued prudent management actions by the state, will lead to the prompt restoration of our stable outlook,” Barnes said.

Rep. Vincent Candelora, R-North Branford, said the rating agencies have treated Connecticut with “kid gloves.”

“They’ve been kind to Connecticut for the most part,” he said. “For the last six years we’ve seen a lot of budget gimmicks that contributed to the structural hole and we haven’t gotten out of the spiral.”

He said the negative outlook from Fitch shouldn’t surprise anyone.

“Since Gov. Malloy took office we’re seen unfunded capital projects go from $2.8 billion to $5.1 billion,” he said. “We’re spending money at a pace quicker than we can fund it.”

But the Malloy administration continues to be optimistic about the news and what it’s done to address the state’s problems during a recession.

“The state continues our commitment to responsibly addressing our significant long-term liabilities,” Barnes said. “Unfortunately, our considerable economic strengths, including high incomes, high levels of education, strong property values, and high productivity have been mitigated by the long, sluggish recovery from the national recession.”

The rating agency also found some fault with how the state decided to borrow $750 million in order to implement Generally Accepted Accounting Principles. But it wasn’t necessarily concerned about the state’s decision to delay payment of the Economic Recovery Notes it borrowed back in 2009 to close the 2010 budget deficit.

Republican lawmakers warned last year that delaying the payment of the Economic Recovery Notes would be frowned upon by rating agencies.

“Fitch recognizes the immediate cash flow benefit of the GAAP borrowing, although notes that the use of bond proceeds essentially replaces the use of budgetary surpluses to make the transition. The borrowing would have a limited impact on the state’s debt burden, already high in Fitch’s view,” analysts said Tuesday.

Candelora said he believes the economic recovery notes point to the structural hole in the budget and he speculated that the GAAP borrowing is being done to fulfill the state’s cash flow needs. Since the money for GAAP isn’t owed to a third party, it’s a debt owed to the state, he finds it curious that the state is borrowing to cover the self-inflicted debt.

Not all the rating agencies were as harsh as Fitch’s.

Moody’s, which downgraded its rating of the state in January 2012, applauded the state for taking steps to reduce some of its unfunded pension liabilities.

“The outlook for Connecticut is stable reflecting the positive steps the State has taken to address its long-standing balance sheet weakness and reduce its fixed post-employment benefit costs through pension reforms, as well as the adoption of a budget that largely relies on recurring solutions,” Moody’s analysts wrote. “We expect that Connecticut’s revenue trends should improve as it emerges from the recession and the state will maintain its new commitment to replenishing its rainy day fund over time.”

Fitch Ratings also changed its outlook for the University of Connecticut’s bonds to negative in anticipation of the sale of $225 million in general obligation bonds for the school. The downgrade in the outlook was tied to the school’s relationship to the state.

“UConn’s GO bonds are rated one notch below the GO bond rating of the State of Connecticut based on the state’s debt service commitment equal to principal and interest and appropriated without further legislative approval. Higher education is a constitutional state priority, and legal protections are strong,” Fitch analysts wrote Tuesday.


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