Wall Street’s three rating agencies generally frown upon Connecticut’s high level of debt, but this week one them cautiously moved the state’s bond outlook from “negative” to “stable.”
Fitch Ratings cited the state’s ability over the last biennium to “address revenue underperformance” as one of the reasons it boosted its outlook for the state. However, it was quick to point out the state’s “incomplete progress in rebuilding fiscal flexibility and within the constraints posed by its high fixed costs.”
Fitch said newly adopted state budget, which was approved after a fiery debate over the state’s business tax climate, “is based on conservative revenue assumptions, appears structurally balanced, and avoids large non-recurring measures.”
Fitch also points out that the economic gains have often “under-performed expectations,” and there’s the potential that the state may have to deplete its rainy day fund to help balance the budget in the future.
“Evidence that the state’s currently limited level of flexibility is insufficient to absorb unforeseen fiscal challenges could result in a lower rating,” a Fitch analyst wrote in a press release.
But Gov. Dannel P. Malloy’s office attributed the change in status with Fitch to the governor’s “commitment to funding our state’s long-term liabilities.”
“Last week, we saw our unemployment rate drop to the lowest levels since 2008 and each year we are making progress at chipping away at our state’s long-term debt obligations,” Mark Bergman, Malloy’s communications director, said.
State Treasurer Denise Napper agreed.
“The commitment to fully funding long-term liabilities and to a structurally balanced budget is paying off,” Nappier said. “Taken together with the recent news of the drop in Connecticut’s unemployment rate to 5.7 percent, lowest since July 2008, these developments are compelling proof of the merits of continuing on this path toward fiscal stability.”
Two other credit rating agencies, Moody’s Investors Service and Kroll Bond Ratings, maintained their ratings of Aa3 and AA for the state, respectively, with stable outlooks. However, Standard & Poor’s maintained its negative outlook, first put in place in March. It maintained its AA rating.
Meanwhile, Republican lawmakers continue to express concern about the level of debt the state is taking on.
Next week the state is expected to borrow an additional $546 million, which will bring the total amount of borrowing for the calendar year up to $1.9 billion.
The last Bond Commission meeting was May 11 and at that time Malloy expressed his desire to stay under a self-imposed “soft” bonding cap of $2.5 billion per year, which is an increase from a previous self-imposed cap of $1.8 billion last year.
Senate Republican Leader Len Fasano has pointed out that “more borrowing means more debt and more instability.”
Sen. L. Scott Frantz, R-Greenwich, one of two Republicans on the Bond Commission, said he would be surprised if the rating agencies don’t frown upon the new amount of borrowing in the future.
“Yes, interest rates are low but that does not give us good cause to go out and borrow excessive amounts of money. We’ve got to put ourselves on a debt diet,” he said.
Malloy’s budget office issued a statement saying that “While we appreciate the Senator’s concerns and value his support for projects to keep Connecticut moving forward, his comments are unnecessarily hyperbolic.”
They added: “We have reached this point because the scale of the crucial projects we are funding — $650 million for school construction and new, state-of-the-art classrooms, $312 million for UConn 2000 and NextGen for a brighter higher education system, $193 million for economic development to grow jobs and boost our economy, and $117 million to build affordable housing and create new vibrant communities.”
The positive rating news comes in advance of a $500 million competitive general obligation bond sale being offered on August 4 — $250 million of which will be tax-exempt bonds and the remaining $250 million will be taxable bonds.
The proceeds of the August sale will be used as follows:
• $134.3 million for various housing programs;
• $119.1 million in economic development related to manufacturing assistance;
• $69.2 million in state grant programs;
• $56.4 million in municipal grants;
• $29.2 million for the Housing Trust Fund;
• $21.2 million to fund various state building projects;
• $20 million for Town Road Aid;
• $20 million to non-profit health and human services providers, and;
• $10 million for the Small Town Economic Assistance Program.
In addition, $20.6 million of the bond proceeds are going toward the construction of a new Sandy Hook School in Newtown, Connecticut.