One of the Wall Street ratings agencies downgraded its outlook of Connecticut’s general obligation bonds citing fixed costs and a stubborn budget deficit.
S&P Global Ratings revised its outlook of Connecticut bonds from stable to negative Wednesday, but maintained its AA- rating.
The revision, according to S&P Global Ratings credit analyst David Hitchcock, reflects “our view that projected growth in fixed costs could rise to a level we believe could comprise a substantial proportion of the state budget and thereby hamper Connecticut’s budget flexibility as the state addresses large out-year budget gaps.”
Lawmakers learned last week that the state likely faces a $1.5 billion budget deficit in fiscal year 2018 and that fixed costs account for almost half of the general fund.
State Comptroller Kevin Lembo certified Thursday that the state is currently on track to end the 2017 fiscal year with a $82.3 million deficit. The projection is about $14.6 million higher than the one issued two weeks ago by Gov. Dannel P. Malloy’s budget office due mostly to how much the state will need to pay out to state employees as a result of a lawsuit settlement.
Connecticut budget analysts project that debt service, pension, and other retirement benefit costs will total 32.6 percent of fiscal 2018 general fund revenue, a level that Wall Street frowns upon.
“Fixed cost growth has led to large out-year budget gap projections that could be difficult to manage following previous biennium tax increases and expenditure cuts,” Hitchcock wrote in his analysis. “Should fixed costs rise substantially further as a percent of the budget, pension funded ratios decrease below 40 percent, or the state resort to structurally unbalanced budget balancing measures over our two-year outlook horizon, even while the nation is experiencing economic growth, we could lower the rating.”
But Hitchcock also said that the state could turn things around.
“Should fixed costs stabilize as a percent of the budget and the state maintain structural balance, or should economic growth enable Connecticut to restore its budget stabilization fund to the point it could provide protection in the next economic downturn, we could revise the outlook to stable,” Hitchcock wrote.”Our current rating anticipates that Connecticut can achieve near structural budget balance during periods of economic expansion, but that it might fall out of
structural budget alignment during economic downturns, and will likely maintain what we would characterize as low reserve levels for the near future, despite national economic growth.”
In the past two budget cycles the state has used money in the Rainy Day Fund to cover end of the year budget deficits.
At the same time, the state expects to make its final $178.7 million payment on the 2009 economic recovery notes it borrowed to cover operating expenses at the end of former Gov. M. Jodi Rell’s administration.
“The continuation of a negative outlook, paired with a growing state deficit, speaks to why so many people have lost confidence in our state,” Senate Republican Leader Len Fasano, R-North Haven, said Thursday.
He said the report is just another sign pointing to the need for immediate action.
“This is why legislative leaders need to work together now to send a strong message to the public that we acknowledge the problems and that we can work together on solutions,” Fasano said. “We have to agree to and commit to the structural changes our state needs so we can address the concerns raised by multiple credit rating agencies. We have to show people that state leaders are of a different mindset today and ready to recognize and address these challenges together.”
Connecticut is expected to begin the sale of $320 million in bonds next week.
Another Wall Street rating agency maintained its outlook for Connecticut’s bonds.
“Despite repeated, and generally structural, responses to bring the current biennial budget into balance, it remains unclear whether the state has aligned its budget to potential future economic and revenue performance,” Fitch Ratings said. “The Stable Outlook at the ‘AA-’ rating level reflects Fitch’s view that, despite its relatively high fixed cost burden and ongoing uncertainty, recent state corrective actions have primarily been structural in nature, and state managers continue to pursue fiscal management changes to improve the state’s longer term prospects.”
At the same time Fitch Ratings recognized that the state has experienced chronic economic and fiscal challenges and its “flexibility to address future cyclicality, in Fitch’s view, has been reduced.”