HARTFORD, CT — Hours after the state Bond Commission voted to put hundreds of millions more on the state credit card one of the four Wall Street rating agencies lowered its bond rating.
S&P Global downgraded the state’s general obligation bonds from A+ to A because of its $18.5 billion in outstanding debt.
“The downgrades follow an increase in Connecticut’s tax-backed debt ratios,” S&P Global Ratings credit analyst David Hitchcock, said. “We calculate the state’s total tax-backed debt at June 30, 2017, the end of the most recent audited year, at $23.6 billion, including combined GO bonds, transportation tax-supported debt, and capital leases.”
The majority of the debt ratios the agency uses “exceed certain thresholds,” Hitchcock said.
He cited income statistics, the assumption of Hartford’s debt, and the possibility of other state tax-backed debt.
A lower bond rating could lead to higher interest rates on debt payments.
Meg Green, a spokeswoman for the Office of Policy and Management, said it’s not shocking Wall Street is responding.
“Considering the state went four months without a budget and has yet to address the current year deficit, it should come as no surprise Wall Street is taking note,” Green said.
The General Assembly has delayed resolving the current year’s $197 million deficit and has yet to tackle the more than $265 million deficit in 2019. That’s the deficit if the General Assembly decides not to adjust the two-year budget they passed in October 2017.
Senate Republican President Len Fasano, R-North Haven, said the governor’s office needs to stop blaming other people for his mess.
“It’s disappointing to see this downgrade but not surprising given how Gov. Malloy has led our state over the last seven years and how Democrat lawmakers have controlled our legislature for decades,” Fasano said. “Since Gov. Malloy took office, Connecticut’s bonded indebtedness has increased by over $6 billion as a result of his historic and irresponsible reliance on the state’s credit card. The Malloy administration, with support from Democrat lawmakers, has also approved contracts that lock Connecticut in to expensive state costs until 2027, severely limiting our ability to get out from under. If Governor Malloy seriously thinks this downgrade is a result of a legislative budget that for the first time ever put caps on how much the state can spend and borrow he’s more out of touch than I ever imagined.”
At the same time, two rating agencies, S&P Global and Moody’s, have raised the city of Hartford’s rating.
On Friday S&P Global raised Hartford’s rating from CCC to A.
“It is abundantly clear the contract assistance agreement, including the strict accountability measures it provides, was a much-needed intervention resulting in a strengthening of the city’s position in the bond market,” Green said. “It’s important to note that Connecticut’s budget situation and historic underfunding of long term liabilities, not this recent action, are driving the state’s rating. While we know Hartford’s problems can’t be solved overnight, and there is still much more work to be done to stabilize the city and state’s financial futures, this is a positive sign for our capital city.”
Fasano said earlier Friday that they’re working on a way to guarantee that after the first two years of debt payments to the city of Hartford the state is able to lower the amount of municipal aid the city receives over the next 20 years of the guarantee.
The General Assembly agreed to help Hartford avoid bankruptcy by giving it about $20 million this year and $28 million next year. The money will be distributed by the Municipal Accountability Review Board, which also has control over most of the city’s finances and contracts as a result of the agreement.
Fasano said they’re not looking to abandon the Municipal Accountability Review Board agreement with the city.
But Republicans are looking for some guarantee that the state won’t be giving more municipal aid to the city and it needs to avoid the judicial oversight that comes with bankruptcy.
While acknowledging the Hartford situation is unique, and the city’s debt is “relatively small in relation to overall state resources, the assumption of debt, combined with other trends, leads us to conclude that Connecticut’s debt burden is not likely to shrink in the near term,” Hitchcock said. “We believe that other distressed cities might apply for state assistance, additional transportation debt remains a possibility if the legislature increases transportation taxes, and debt could potentially be used to smooth a projected spike in annual teacher retirement system contributions. The state also has a history of deficit financing during recessions, we believe in part due to high fixed costs.”
The rating agency maintained a stable outlook for the state of Connecticut.
“Should state debt levels moderate, or we believe the state is regaining budget flexibility due to robust revenue growth, we could raise our outlook or rating,” Hitchcock said. “However, should substantial mid-biennium shortfalls appear and result in prolonged budgetary gridlock, large structural imbalances, or weak liquidity, we could revise our outlook or lower our rating on Connecticut.”