Rating agency downgrades Conn.'s debt

Associated Press

Updated: Jan 20, 2012 5:02 PM

HARTFORD, Conn. (WTNH/AP) — Moody's Investor Service on Friday downgraded Connecticut's debt rating despite efforts by Gov. Dannel P. Malloy to reduce the state's pension costs and balance the budget, saying the state's financial problems continue to stand apart from those of other states.

"The governor has taken a lot of positive steps, but it's going to take a long time to undo the problems they've gotten themselves into," said Moody's analyst Nicole Johnson, referring to the state's high borrowing and retirement expenses. "When we look at all of Connecticut and compare it to its peers, other states, it is an outlier in terms of those fixed costs, and we don't expect those fixed costs to come down significantly over the near term."

Johnson pointed out how Connecticut has no rainy day fund for fiscal emergencies and how the state won't be able to build it up for a few years because it needs to pay off bonds that were issued in past years to cover deficits. Also, she said, Connecticut's state employee retirement plans continue to be seriously underfunded and that the state carries a very high debt load.

Moody's said in its report released Friday that it expects the state's revenue trends to improve as Connecticut emerges from recession. Moody's designated the state's financial outlook as "stable."

[Read Moody's report]

Benjamin Barnes, Gov. Dannel P. Malloy's budget secretary, blasted the rating agency's announcement, saying Moody's "is wrong in its analysis of the state's finances" and wrong to change the state's rating for about $14.6 billion in general obligation bonds from Aa3 to Aa2. He also charged that Moody's was trying to save face following last year's controversy over its downgrading of federal government's debt.

"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," Barnes said. "Connecticut has always paid its debt, and remains an attractive issuer of public debt."

[Click here to read Barnes' statement]

Asked about Barnes' charges, Johnson said Moody's "understands that (bond) issuers are not happy when they're downgraded," but that Connecticut currently "looks weak relative to its peers."

A downgrade can lead to higher borrowing costs, and House Minority Leader Lawrence Cafero Jr., R-Norwalk, warned that it could hurt efforts to attract business to the state because it appears Connecticut's finances are not in order.

But state Treasurer Denise Nappier said she doesn't expect an increase in interest costs for future bond issuances because interest rates are at historic lows. Also, she said Moody's has had a negative outlook on the state's credit since last summer and "at least a portion of the rating change is already priced into current interest rate levels on new debt."

“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," said Nappier. "Despite these steps forward, this rating agency appears to be judging the State’s credit worthiness through the rearview mirror."

[Read Nappier's full statement here]

The rating change comes the same week that Malloy's administration announced that state revenues are expected to decline by about $95 million in the current fiscal year that ends June 30, or one-half of 1 percent of the annual budget. They are expected to drop by about $139 million the following fiscal year that ends June 30, 2013, or seven-tenths of 1 percent of the annual budget.

Cafero said the revenue drop, the ratings downgrade and Nappier's warning earlier this month that Connecticut had $195 million in cash on hand — about enough to pay for two-and-a-half-days of expenditures — are all warnings the Malloy administration has "pooh-poohed" and denied as warning signals.

He maintains that if Malloy and state lawmakers had cut more spending instead of raising taxes $2.6 billion over two years and secured more realistic savings from state employees, Moody's might have held Connecticut's bond rating steady and acknowledged the state was taking steps in the right direction to address its fiscal problems.

Roy Occhiogrosso, the governor's senior adviser, called Cafero's accusation that Malloy is ignoring budgetary warnings "ridiculous," and said the governor has been warning about the state's budget problems since he was a candidate and has taken steps to eliminate budgetary gimmicks and honestly balance the state's books. Since Malloy took office a year ago, following two consecutive Republican governors, Occhiogrosso said the state has seen important improvements.

"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."

He said much of that is happening because Malloy and "some very courageous legislators had the guts to do what was necessary to stabilize the state's finances."

Jerry Labriola, chairman of the Connecticut Republicans, said Friday's downgrade shows that Malloy's fiscal policies, backed by the Democratic-controlled General Assembly, are not working.

"We have the highest per capita borrowing of any state in the country. In 2011, we were the only state in the region to actually increase state government spending, and we also led the nation in per capita taxes," he said. "So the governor is fond of blaming prior Republican governors for his budget problems, but this was the governor's budget. He proposed it and the Democrats approved it in lock step. He wanted all those taxes and he approved all that spending."

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