Risk

Will Ratings Agency Downgrades Haunt Connecticut?

'Connecticut has less flexibility to meet unanticipated revenue shortfalls,' said Standard & Poor's.
Matthew HellerMay 19, 2016

Standard & Poor’s and Fitch Ratings have downgraded Connecticut’s debt ratings, citing concerns over the state’s ability to address future fiscal challenges.

S&P changed its rating of the state’s general obligation bonds from “AA” to “AA-.” It said substantial revenue shortfalls over the past year have left Connecticut with low reserves and an increasing share of its budget devoted to fixed costs.

“In our opinion, Connecticut has less flexibility to meet unanticipated revenue shortfalls, such as those that occurred in fiscal 2016, and may be poorly positioned should there be a national economic downturn in the next several years,” S&P credit analyst David Hitchcock said.

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Fitch Ratings expressed similar concerns in also downgrading the bonds to “AA-” from “AA.”

“The state has experienced chronic economic and fiscal challenges during the current expansion and consequently its scope of flexibility to address future cyclicality, in Fitch’s view, has been reduced,” the credit ratings agency said in a news release, noting that its recovery from the recession “has been very slow compared to previous economic cycles.”

“Over the 2012-2015 period, employment in the state rose at roughly half of the pace enjoyed by the nation, and current employment remains below the pre-recession peak,” Fitch said.

The Connecticut Legislature earlier this month approved a $19.76 billion budget for 2016-17 that includes spending cuts to erase a $1 billion deficit.

“The path to recovery is straightforward, and the governor and legislature have positioned the state in the right direction,” state Treasurer Denise Nappier said in a statement responding to the debt downgrades. “With the 2017 mid-term budget adjustments, spending levels will be below 2016 levels even with increased fixed costs.”

Even with the new budget cuts, the Connecticut Mirror reported, “nonpartisan state analysts still say Connecticut finances, unless adjusted, are on pace to run about $1.3 billion in the red, or about 6%, in 2017-18.”

“Further expenditure adjustments remain a source of additional flexibility, although high fixed costs limit the state’s scope of action,” Fitch said.