S&P Global late Wednesday downgraded the state’s outlook from stable to negative, citing budget complexities that could jeopardize stability when the rest of the nation is growing economically.
The New York ratings agency kept the state’s AA- general obligation (GO) debt rating, its ‘A+’ rating on the state’s appropriation-secured debt, and ‘A-‘ moral obligation debt rating the same.
The agency also assigned its ‘AA-‘ rating to Connecticut’s approximately $320 million GO refunding bonds, 2016 series G.
“The outlook revision 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,” said S&P Global Ratings credit analyst David Hitchcock.
Connecticut projects that service debt, pension, and other post-employment benefit costs will total 32.6 percent of fiscal 2018 general fund revenue, a level that the agency considers high, with the potential to increase in future years.
“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,” the agency said.
The rating could be lowered further if fixed costs rise substantially as a percent of the budget, pension funded ratios drop below 40 percent, or the state resorts to “structurally unbalanced” budgeting measures at a time when the nation is growing economically, the agency noted.
In an email, state Treasurer Denise L. Nappier said S&P’s shift in its outlook should come as no surprise, but pointed out that the change is only in the outlook and is not a ratings change.
“Connecticut continues to earn a ‘strong’ rating from S&P for financial management of its budget, debt management and investing, and S&P maintains its view that the state’s overall management practices are ‘robust,’” she wrote.
