NEW YORK - (Business Wire) Fitch Ratings has assigned an 'AA' rating to the State of Connecticut's general obligation (GO) notes (economic recovery 2009 series A) with a Negative Rating Outlook. Fitch also has affirmed the 'AA' rating on approximately $12.8 billion in outstanding state GO bonds and revised the Rating Outlook to Negative from Stable. The affirmation and Outlook revision affect other credits associated with the state's GO rating, as detailed at the end of this release. The GO notes will sell via negotiation on or about Nov. 10, 2009 and will mature Jan. 1, 2012-2016; early redemption provisions will be determined upon sale.
The 'AA' long-term GO rating is based on Connecticut's high debt and long-term liabilities and imbalanced operations offset by the state's vast wealth and income resources. The Outlook revision to Negative from Stable reflects the sizable fiscal challenges facing the state in the current biennium and beyond. Revenue weakness due to the recession and continued spending pressures are widening projected gaps. The state had temporarily resolved the gaps through the fiscal 2010-2011 biennium primarily through reliance on one-time revenues, including the present borrowing to address part of the remaining deficit from fiscal 2009 and budgeting a $1.3 billion securitization for the second year of the biennium.
Since the budget's enactment continued revenue erosion and higher spending needs have reopened a current year gap; the state's comptroller now forecasts a deficit of $624 million this year absent balancing measures. Further rating action will be tied to the state's ability to make progress in closing emerging gaps and addressing structural imbalances through recurring actions, as well as minimizing reliance on planned borrowing for operations.
Connecticut's volatile revenue system periodically leads to budget imbalances. The state's recent practice of setting aside large reserves had supported the credit. With planned exhaustion of reserves and significant deficit borrowing already budgeted during the fiscal 2010-2011 biennium, the state faces diminished flexibility to respond to reopened near-term shortfalls, even as longer-term structural gaps remain.
Connecticut's fixed debt burden is high, with net tax-supported debt as of Oct. 15, 2009 at $17.6 billion, including planned economic recovery notes (ERNs), or 8.9% of 2008 personal income. Three-quarters of net tax-supported debt is GO, a large share of which is issued for local schools; excluding $2.3 billion in GO pension bonds issued for the teachers' retirement fund (TRF), the debt burden falls to a still high 7.7% of 2008 personal income. Funding levels for the state's major pension systems remain a concern. As of June 30, 2008, the state employees' retirement system (SERS) was funded at 52%, and the TRF was funded at 70%, the latter following deposit of pension bond proceeds.
Large surpluses through fiscal 2007 enabled the state to accrue a $1.38 billion budget reserve fund (BRF), equal to 8% of fiscal 2009 appropriations. Net tax receipts, particularly from personal income, eroded steadily in the course of fiscal 2009. Initially forecasted to rise 3.6% over fiscal 2008 actuals, to nearly $13 billion, forecast receipts were repeatedly lowered, ending the year down 14.5%, or $10.7 billion. Despite balancing actions, including transfers, spending cuts and use of federal stimulus, the year ended with a $947.6 million deficit, equal to 5.6% of appropriations. The state has opted to close the deficit through sale of ERNs while preserving the BRF balance to resolve forecast gaps in the current biennium. The state has issued ERNs in the past, albeit after exhausting available BRF balances.
The fiscal 2010-2011 biennium budget, enacted late in August 2009, achieved balance largely through use of one-time resources, including planned borrowing, as well as tax rate changes and spending cuts. Use of one-time resources included drawing down the BRF by $1.04 billion in fiscal 2010 and $342 million in fiscal 2011, federal stimulus of $879 million in fiscal 2010 and $595 million in fiscal 2011, and an authorized $1.3 billion securitization in fiscal 2011. Recurring measures included rate increases in multiple taxes and fees, including a new personal income tax top rate at 6.5% for high earners and a temporary corporation tax surcharge; tax changes were projected to yield $847 million in fiscal 2010 and $335 million in fiscal 2011. With rate changes, net tax receipts rise 2.1% in fiscal 2010, to $10.9 billion, and remain flat in fiscal 2011; the revenue outlook since budget enactment has been lowered due to continued underperformance. Spending reductions in the plan include measures to reduce labor-related expenses going forward.
Connecticut has a wealthy, diverse economy, but is experiencing broad recession-related weakness. The state is the wealthiest among the states measured by personal income per capita, at 140% of the national average in 2008. After peaking in mid-2008, employment levels are declining, with September 2009 down 4.3% in the state compared to September 2008; nationwide, employment levels were down 4.2%. Losses are particularly severe in construction, down 18.4%, manufacturing, down 8.3%, and professional and business services, down 8%. Unemployment has risen to 8.4%, from 6% a year ago, but is 86% of the U.S. rate. The state's large financial activities sector, with insurance concentration in Hartford and banking in Fairfield County, was down 3.4% in September 2009.
In conjunction with the affirmation of the state's GO rating and Outlook revision, Fitch has affirmed the following state-related ratings and revised the Rating Outlook to Negative from Stable:
--Connecticut Development Authority GO bonds series 1993A at 'AA-';
--Connecticut Development Authority state general fund obligation bonds and refunding bonds at 'AA-';
--Capital City Economic Development Authority parking and energy fee revenue bonds at 'AA-';
--Connecticut Health & Educational Facilities Authority (child care facilities program) at 'A+';
--Waterbury (CT) GO special capital reserve fund bonds at 'AA-'.
Additional information is available at 'www.fitchratings.com'.
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Fitch Ratings, New York
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