RATING ACTION AFFECTS APPROXIMATELY $14.6 BILLION IN OUTSTANDING G.O. DEBT
New York, January 20, 2012 --
Moody's Investors Service has downgraded the State of Connecticut's
general obligation bond rating to Aa3 from Aa2, affecting approximately
$14.6 billion in outstanding general obligation bonds.
Concurrently, Moody's has downgraded the state's general
fund obligations to A1 from Aa3, bonds supported by a Special Capital
Reserve Fund (SCRF) make-up provision to Aa3 from Aa2, and
the University of Connecticut General Obligation Bonds (State Debt Service
Commitment) to Aa3 from Aa2. The outlook is stable, revised
from negative.
SUMMARY RATINGS RATIONALE
The rating downgrade is based on Connecticut's high combined fixed
costs for debt service and post employment benefits relative to the state's
budget; pension funded ratios that are among the lowest in the country
and likely to remain well below average; and depleted reserves with
slim prospects for near-term replenishment. Connecticut's
state employees retirement system (SERS) and teachers retirement system
(TRS) had funded ratios of 44% and 61%, respectively,
as of June 30, 2010. The state has committed to paying the
full actuarially determined annual required contribution (ARC) for both
systems, and some pension and healthcare reforms were achieved in
last year's round of union negotiations. A new valuation
is expected to be published soon incorporating the reform measures.
However, funded ratios are not likely to improve significantly until
closer to the end of the remaining amortization periods -- 21 years
for SERS and 25 years for TRS. Connecticut's combined fixed
costs for debt service, pension, and other post employment
benefits (OPEB) are already high and, absent significant further
reforms, will continue to consume an increasingly larger portion
of the state's budget.
Following the 2001 recession, Connecticut rebuilt its rainy day
fund, the budget reserve fund (BRF), to a healthy $1.4
billion, although the unreserved, undesignated General Fund
balance (UUFB) remained deeply negative on a GAAP basis due to decades-old
liabilities that have never been repaid. Over the course of the
recent recession, Connecticut depleted its BRF and issued deficit
bonds to fill budget gaps. The state plans to use surplus funds
to retire the deficit bonds two years ahead of schedule. However,
this reduces the amount of funds that may be available to rebuild reserves
in the near term. The current biennial budget includes funds to
begin addressing the negative UUFB, and Connecticut plans to start
budgeting on a GAAP basis in fiscal 2014.
The Aa3 rating with a stable outlook incorporates our expectation that
Connecticut's revenue trends should improve as it emerges from the
recession, and the state will maintain its new commitment to structural
budget balance and addressing its negative GAAP basis unreserved undesignated
General Fund balance (UUFB).
STRENGTHS:
*Historical application of operating surpluses to the BRF, which
totaled nearly $1.4 billion at the end of fiscal years 2007
and 2008
*Early repayment of deficit bonds issued during the prior recession
years, fiscal years 2002 and 2003
*Commitment to structural budget balance in current biennium
*Wealthiest state in the nation with per capita personal income levels
well above national levels
CHALLENGES:
*Fixed costs for debt, pension, and other post employment
benefits (OPEB) relative to budget are among the highest in the nation
*Very low funding ratios for pension systems
*Vulnerability to financial market fluctuations due to effect on capital
gains for very high wealth residents and employment in the financial services
sector
*Weak GAAP-basis balance sheet due to negative UUFB and depletion
of rainy day fund
Outlook
The outlook for Connecticut is stable reflecting the positive steps the
state is taking to address its long-standing balance sheet weakness
and reduce its fixed post employment benefit costs through pension reforms.
We expect that Connecticut's revenue trends should improve as it
emerges from the recession, and the state will maintain its new
commitment to structural budget balance and replenishing its rainy day
fund over time.
WHAT COULD MOVE THE RATING UP
*Achievement and maintenance of higher GAAP-basis combined
available reserve levels
*Established trend of structural budget balance
*Evidence of stronger economic performance
*Reduced debt ratios relative to Moody's 50-state median and
lower fixed annual costs.
*Significantly improved funding of pension and post-retirement
liabilities,
WHAT COULD MOVE THE RATING DOWN
*Lack of improvement in available reserve levels
*Reversion to significant one-time budget solutions,
including deficit financings
*Substantial revenue weakness driven by delayed economic recovery
*Cash flow strain stemming from reduced liquidity
*Significant increase in fixed costs as percent of budget
The principal methodology used in this rating was Moody's State Rating
Methodology published in December 2004. Please see the Credit Policy
page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
Although this credit rating has been issued in a non-EU country
which has not been recognized as endorsable at this date, this credit
rating is deemed "EU qualified by extension" and may still
be used by financial institutions for regulatory purposes until 30 April
2012. Further information on the EU endorsement status and on the
Moody's office that has issued a particular Credit Rating is available
on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
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Information source used to prepare the rating is the following:
parties involved in the ratings, public information, confidential
and proprietary Moody's Investors Service's information,
and confidential and proprietary Moody's Analytics' information.
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Nicole Johnson
Senior Vice President
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Kimberly Lyons
Analyst
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
MOODY'S DOWNGRADES STATE OF CONNECTICUT GENERAL OBLIGATION BONDS TO Aa3 FROM Aa2 RATING AND ASSIGNS STABLE OUTLOOK
