New York, May 15, 2017 -- Summary Rating Rationale
Moody's Investors Service has downgraded the rating of the state of Connecticut's general obligation debt to A1 from Aa3. Moody's has also downgraded to A1 from Aa3 outstanding ratings on special tax obligation senior and subordinate lien bonds. Bonds secured by state agreements to pay debt service with funds that are deemed appropriated, through a special capital reserve fund, the UCONN 2000 program or other state guarantee mechanisms, have also been downgraded to A1 from Aa3. State-supported child care revenue bonds requiring appropriation for debt service payments have been downgraded to A2 from A1. Moody's has affirmed the A1 rating on economic development bonds issued by the Connecticut Development Authority and the VMIG 1 on the state's General Obligation Bonds, 2016 Series C bonds. The outlook on Connecticut was revised to stable from negative.
The downgrades reflect continuing erosion of Connecticut's finances, evidenced by the pending elimination of its rainy day fund, growing budget gaps and rising debt levels. The pressures created by growing fixed costs, coupled with weak economic performance, are unlikely to relent and will raise the risk of credit-negative actions such as deficit borrowing or backloaded financings. The affirmation of the A1 Connecticut Development Authority's economic development bonds reflects a change in our assessment of the strength of the state's guarantee of the bonds.
The A1 GO rating reflects Connecticut's high income levels, strong governance, and adequate liquidity, offset by high fixed costs for debt service, pension, and post-employment benefits relative to the state's budget; unfunded pension liabilities and debt outstanding that are among the highest, relative to revenues, of any state in the country; and minimal reserve levels. The rating also reflects a lagging economy that is highly dependent on volatile revenue sources and three consecutive years of population loss. The A1 rating on bonds secured by a special capital reserve fund and similar structures reflects the very strong legal security, which does not require annual appropriation, and essentiality of projects financed, supporting a rating at the state level.
The A1 rating on senior and subordinate lien special tax obligation bonds reflects the strong legal covenants, including a two times additional bonds test and a combined senior and second lien debt service reserve funded at maximum aggregate annual debt service; the diversified stream of pledged revenues with some sensitivity to economic fluctuations; and satisfactory debt service coverage. Both economic and legal factors closely link the credit profile of the special transportation fund to the state general obligation profile.
The A2 rating on state-supported child care bonds reflects the requirement for annual appropriation for debt service. The VMIG-1 short-term rating on the state's 2016 Series C variable rate demand bonds reflects the credit quality of the Bank of America, N.A.(A1(cr)/P-1(cr)) as provider of liquidity support in the form of a standby bond purchase agreement (SBPA), the long-term rating of the bonds, and our assessment of the likelihood of an early termination or suspension of the SBPA without a final mandatory tender.
Connecticut's outlook is stable, reflecting the state's strong provisions to promote fiscal discipline, which pair redressing elements of its high leverage position and requiring GAAP-based budgeting.
Factors that Could Lead to an Upgrade
Achievement and maintenance of higher GAAP-basis combined available reserve levels
Established trend of structural budget balance
Evidence of sustained stronger economic performance
Reduced pension and debt leverage relative to Moody's 50-state medians, resulting in lower annual fixed costs
Factors that Could Lead to a Downgrade
Significant additional leverage, encompassing bonded debt, pension and OPEB obligations and negative unassigned GAAP balances
Rapid acceleration of revenue/economic/demographic weakness
Declining liquidity position
The state's general obligation bonds are secured by its full faith and credit pledge. The state's lease appropriation bonds are secured by general fund appropriation or by general funds that are deemed appropriated. The state's Special Tax Obligation bonds are secured by a pledge of taxes deposited in the Special Transportation Fund for payment of debt service on the bonds.
The State of Connecticut has a population of almost 3.6 million people. The state, located in the northeastern US, has a large and diverse economy with a gross state product of $253 billion. It is the wealthiest state in the country with per capita income of 143% of the US average.
The principal methodology used in the general obligation rating was US States Rating Methodology published in April 2013. The principal methodology used in the lease appropriation rating was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2016. The principal methodology used in the special tax rating was US Public Finance Special Tax Methodology published in January 2014. The additional methodology used in the short-term rating was Variable Rate Instruments Supported by Conditional Liquidity Facilities published in March 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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 have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
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Marcia Van Wagner
Moody's Investors Service, Inc.
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Moody's Investors Service, Inc.
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