Fiscal Guardrails Boost State’s Bond Rating

Citing Connecticut’s fiscal guardrails, two credit rating agencies this week upgraded the state’s general obligation bond ratings from “stable” to “positive.”

Moody’s Ratings and Fitch Ratings each pointed to the state’s strengthened fiscal health—a direct consequence of the 2017 budget reforms—in issuing the upgrades May 30.

Fitch said its revision reflected the view “that Connecticut is likely to see medium-term revenue growth at or slightly above Fitch’s long-term expectations for national inflation, while the state maintains its renewed commitment to budgetary guardrails that constrain expenditure growth.”

“Connecticut’s robust fiscal resilience is bolstered by statutory mechanisms supporting accumulation of reserves including setting aside in the budget reserve fund volatile revenue collections over specific thresholds and a required excess margin of revenues over budgeted spending,” the agency noted.

Moody’s said its upgrade “is driven by the state’s prudent financial policies that have led to increased budgetary reserves and consistent pension contributions that have begun moderating the state’s very high unfunded pension liabilities.”

“With continued adherence to these policies, the state is expected to maintain solid reserve levels and further reduce leverage metrics,” the agency said in a statement. 

Lower Costs

The ratings upgrades are significant, as they impact state borrowing costs.

When Moody’s upgraded Connecticut’s rating in 2021, that marked the first positive credit revision in 20 years, following two decades of fiscal instability and uncertainty.

Gov. Ned Lamont welcomed the latest upgrades, saying “investors are taking note of the significant progress Connecticut continues to make to grow our economy and reduce our fixed cost growth.”

CBIA’s Chris DiPentima said the upgrades “should serve as a cautionary note for those policymakers looking to weaken the fiscal guardrails.”

“Connecticut residents and businesses directly benefit from this improved outlook in the form of lowered borrowing costs,” he said in a statement.

CBIA president and CEO Chris DiPentima said the latest upgrades “should serve as a warning for those policymakers looking to weaken the fiscal guardrails.”

“Both Moody’s and Fitch made it very clear the important role that the fiscal guardrails played in their ratings decisions and the potential consequences for weakening those reforms,” he said.

Cautionary Notes

Both agencies issued cautionary notes with their ratings upgrades, noting the state’s long-term unfunded liabilities, ongoing moderate economic growth, and the consequences of diluting the fiscal guardrails.

“While Connecticut’s credit profile has continued to improve since the adoption of fiscal guardrails in 2018, liabilities remain high, resulting in high fixed costs that limit budget flexibility compared to state sector peers,” Moody’s noted.

“Connecticut’s positive outlook reflects the expectation that the state’s trend of positive financial performance will continue under its extended fiscal guardrail framework, enabling it to proactively  pay down its high pension liability.”

“Connecticut’s positive outlook reflects the expectation that the state’s trend of positive financial performance will continue under its extended fiscal guardrail framework.”

Moody’s Ratings

Fitch noted that Connecticut’s “long-term liability burden is elevated and among the highest for U.S. states.”

The agency cited two factors that could lead to a downgrade of the state’s credit rating, including “weakening of budget management policies and practices that materially amplifies structural challenges” and/or “actions that elevate the state’s liability burden.”

Factors that could lead to rating upgrades included “consistent economic or revenue growth at or above Fitch’s long-term expectations for national inflation, while the state maintains its renewed commitment to budgetary guardrails.”