Moody’s, Fitch Upgrade State’s Debt Ratings

Two leading Wall Street rating agencies this week upgraded Connecticut’s debt ratings, the latest reflection of the major impact of the 2018 bipartisan fiscal reforms on the state’s financial health.

Moody’s Investors Service upgraded Connecticut’s bond issuer rating to Aa2—its second highest ratings bracket—and revised its outlook for the state to stable from positive.

Moody’s also assigned Aa2 ratings to $1.4 billion in general obligation bonds the state plans on issuing Sept. 18.

“The Aa2 issuer rating reflects Connecticut’s reduced liabilities and fixed costs, resulting in part from the state’s commitment to numerous governance improvements, namely its fiscal guardrails originally put in place in 2018,” Moody’s noted in its Sept. 9 rating action notice.

“The strict adherence to adopted financial policies have also lead to consistent structural balance and continued improvement in budgetary reserves.”

Cautionary Warnings

Fitch Ratings upgraded Connecticut’s Long-Term Issuer Default Rating to AA, its second highest rating, and assigned a AA rating to the same set of general obligation bonds upgraded by Moody’s.

“Connecticut’s robust fiscal resilience is bolstered by statutory mechanisms supporting accumulation of reserves, including setting aside volatile revenue collections over specific thresholds in the budget reserve fund and a required excess annual margin of budgeted revenues over spending,” Fitch noted in a Sept. 10 rating action notice.

“Budget management features sophisticated fiscal monitoring and frequent revenue and budget forecasting, which allow the state to quickly identify budget underperformance and address emerging gaps.”

“Connecticut’s stable outlook reflects the expectation that the state will remain committed to the fiscal guardrails.”

Moody’s Investors Service

Both agencies issued cautionary warnings in their ratings notices, with Moody’s noting that “while reduced, liabilities remain high, resulting in high fixed costs that limit budget flexibility compared to state sector peers.”

“Connecticut’s stable outlook reflects the expectation that the state will remain committed to the fiscal guardrails in place, ensuring continued structural balance, healthy rainy day reserves, and aggressive pay-down of pension liabilities,” the agency noted.

Fitch noted that its ratings upgrade reflected the agency’s “expectation that the state will manage comparatively elevated pressure from long-term liabilities, carrying costs, and expenditure growth without eroding fiscal resilience.”

‘Resounding Endorsement’

Gov. Ned Lamont celebrated the ratings upgrades, telling reporters at a Sept. 10 press conference, “let there be no doubt that Connecticut is back.”

“This is the result of sound fiscal management, a growing trust in Connecticut by businesses and residents, which is reflected in our improved economic statistics, and a historic run in the stock market,” he said.

“If we continue the progress we have made, the state’s pension debt will be fully funded within a generation.”

CBIA president and CEO Chris DiPentima welcomed the upgrades, calling them “a resounding endorsement of the 2018 fiscal reforms and the legislature’s unanimous extension of the fiscal guardrails two years ago.”

CBIA’s Chris DiPentima welcomed the upgrades, calling them “a resounding endorsement of the 2018 fiscal reforms.”

DiPentima added that businesses were concerned with growing pressure from some lawmakers to weaken the fiscal guardrails and further boost state spending‚ already one of the highest per capita in the country.

He referenced this year’s state budget debate, when lawmakers used fiscal guardrail workarounds and over $357 million in business tax hikes to increase state spending by $2.6 billion over the next two years.

“What happened this year was alarming, with lawmakers diverting about $1.2 billion that would have flowed into paying down pension debt and continuing the remarkable progress we’ve made in recent years,” he said.

“Those who want to dismantle the guardrails must heed the ratings agencies’ warnings—Connecticut has a long way to go to fully restore its fiscal health and stability.”