Moody’s Downgrade Reveals State’s Challenge

01.20.2012
Issues & Policies

Moody’s Investor Service today downgraded Connecticut’s bond ratings but also acknowledged the state’s efforts to address its fiscal problems.
The Moody’s ratings report is a clear signal that more work has to be done to get our fiscal house in order, even as Connecticut begins to make progress.
We should be more aggressive than ever, for example, in ‘leaning’ state government to deliver services more effectively, avoiding economy-dampening tax increases, keeping state spending within taxpayers’ means, and dealing with our long-term liabilities.
Moody’s downgraded Connecticut’s general obligation bond rating to Aa3 from Aa2 chiefly because of the state’s significant long-term debt obligations and inadequate funding of them. It also downgraded the state’s general fund obligations to A1 from Aa3.
Lower bond ratings will make it more expensive for the state to borrow funds. 
Still, Moody’s believes the state’s overall fiscal outlook has changed from “negative” to “stable.”  
It hailed 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” as reasons for the improved outlook.
Holding us back, however, is the state’s persistently low funding ratio for pension systems. Funded ratios for the state employee retirement system and teachers’ retirement system were an inadequate 44% and 61%, respectively (as of June 30, 2010) says Moody’s.
The agency doesn’t see those percentages improving significantly “until closer to the end of the remaining amortization periods”—21 years for the state employees and 25 years for teachers, says Moody’s.
If so, that’s a tough forecast, especially with Connecticut’s economy still in a slow recoveryand in the face of recordstate tax increases in the current state budget.
Of course, things could change. Moody’s outlines several actions Connecticut can take to move its ratings up, including replenishing the Rainy Day Fund, using GAAP, keeping the state budget structurally balanced, and more robustly funding of our long-term obligations.
Obviously, the strength of Connecticut’s economic recovery remains the big X factor. Moody’s is counting on the state’s economy ultimately to improve.
Yet earlier this week, budget director Ben Barnes cautioned that weaker tax revenues could mean state budget deficits in this fiscal year and next, instead of projected surpluses. And the biennial budget must still realize millions in unspecified savings to make ends meet.
Nobody likes to see ratings downgrades, but in this case it comes with both encouragement and caution. It is up to state policymakers to heed the messages and make the best of both.

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