Connecticut officials took a victory lap when Moody’s Investors Service issued the state’s first bond rating
Moody’s, whose upgrade affects $16 billion of debt, cited Connecticut’s buildup of reserves to its legal maximum of 15% of general fund spending, or $3.1 billion. The state, by contrast, ended fiscal 2017 with only $213 million. It also received across-the-board downgrades that year.
The state automatically deposits budget surpluses to its stabilization, or rainy day fund. In addition, under a so-called volatility agreement that functions as a secondary savings program, redirects to the reserve account quarterly tax receipts tied to investment earnings.
“It helps deal with the volatility by putting away money for use during rainy times,” said Howard Cure, director of municipal bond research for Evercore Wealth Management. Stock-market gains have also been a plus. “The state has a pretty significant amount of people working in the financial sector.”
Revenue fluctuations from Connecticut’s progressive income tax also make reserves more important.
The General Assembly’s nonpartisan Office of Fiscal Analysis on March 24 projected a volatility adjustment transfer of $555 million. Lawmakers enacted the adjustment with the fiscal 2017 budget.
“That’s helped,” Cure said. “Massachusetts has done it for years. California has done it and it’s helped them.”
In 2017, Connecticut’s Senate was split 18-18 between Democrats and Republicans. Bipartisanship helped at the time, said Rep. Holly Cheeseman, R-East Lyme, the ranking member of the General Assembly’s finance, revenue and bonding committee.
“We finally had a constitutional spending cap,” she said at a committee hearing on April 5. “We finally had a bonding cap, and look where we are with a record rainy day fund to allow us to address the pandemic.”
Democrats now hold advantages of 24-12 in the Senate and 96-53 in the House of Representatives, with two vacancies. Third-year Gov. Ned Lamont is also a Democrat.
The upgrade from Moody’s also affects $1.7 billion of University of Connecticut bonds and roughly $6 billion of special tax obligation bonds issued for transportation purposes — both also to Aa3 from A1. Moody’s also upgraded other state-backed bonds that quasi-public agencies issue.
State Treasurer Shawn Wooden said more upgrades could follow. State officials are preparing to sell up to $800 million of GO bonds in May and June.
S&P Global Ratings and Fitch Ratings rate the state’s GOs A and A-plus, respectively. Kroll Bond Rating Agency rates them AA-minus. All, including Moody’s, assign stable outlooks.
Connecticut is still below the Moody's median state rating of Aa1. Moody’s cited debt and retiree benefit liabilities, both among the nation’s highest.
While Connecticut has drawn criticism for its high debt, Cure sees some mitigating factors. For example, the state pays for K-12 school construction and has assumed many county functions from transportation to criminal justice since the General Assembly abolished county governments in 1960.
Connecticut also covers teacher pension costs. “That is going to be hanging around them for a long time,” Cure said, adding that since the state has maxed out on its budget reserves, it could redirect some funding toward teacher pensions.
Think tank Volcker Alliance assigned Connecticut a D, its second-lowest mark, in legacy costs. They include public worker pensions and other postemployment benefits, primarily healthcare. Connecticut finances OPEB on a pay-as-you-go basis rather than making actuarially determined contributions to finance benefits.
Volcker Alliance cited a 2019 pension funding level of 46%, 25 percentage points below the 50-state total. “Only Illinois, Kentucky, and New Jersey had lower funding levels,” the organization said.
By contrast, it graded Connecticut A for budget forecasting procedures for fiscal 2015 to 2019, one of only 10 states to earn the top mark. The state’s consensus revenue estimating process requires the governor and legislature to agree on projections and reasoning each November, with updates, if necessary, in January and April.
“Connecticut also provides revenue and expenditure projections for three years beyond the current budget, a best practice,” the organization said.
The state still has a lot on its plate beyond COVID-19 management and Lamont's $46 biennial
Factors that could benefit the state are pandemic-related work-at-home dynamics, a returning desire for suburban living and prospects of a continued exodus from New York State, which just raised taxes on corporations and its wealthiest residents.
Transportation funding remains a sticking point. Lamont, whose calls to revive highway tolling have stalled, instead proposed in his budget for a mileage-based fee on tractor trailers, akin to New York and Oregon.
Many workers in New York’s financial district commute from Connecticut.
“After years of pretty lackluster demand for property, there’s more of an increase in demand for property, certainly around New York,” Cure said. “Connecticut’s a wealthy state and wealthier people have done better during the coronavirus. People have been able to do their jobs away from the office.”
The nonpartisan New York City Independent Budget Office has
Though Connecticut is the nation’s wealthiest state with per-capita income of roughly 140% of the U.S. average, “they still have pretty significant urban problems,” Cure said. “Overall, though, the state has been pretty paternal toward its cities.”
He cited the state’s
In addition, a
Connecticut, long a triangle of conflict among cities, suburbs and rural areas, remains a divided state. “Surely we can all agree that there are steps we can take as a state without getting caught up in ‘it’s city vs. suburbs,’” Cheeseman said.
State officials and lawmakers must work through these conflicts, said state Sen. John Fonfara, D-Hartford.
“I don’t expect that all of a sudden we’re going to have this unanimity of thought regarding the issues that urban Connecticut faces and some rural towns face, and by the way, an increasing number of suburban towns that are adjacent to [cities] if we open our eyes and really look at it.”
