Fitch Ratings has assigned an 'AA' rating to $250 million in State of Connecticut general obligation (GO) bonds, series 2008C. The bonds are expected to sell via negotiation the week of October 20, and will mature Nov. 1, 2009-2028. Early redemption provisions will be determined upon final sale. Fitch also affirms the 'AA' rating on approximately $12.1 billion in outstanding GO bonds. The Rating Outlook is Stable.
The state's 'AA' GO rating is based primarily on its fundamental wealth and economic resources. While debt levels are high, Connecticut ranks first among the states in per capita personal income, at 143% of the U.S. level in 2007. Revenues are now weakening, leading to a projected deficit in the current year. The state has responded with spending cuts to date; moreover the state's budget reserve balance is large, at 8.1% of general fund appropriations.
Connecticut's debt burden is high, with net tax-supported debt as of September 1 at $15.9 billion, or 8.2% of 2007 personal income. Excluding $2.3 billion in bonds issued earlier this year for the teachers' retirement fund (TRF), the net tax-supported debt burden falls to 7.1% of 2007 personal income. Debt is expected to remain high with $2.3 billion in additional transportation capital spending expected over 10 years. Funding levels for Connecticut's major pension systems have been a concern; the state employees' system was funded at 53% as of June 30, 2006, the last actuarial valuation. Deposit of bond proceeds to the TRF brings its funding level to 70%, based on the June 30, 2006 actuarial information.
The state had prudently rebuilt large reserves since their depletion in the last recession, a key credit consideration given the state's history of revenue volatility. After several years in which realized revenue gains exceeded conservative forecasts, actual revenue collections began underperforming late in fiscal year (FY) 2008. FY 2008 net tax collections of $12.5 billion were only 0.6% over budget; by contrast, FY 2007 was 5.8% over budget. FY 2008 ended with only a small surplus, and the budget reserve fund remained just under $1.4 billion, or 8.1% of general fund appropriations; the statutory target is 10%.
The FY 2009 budget, passed 16 months ago as part of the FY 2008-2009 biennium plan, was left unchanged last year by the legislature given the revenue weakness that emerged late in FY 2008. Since then, the FY 2009 revenue forecast has been lowered several times, most recently due to a weakening outlook for personal income tax collections. The state now expects net tax collections to rise only 0.4%, to $12.6 billion. A gap of $302 million is projected, or 1.8% of appropriations. As the revenue outlook has weakened, the governor has announced several rounds of administrative actions to reduce spending through spending rescissions. Additional balancing measures are expected in the coming weeks.
Connecticut's diverse and wealthy economy includes important manufacturing, finance and insurance sectors, as well as a growing tourist sector. Although Connecticut's economy is slowing in tandem with the nation's, weak growth continues. Employment rose 0.2% in Aug. 2008, compared to a decline of 0.3% nationally. Unemployment has risen to 6.5%, from 4.6% a year ago. Ongoing declines in manufacturing now have been joined by declines in construction and financial activities. Connecticut's large financial activities sector, with insurance concentration in Hartford and banking in Fairfield County, is a significant vulnerability to state economic and revenue performance given recent finance market volatility. Personal income in the second quarter of 2008 rose only 3.8%, versus 5.2% nationally.
Note: Fitch issued an exposure draft on July 31, 2008 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework'). At this time, Fitch is deferring its final determination on municipal recalibration. Fitch will continue to monitor market and credit conditions, and plans to revisit the recalibration in the first quarter of 2009.
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Contacts:
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Richard
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