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State's Credit Rating Downgraded

Moody's Move Blasted By Malloy Administration

By Christopher Keating

January 21, 2012

A key Wall Street rating agency downgraded the state's bonds Friday as Connecticut teeters toward a deficit in the current fiscal year.

Moody's Investors Service cited the state's high debt, racked up by substantial borrowing through the years, and depletion of the state's rainy-day fund for fiscal emergencies. Legislators drained the emergency fund to cover budget deficits during the deep recession that severely limited the state's tax collections.

A ratings downgrade can lead to higher borrowing costs when the state sells bonds, and officials said it can also send a bad signal to businesses considering relocating to Connecticut because corporate leaders might question the state's financial stability.

The downgrade, from Aa2 to Aa3, brought a sharp rebuke from Ben Barnes, the budget chief for Democratic Gov. Dannel P. Malloy.

"Moody's is wrong in its analysis of the state's finances, and wrong to change Connecticut's credit rating," Barnes said in a statement. "Connecticut has done all the right things to shore up our finances, and Moody's has responded with a downgrade intended to satisfy their internal corporate need to deflect attention from their historic lack of credibility."

"Connecticut has always paid its debt, and remains an attractive issuer of public debt. Investors appreciate Connecticut's strong income levels, conservative debt management practices, and fiscally conservative leadership."

Although Republicans have repeatedly blasted Malloy for enacting the largest tax increase in state history, the governor has said that he made difficult choices to right a sinking ship and put the state's fiscal house in order. That included walking through the political fire of tax increases.

Moody's says that the state's overall fiscal health has not improved because of huge pension and health care obligations for retired state employees. Republicans said the downgrade was a major wake-up call for Malloy and the Democratic-controlled legislature to cut spending in order to wrestle the state's fiscal problems to the ground.

House Republican leader Larry Cafero of Norwalk said that Moody's has been a well-respected, nationally recognized, honest broker in the financial world for many years, and that Barnes is a new budget chief who is "not qualified" to criticize the agency.

"Moody's doesn't have a political dog in this fight," Cafero told reporters in the state Capitol press room. "This isn't about appearances or P.R. They state the facts as they see them. ... Basically, what they're saying is Connecticut is doing worse than it was, and therefore our bond rating is downgraded. That's all you can say about it. You can make excuses. That's irrelevant. We have to deal with the issue."

Republicans said the state needs to cut spending, rather than trying to balance the budget with the tax increases enacted last year -- overall, the largest in state history. The legislature voted to approve Malloy's plans to increase the state income tax, along with the corporate profits, cigarette, and sales taxes, among others.

Malloy's senior adviser, Roy Occhiogrosso, said, "Those are ridiculous comments, even for Rep. Cafero. Unemployment is at its lowest point in more than two years, and is headed down. Gov. Malloy's first year in office resulted in the state experiencing net job growth for the first time in four years. And today [the Connecticut Business and Industry Association] suggested the economy could grow by 4 percent next year. Most of this is happening because the governor -- supported by some very courageous legislators -- had the guts to do what was necessary to stabilize the state's finances."

Occhiogrosso continued, "Moody's is looking backward, not forward, which is what they must've been doing when they gave AAA ratings to the subprime mortgages that led to the financial collapse in 2008."

Senate Republican leader John McKinney of Fairfield, like Cafero, questioned the Malloy administration's attack on the nonpartisan, independent ratings agency.

"Moody's downgrade is a fair and honest failing grade for the Malloy administration and Democrat legislators who have not made the necessary fiscal reforms Republicans have advocated," McKinney said. "It is also a rebuke of the failed concession package the governor agreed to with state employee unions, which will not yield the savings claimed by the administration and only further tie the state's hands until 2022. Finally, it is a failing grade for the Democratically controlled legislators who have refused all efforts to rein in the size and cost of government, address our long-term liabilities, and reform the lavish and unsustainable pension and health care benefits we provide our state employees."

"Secretary Barnes' flippant, if not slanderous, dismissal of the Moody's downgrade and the facts that led to it are equally troubling," McKinney said. Moody's is one of three major ratings agencies on Wall Street that set the standard for the strength of the state's bonds. During the gubernatorial race in June 2010, Fitch Ratings lowered the bond rating because the state, among other moves, had borrowed money for operating expenses -- an action frowned upon in the financial world. As a candidate at the time, Malloy blamed both Democrats and Republicans, saying that in his view the state's fiscal problems were a "bipartisan train wreck."

In the fourth quarter of 2011, Connecticut's tax collections were lower than expected -- partly because bonuses for the big players on Wall Street were lower than originally anticipated. As a result, Connecticut collected less in state income taxes than originally projected. Malloy has ordered Barnes to offer spending cuts to ensure that the state would finish the fiscal year in the black.

Previously, the state surplus was projected at about $83 million, but now the state is trying to avert a deficit for the fiscal year that ends June 30.

In his statement Friday, Barnes said: "Moody's lowered the rating for Connecticut below where it has been since April 2010 even though Connecticut's fiscal health has significantly improved during that period. Recall that in 2010 Connecticut faced looming multi-billion deficits into the future, had pension funding ratios in the low 40s, had spent the entire rainy day fund, and was in the middle of a series of budgetary gimmicks which Governor Malloy has spent his first year in office undoing."

Part of those changes will be the implementation of generally accepted accounting principles, known as GAAP, which has been highly touted but not fully implemented.

Barnes said: "Moody's Investor Service's decision today to lower their rating of Connecticut's general obligation debt from Aa2 (negative) to Aa3 (stable) is unfortunate. It reflects their continued reaction to their central involvement in the financial scandals that led to the deepest recession since the Great Depression. Coming on the eve of our budget release, without an imminent bond sale, suggests that the move is motivated by factors other than Connecticut's creditworthiness."

"Moody's, which receives approximately $170,000 per year in fees from the State for their bond rating services, is one of three agencies that rate Connecticut debt. The others, Standard & Poor's and Fitch, continue to rate Connecticut debt as AA (equivalent to Aa2 from Moody's.)"