Doing business in Connecticut may soon become more expensive after state bonds received poor marks from Wall Street.
Moody’s Investor Service, one of the three major credit rating agencies, announced Friday that it had downgraded its rating of Connecticut’s $14.6 billion in outstanding bonds from Aa2 to Aa3, citing an unbalanced budget and the state’s lack of a “rainy day fund” in case of emergency. As the state faces a growing deficit despite implementing the largest tax increase in its history in May, the downgrade may slow the state’s economic growth by increasing interest rates and thereby borrowing costs.
“The [general fund balance remains] deeply negative … due to decades-old liabilities that have never been repaid,” Moody’s wrote in a Jan. 20 press release. “Over the course of the recent recession, Connecticut depleted its [reserve fund] and issued deficit bonds to fill budget gaps.”
Moody’s key criticisms include Connecticut’s high expenditures on post-employment benefits for state workers including pensions, its vulnerability to financial market fluctuations and its weak balance sheet with low, debt-ridden funds.
Ward 7 Alderman Doug Hausladen ’04 said the entire state will likely experience repercussions as a result of the downgrade.
“[New Haven] has seen a lot of education, transportation and infrastructure projects,” Hausladen said. “[But with the downgrade], it’s going to cost more to do business [and it] decreases the amount of capital projects that we can afford.”
The Moody’s downgrade may have occurred because of the aftereffects of the 2008 economic recession that Gov. Dannel Malloy inherited when he took office last year, Hausladen said, adding that he is “extremely impressed and supportive” of Malloy’s management of the economy thus far.
City Hall spokeswoman Elizabeth Benton ’04 said Malloy has been supportive of New Haven’s economic growth.
“Gov. Malloy and the state legislature were very good to cities [in the state’s biannual budget released last year], which allowed us to balance our budget and do things we care about here in New Haven,” she said.
Hausladen said New Haven will likely suffer less severely than the rest of the state from the downgrade because it has already completed major state-funded projects, and the city is an important component in Malloy’s attempts to enhance tourism in the state and curb its “brain drain.” Still, New Haven officials said they are optimistic that the city will escape the worst of the downgrade’s consequences.
Ben Barnes, secretary of Connecticut’s Office of Policy and Management, delivered a scathing criticism of Moody’s in a Jan. 20 press release.
“Moody’s is wrong in its analysis of the state’s finances, and wrong to change Connecticut’s credit rating,” Barnes wrote. “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.”
Despite the downgrade, Moody’s simultaneously revised the outlook for the state from “negative” to “stable,” acknowledging “the positive steps the state is taking to address its long-standing balance sheet weakness.”
Moody’s said it expects that Connecticut’s revenue trends will improve as it emerges from the recession, and expressed confidence “that the state will maintain its new commitment to structural budget balance and replenish its rainy day fund over time.”
Moody’s also promised a new valuation as the state continues to reduce spending on post-employment benefits and rebuild its funds.
The Aa category, which includes the Aa2 and Aa3 ratings, is defined by Moody’s as “obligations judged to be of high quality and subject to very low credit risk.” The other two major credit rating agencies, Standard & Poor’s and Fitch, rate Connecticut bonds as AA, equivalent to Aa2 from Moody’s.