NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned 'AA' ratings to the following general obligation (GO) bonds of the state of Connecticut (the state):
--$237.87 million GO bonds (2011 series B);
--$89.045 million taxable GO bonds (2011 series B).
The bonds are expected to be sold via negotiated sale on or about May 13.
In addition, Fitch has affirmed the following outstanding ratings:
--$13.6 billion GO bonds at 'AA'.
The Rating Outlook is Stable.
RATING RATIONALE:
--Finances benefit from conservative revenue estimating, with surplus revenues during economic growth periods set aside for the rainy day fund or to repay past borrowing. Consistent with historical practice, the state managed recent revenue weakness primarily by relying on one-time resources, including deficit borrowing, depleting reserves, and federal aid.
--The state is the nation's wealthiest as measured by per capita personal income.
--Tax-supported debt levels are high compared to other states. Most GO bonds, excluding GO bonds issued to fund the teachers' retirement system, amortize rapidly.
--Unfunded liabilities for employees are significant, including for state employee and teacher pensions and for other post-employment benefits.
KEY RATING DRIVER:
--Ability to maintain budgetary balance given constrained fiscal flexibility and high liabilities.
SECURITY:
GO bonds to which the full faith and credit of the state will be pledged for payment of principal and interest.
CREDIT SUMMARY:
The state's 'AA' rating reflects its vast wealth and income resources, tempered by a relatively high burden of debt and retirement liabilities. The state faced significant recessionary fiscal challenges in recent years despite a demonstrated history of setting aside substantial budgetary reserves. Steep and persistent revenue underperformance and the resulting budgetary gaps were addressed in the current biennium, ending June 30, 2011, primarily through one-time resources, including depletion of budgetary reserves, federal funds, and borrowing. Economic growth is now reviving, leading to gradual improvement in tax revenue performance. However, the state faces the twin challenges of paying down borrowing tied to recent gap-closing plans even as it addresses a sizable structural budget gap in the biennium beginning July 1, 2011. The enacted budget for the fiscal 2012-2013 biennium achieves balance through a combination of tax revenue increases, spending cuts and yet-to-be-finalized labor concessions.
Severe recessionary conditions and the state's cyclical revenue streams, particularly the personal income tax, have weighed on fiscal performance over the last two biennia, despite the state's practice of accumulating excess revenues in the budget reserve fund (BRF). Prior to the onset of the downturn through fiscal 2007, the BRF balance had risen to $1.38 billion, equal to 8.5% of appropriations; the statutory maximum is 10%. Revenues slowed in fiscal 2008 and declined steadily through fiscal 2009, with fiscal 2009 state tax receipts falling 14.5%, to $10.7 billion. Balancing actions included transfers, spending cuts and use of federal stimulus, with a year-end, $947.6 million deficit closed through issuance of GO economic recovery notes (ERNs).
The fiscal 2010-2011 biennium enacted budget was balanced through reliance on one-time resources including a large planned securitization ($1.3 billion), federal stimulus ($1.4 billion) and depletion of the BRF balance. The budget also incorporated personal income and corporation tax rate increases and spending cuts. After enactment, persistent revenue weakness early in fiscal 2010 and higher spending needs, particularly for Medicaid, reopened large projected gaps. The state enacted broad, mid-biennium budget adjustments to close the gap, primarily spending cuts, transfers, and use of extended federal stimulus aid. Revenue stabilization late in fiscal 2010 resulted in a $449 million surplus balance at fiscal year-end, which was applied to reducing the fiscal 2011 gap (by $140 million) and the planned securitization (by $309 million, to $647 million). The securitization is to be supported by a non-general-fund utility assessment. Fiscal 2011 actual performance shows continued revenue improvement, with the state's comptroller forecasting a fiscal year-end fund balance of $510 million projected as of April 30, 2011. Future general fund surpluses through fiscal 2017 will be directed toward repayment of budgetary borrowing, delaying the state's ability to begin rebuilding the BRF balance.
The enacted budget for the fiscal 2012-2013 biennium closely follows the executive budget proposed by the governor. The executive budget identified gaps of approximately $3 billion in each year, equivalent to 19.3% and 17% of baseline projected revenues, respectively. Projected gaps were closed primarily through recurring actions, including new tax revenues ($1.5 billion annually), labor concessions ($1 billion), and spending cuts ($758 million). Tax revenue increases included a new, five-bracket personal income tax, extension of sales tax to a variety of services, and the extension of a temporary corporation income tax surcharge. Projected surpluses in fiscal 2012 ($369 million) and fiscal 2013 ($635 million) would be applied to reducing outstanding budgetary borrowing. Negotiations continue on achieving the labor savings target, with the enacted budget requiring any shortfall to be made up by additional measures. Moreover, several budget reforms included in the original budget package continue to be deliberated, including a requirement for legislative approval of labor agreements. The BRF is projected to remain unfunded through the biennium.
The state's fixed debt burden is high compared to other states, with net tax-supported debt as of Feb. 1, 2011 at $18.7 billion, or 9.6% of 2010 personal income. Three-quarters of net tax-supported debt is GO, a large share of which is issued for local schools; excluding $2.3 billion in GO pension bonds issued for the teachers' retirement fund (TRF), the debt burden falls to a still high 8.4% of personal income. Funding levels for the state's major pension systems remain a concern. As of June 30, 2010, the state employees' retirement system (SERS) was funded at 44%, and the TRF was funded at 61%, with the latter having benefited from the 2008 issuance of pension bonds. Using Fitch's more conservative 7% investment return assumption (instead of the 8.25% rate assumed by SERS and the 8.5% rate assumed by TRF) reduces funding levels to 39% and 53%, respectively. The state now fully funds an actuarially required contribution (ARC) to TRF under a covenant linked to the pension bonds. Full ARC funding for SERS will resume in fiscal 2012 after three years of underfunding.
The state has a wealthy, diverse economy. After broad recession-related weakness during the last three years, economic performance is beginning to improve. Although the state entered recession later than the U.S. as a whole, employment growth stalled in 2008 before falling 4.3% in 2009 and 1.1% in 2010. March 2011 employment rose 1.7% over March 2010, higher than the 1% growth recorded nationally. Growth was reported across most major sectors, notably excluding government employment. Unemployment remains elevated, at 9.1% in March 2011 compared to 8.8% nationally. The state remains the wealthiest as measured by personal income per capita, at 138% of the national average in 2010. After falling sharply in the recession, personal income is rebounding, with the fourth quarter 2010 up 3.4% year-over-year, matching the 3.4% gain nationally.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the U.S. Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 16, 2010);
--'U.S. State Government Tax-Supported Rating Criteria' (Oct. 8, 2010).
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'
Applicable Criteria and Related Research:
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564546
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
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