Tuesday, October 27, 2009

Surfing The Slippery Slope: Moody Downgrades Connecticut’s Bonds


Moody's Investors Service has revised its outlook on the State of Connecticut's general obligation bonds from stable to negative.

Moody justified the rating change on Connecticut’s economic future for a number of reasons that should not surprise people familiar with the recent budget battle between Gov. Jodi Rell and a Democratic controlled legislature that was unwilling to made hard choices involving budget cuts and spending allocations.

“The negative outlook reflects the choices made to address the state's biennial 2010-2011 budget gaps as well as the shortfall for fiscal 2009,” Moody reported “including a majority of non-recurring solutions and deficit financing, combined with a credit profile that includes significant long-term liabilities.”

The report should be taken as gun at the temple of legislators who may still believe the state’s budget deficit can be resolved by a series of easy choices and short term fixes. You cannot bond your way out of debt, Moody warned, and when the debt collector comes knocking, he will be demanding payment in real coin, not promissory notes from a highly politicized federal government, itself deeply in debt.

“Connecticut plans to issue $947 million in deficit bonds to resolve the budget shortfall that emerged in fiscal year 2009, and the biennial budget includes $1.3 billion from a fiscal year 2011 securitization of a yet-to-be-determined revenue stream. In addition, the state has budgeted to deplete its Budget Reserve Fund (BRF) by the end of the biennium and, as in most states, to use one-time federal stimulus funds for ongoing needs.”

And, Moody’s advises, you can’t fix long term problems with temporary solutions. To be sure, part of the budget fixed part of the problem: “However, Connecticut used one-time solutions to close slightly over half of the shortfall. These solutions create future structural budget gaps and leave the state with significantly reduced flexibility to address additional fiscal pressures that may arise due to a delayed and/or weaker than expected recovery from the worst economic recession since the depression.”

No more kicking the payment due bill down the street, if you please: “In addition, the state's GAAP-basis general fund balance sheet will weaken as the BRF is depleted due to the already sizeable unreserved, undesignated fund balance that the state has carried since the early 1990s, largely reflecting an accrued liability that has never been repaid.”
And if all this were not bad enough, Connecticut’s debt ratios are “among the highest in the nation;” the state’s pension funding levels were the “lowest in the nation in 2008” before the market took a nose dive; and the state’s “post employment benefit liabilities are larger than the size of the state's annual operating budget.”

In the last fitful budget session, Democrats finally, after much palavering with the governor, were able to realize their long deferred dream of a progressive income tax that would tap into the assets of mini-millionaires, thus relieving them of the necessity of prudent spending cuts.

Moody’s reduced rating level recognizes that “as the wealthiest state in the nation, Connecticut is more dependent than most states on high income earners. Thus, continued uncertainty in the recovery of the financial markets has an exaggerated impact on the state's personal income tax receipts which account for almost half of the general fund's resources.”

The good news is that as the nation recover from its deep recession, Moody expects the state’s depleted treasury to increase. As the post recession rising tide lifts Connecticut’s yachts, Moody expects the governor and the legislature to use recovering funds “for the early retirement of the 2009 economic recovery notes (deficit bonds) and to begin rebuilding the BRF.” There is discouraging fine print even in Moody’s partially positive assessment: “However, given the magnitude of the recent one-time actions taken to balance the budget, Connecticut will likely struggle more than other states in the near term to achieve structural budget balance, especially once the federal stimulus funds are no longer available.”

Those of us who have long been crying “wolf!” when the wolf was at the door may view Moody’s candid assessment of Connecticut’s destructive legislative session as a further warning that may possibly be heeded by the ostriches in the state’s Democratic controlled legislature - most especially legislative leaders Chris Donovan and Don Williams -- who have solved none of the state’s enduring problems.

But don’t bet the farm on it.
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