Friday, June 04, 2010

Go Fitch, Or Are We Greece Yet?

Fitch rating service is one of those annoying organizations, as yet unsued by Attorney General Richard Blumenthal, that rates bonds, lowering the bonds for risky enterprises such as Greece, now kaput, and Connecticut, heavily in debt and unwilling to cut costs through reasonable measures.

Fitch has lowered Connecticut’s bond rating one level to AA.

This is why: Connecticut last year borrowed $947.6 million to cover a deficit. The state this year is borrowing $956 million to close a budget gap beginning July 1. Rather than cut costs, the state has fairly eliminated its rainy day fund and raised the top income tax rate for its residents when tax collections fell 15 percent in the year that ended June 30, 2009. Connecticut has $13.7 billons of bonds outstanding and is preparing to borrow $600 this month. Other rating agencies have lowered Connecticut’s rating, Standard & Poors to AA and Moody’s to Aa2.

The degraded rating, Fitch said, “reflects the state’s reduced financial flexibility, illustrated by its reliance on sizable debt issuances during the current biennium to close operating gaps in the context of already high liabilities.”

For the consequences of such borrowing and spending, see Greece, Portugal and Spain, all countries that spent heavily on social services and now find themselves broke and begging from more responsible Euro-nations such as Germany and England.

Are we Greece yet? Some gubernatorial aspirants think we are. Others running for governor think not.

An alert Republican candidate for state treasurer, Jeff Wright, cited Fitch’s downgrade as an example of a lack of leadership on the part of present State Treasurer Denise Nappier:

“Denise Nappier has been asleep and absent as Connecticut’s credit has crumbled. She has failed to keep the Legislature from racking up more needless debt on our state’s credit card. Where has Nappeir been as the red ink has risen to tsunami proportions?”
As the sole fiduciary and chief financial officer, Wright said in a press release, Nappier has the power and authority to reject harmful borrowing schemes:

“We need someone who understands you must cut spending and live within your means. Borrowing money through state bonds should only we used for items that have a long-term benefit for quality of life and Connecticut’s competitiveness.”
Responding to the downgrade, Nappier said, “No doubt, the next Governor and General Assembly will face an obviously difficult task as they will need to address large projected budget deficits for the next biennium. –However, I would counter that mitigating factors that will help the State meet these challenges include conservative revenue forecasting, the use of non-General Fund revenue to repay debt issued for the 2011 budget and an improving economy. Ultimately, the State will always take the appropriate steps to balance its budgets, because it must. With that said, today’s announcement by Fitch is a veritable caution sign about the perils of relying too heavily on debt to balance the budget. As my office follows through on the issuance of debt authorized by the Legislature, it is worth noting that our track record in driving down borrowing costs for new money and refinancing can help to alleviate budget pressures.”

Whatever detached and dangerously uninvolved politicians think, a hangman’s noose awaits the state at the end of this road if the state legislature and the governor yet to be elected do not – CUT SPENDING.

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