After the largest tax increase in Connecticut state history, a key Wall Street rating agency downgraded the state's bonds Friday as the state is teeter-tottering toward a deficit in the current fiscal year.
The Moody's Investors Service rating agency cited the state's high debt that was racked up by huge amounts of borrowing through the years, as well as the complete depletion of the state's "rainy day fund'' for fiscal emergencies. The state lacks a financial cushion because legislators drained the entire emergency fund to cover budget shortfalls during the recession that became worse with the collapse of the Lehman Brothers investment bank and the resulting downturn on Wall Street.
A ratings downgrade can lead to higher borrowing costs when the state sells bonds, and officials said it can also be a bad signal to businesses seeking to relocate to Connecticut because corporate leaders might question the state's financial stability.
The downgrade prompted 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.''
But 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, adding that Barnes is a new budget chief who is "not qualified'' to make the statements criticizing the agency.
"Moody's doesn't have a political dog in this fight,'' Cafero told reporters in the state Capitol press room early Friday afternoon. He added that the statements by Barnes were "very defensive.''
Cafero said that Malloy took over as governor "and painted a picture that he came in as the white knight on the white horse'' to ensure that "the crisis was averted'' in the state budget. He also compared Malloy to the embattled captain of the huge cruise ship that recently ran aground off the coast of Italy.
"He said, 'No, we're not sinking. We just have a blackout,' '' Cafero said, referring to the captain. "P.S. We're sinking. Do something. ... Did you see that headline? Chicken of the sea.''
Republicans said the state needed to cut spending, rather than trying to balance the budget with the largest tax increase in state history. The Democratic-controlled legislature voted to approve Malloy's plans to increase the state income tax, along with the corporate profits tax, cigarette tax, and other levies.
"You cannot get fiscal stability when your only tool is tax increases,'' Cafero told reporters. "It's too volatile. There's no way to predict them. ... He took a gamble. Thus far, it seems it's not working.''
Cafero said that Malloy is scrambling for revenues that are not directly related to raising taxes. Those include a plan to legalize the sale of alcohol on Sundays at package stores and supermarkets, as well as increasing the closing hour to 10 p.m. for package stores and 2 a.m. for bars.
"The governor's affection for online gaming, Sunday sales, extended hours all came in the month of January,'' Cafero said. "I think he's looking at some revenue. He realizes that he needs revenue because what he predicted with his tax increases isn't coming in.''
The news richocheted quickly throughout Wall Street and the financial world with articles by The Wall Street Journal online and by The Bond Buyer, an influential financial publication for insiders. The news was also carried by publications like The Hartford Business Journal and The Courant.
Cafero discussed the issue during a live radio interview with former Gov. John G. Rowland on WTIC-AM on Friday afternoon.
"When you attack the integrity of the rating agency, that is like the worst of the worst of the worst thing to do,'' Rowland said, adding that the criticism was "infantile'' and "sophomoric.''
"How about their bravado, Larry?'' Rowland asked. "Unbelievable, isn't it?''
Republicans rejected the statements on Moody's by the Malloy administration, releasing quotes from newspaper articles when Malloy was the mayor of Stamford as he touted his hometown's high ratings by Moody's at the time.
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 CBIA 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.
"As for Rep. Cafero, he sat idly and voted for budgets year after year in which money was borrowed to pay for operating expenses, and that pawned off the state’s obligations on future taxpayers,'' said Occhiogrosso, who has tangled with Cafero on multiple issues over the past year. "This governor’s been warning Connecticut about budget problems since he was a candidate, and since becoming governor he’s faced those problems head on. Unlike his predecessors, Gov. Malloy’s played no gimmicks whatsoever with the state’s finances. None. Thanks to Gov. Malloy the state is keeping its books honestly, for the first time ever, and meeting its obligations completely – you know, the obligations Gov. Malloy inherited from Rep. Cafero and the past two Republican governors.''
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.''
He noted that many states, not just Connecticut, had fiscal problems as revenues dropped sharply during the recession. Since the bottom of the recession, some states have recovered better than others.
The reasons, as outlined in the Moody's report, are often detailed and dense.
"The rating downgrade is based on Connecticut's high combined fixed costs for debt service and post-employment benefits relative to the state's budget; pension funded ratios that are among the lowest in the country and likely to remain well below average; and depleted reserves with slim prospects for near-term replenishment,'' the report said. "Connecticut's state employees retirement system (SERS) and teachers retirement system (TRS) had funded ratios of 44% and 61%, respectively, as of June 30, 2010. The state has committed to paying the full actuarially determined annual required contribution (ARC) for both systems, and some pension and healthcare reforms were achieved in last year's round of union negotiations. A new valuation is expected to be published soon incorporating the reform measures. However, funded ratios are not likely to improve significantly until closer to the end of the remaining amortization periods -- 21 years for SERS and 25 years for TRS. Connecticut's combined fixed costs for debt service, pension, and other post employment benefits (OPEB) are already high and, absent significant further reforms, will continue to consume an increasingly larger portion of the state's budget.''
In the same way as Cafero, Senate Republican leader John McKinney of Fairfield 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 reign in the size and cost of government, address our long-term liabilities, and reform the lavish and unsustainable pension and healthcare 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 continued. "Secretary Barnes should immediately back up his unsubstantiated claims or retract them. Otherwise, see this rating for what it is: a stinging indictment of the governor's failure to address real pension reform and clear evidence that the state has not done enough to stem the flow of red ink and secure its economic future.”
In his earlier statement, Barnes continued, "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.
"Today, we have a structurally balanced budget, have converted to GAAP, have fully funded our current pension obligations and seen their funding ratio rise, have negotiated significant pension benefit concessions from organized labor, have negotiated significant employee contributions to retiree health benefits, and have begun to add jobs to the state economy.
"Moody’s Investor Service 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.)"
State Treasurer Denise Nappier said, “The decision is certainly disappointing, but not totally unexpected given the negative outlook placed on the State’s rating by Moody’s last June. In many ways, Moody’s action is going in the wrong direction, particularly since Connecticut has made tough decisions to bring structural balance to its operating budget and set in motion a clear path to improve financial stability. Despite these steps forward, this rating agency appears to be judging the state’s creditworthiness through the rearview mirror.”
Nappier said in a statement that Moody’s offered "scant consideration'' concerning the state's planned switch to generally accepted accounting principles, known as GAAP, and the state's plans in the future to get its arms around significant long-term liabilities.
She added, “This change to our credit rating will not deter us from our goals of working to
bolster the fiscal strength of Connecticut and funding our long-term liabilities. We will continue to manage the State’s debt, cash, and pension assets in a fiscally sound manner, and remain actively engaged with each of the credit rating agencies to ensure that the State’s strengths are given appropriate consideration in their analysis.”