Fitch Rates Connecticut's $555MM GO Bonds 'AA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings assigns an 'AA' rating to the following general obligation (GO) bonds of the State of Connecticut (the state):

--$212.4 million GO bonds (2012 series A) - SIFMA index bonds;
--$259.6 million GO bonds (2012 series B);
--$83 million taxable GO bonds (2012 series A).

The bonds are expected to sell via negotiated sale on April 12, 2012.

In addition, Fitch affirms the following outstanding ratings:

--Approximately $13.5 billion GO bonds and notes at 'AA'.

The Rating Outlook is Stable.

SECURITY

GO bonds to which the full faith and credit of the state will be pledged for payment of principal and interest.

KEY RATING DRIVERS

--HIGH WEALTH LEVELS: Connecticut is the nation's wealthiest state as measured by per capita personal income. Economic performance has stabilized following the recession, but the recovery has been slow and uneven.
--CONSERVATIVE FORECASTING: State finances are marked by conservatively forecast, though cyclical, revenue performance and persistent spending pressure, including for labor and Medicaid.
--SLOW RECOVERY DELAYING FISCAL IMPROVEMENT: The slow, uneven economic recovery is delaying the state's ability to recover quickly from the recession. The state's past practice has been to use revenue recovery to quickly repay recessionary budget borrowing and rebuild rainy day balances.
--HIGH DEBT: Tax-supported debt is high for a U.S. state. Most GO bonds, excluding GO bonds issued to fund the teachers' retirement system, amortize rapidly.
--SIGNIFICANT PENSION OBLIGATIONS: Unfunded liabilities for employees are significant, including for state employee and teacher pensions.

CREDIT PROFILE

The state's 'AA' GO rating reflects its vast wealth and income resources, tempered by a relatively high burden of debt and retirement liabilities. The slow and uneven pace of the economic recovery is affecting the pace of revenue growth and the state's ability to quickly recover from the downturn.

The enacted budget for the fiscal 2012-2013 biennium, which began July 1, 2011, incorporated tax rate increases, spending cuts and labor savings to achieve balance. After lowering its consensus revenue forecast in January 2012, the state is proposing additional mid-biennium adjustments to maintain budgetary balance and improve pension system funding.

Connecticut has a wealthy, diverse economy anchored by a large finance sector and important manufacturing, education and health sectors. The state entered the recession later than the U.S. as a whole, with employment growth stalling in 2008 before falling 4.3% in 2009 and 1.1% in 2010. Growth resumed in late 2010, although economic performance has been mixed since then. Employment rose 1% in 2011, and January 2012 employment rose 0.6% over January 2011, well below the 1.5% growth rate recorded nationally. Unemployment has fallen to 8% in January 2012, compared to a 9.3% rate reported one year ago. The state remains the wealthiest as measured by personal income per capita, at 137% of the national average in 2011. After falling sharply in the recession, personal income is rebounding, with the fourth quarter 2011 up 4.7% year-over-year.

Fiscal performance was strained through the recession, with the state relying on non-recurring resources to close persistent budgetary gaps, including borrowing $916 million in GO economic recovery notes (ERNs). The enacted budget for the fiscal 2012-2013 biennium anticipated modest revenue recovery, with surpluses directed toward repayment of ERNs and transitioning the state to GAAP budgeting. The adopted budget closed gaps of approximately $3 billion in each year, equivalent to 19.3% and 17% of baseline projected revenues, respectively. Projected gaps were addressed primarily through recurring actions, including new tax revenues ($1.5 billion annually), labor concessions ($1.6 billion through the biennium), and spending cuts ($758 million).

The slow pace of economic recovery and persistent spending needs have eroded forecast revenues and fund balances since budget adoption. The January 2012 consensus forecast lowered the general fund revenue outlook by $95 million in fiscal 2012 and $139 million in fiscal 2013. The governor's mid-biennium budget proposal, released in early February, assumes use of rescissions to maintain balance in fiscal 2012. Including $72 million in rescissions, the state budget office forecasted a fiscal 2012 ending budgetary balance of $35.9 million, below the $80.9 million level forecast at budget adoption and below the level targeted by the state as part of its multi-year plan to convert to GAAP-based budgeting. The governor's proposal also includes a net $314 million in fiscal 2013 spending adjustments, primarily consisting of accelerated pension contributions and targeted social service cuts. The proposal forecasts a fiscal 2013 budgetary ending balance of $51.6 million, well below the $488.5 million expected at budget adoption.

As of March 20, the state now forecasts a fiscal 2012 ending balance of $12.4 million on a budgetary basis and negative $62.6 million on a GAAP-basis. Revenue changes reflect stronger personal income and oil companies tax receipts offset by higher refunds. The revised figures also include $78.7 million in actual rescissions implemented by the governor, slightly higher than anticipated in the mid-biennium revision.

The state has a history of conservative revenue forecasting and accumulating excess revenues in its budget reserve fund (BRF). Prior to the onset of the downturn, the BRF balance had risen to $1.38 billion in fiscal 2007, equal to 8.5% of appropriations; the statutory maximum is 10%. The balance was fully drawn in the fiscal 2010-2011 biennium. Given planned application of any near-term surpluses to early repayment of ERNs, there are no planned BRF deposits through the biennium.

The state's fixed debt burden is high compared to other states, with net tax-supported debt as of February 2012 at almost $18.2 billion, or 8.9% of 2011 preliminary personal income. Three-quarters of net tax-supported debt is GO, a large share of which is issued for local school capital needs. Excluding $2.3 billion in GO pension bonds issued for the teachers' retirement fund (TRF), the debt burden falls to a still high 7.8% of personal income.

Funding levels for the state's major pension systems remain a concern. As of June 30, 2011, the state employees' retirement system (SERS) was funded at 47.9%, and the TRF was funded at 61.4%, 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 42.1% and 52.7%, respectively.

On a combined basis, the burden of net tax-supported debt and adjusted unfunded pension obligations equals 22.1% of 2011 preliminary personal income, well above the 6.6% median for U.S. states rated by Fitch. The state fully funds an actuarially required contribution (ARC) to TRF under a covenant linked to the POBs, and the SERS ARC is again fully funded in the budget. The governor's mid-biennium budget revision proposes increasing the state's contributions to SERS beyond the ARC to accelerate improvement to the funded ratio.

Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch'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. 15, 2011);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 15, 2011).

Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648897

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