Kroll Bond Rating Agency Assigns Long-Term AA Rating to the State of Connecticut

NEW YORK, March 29, 2012 /PRNewswire/ -- Kroll Bond Rating Agency (KBRA) has assigned a long-term rating of AA with a stable outlook to the State of Connecticut. The stable outlook reflects KBRA's expectation that Connecticut's economy will continue to improve slowly and its revenues will continue to increase.

The rating marks KBRA's first general obligation rating, and its entry into this market. In determining the rating, KBRA concluded that Connecticut's resource base is consistent with a AA rating. The State has a high income per capita and high GSP per capita relative to the region and the nation. Connecticut also has high levels of educational attainment and low levels of poverty. KBRA views the State's employment growth of 1% in 2011, as well as declining unemployment rates as positive. 

There is no current plan in place to restore financial reserves, however, which may limit flexibility and put pressure on financial operations. Connecticut also continues to carry relatively high levels of direct tax-supported debt, unfunded pension liabilities and post-employment liabilities. 

"We recognize that economic recovery in the U.S. as a whole is still fragile, but we also expect an ongoing commitment by the State's leadership to fiscal discipline and that budget adjustments will be made to maintain budgetary balance," said Jim Nadler, President, KBRA.

This AA rating is based on KBRA's U.S. State General Obligation Rating Methodology, published on March 28, 2012.  In the process of assigning the rating, KBRA reviewed multiple sources of information and met with State management.  

The report cites key rating strengths that factored into its report, including the following:

• Current leadership has demonstrated an ability and willingness to raise revenues and adjust expenditures.
• A strong financial management framework exists for tracking revenues and monitoring budget performance.
• The Biennial budget for FY 2012/ FY 2013 restores budgetary balance after several years of dependence on deficit financings and transfers from the Budget Reserve Fund.

However, several key ratings concerns cited include:

• Slower than expected economic recovery could impact revenue collection, threatening budget balance.
• Depletion of the Budget Reserve Fund over the last several years with no specific near-term plan to restore reserves, which will limit financial flexibility.
• Revenue base is volatile due to concentration in the financial services sector and progressive nature of the income tax structure.

"As Connecticut's economy recovers and revenues increase, the State's constitutional spending cap may work to generate surpluses which will then be used to fund the Budget Reserve Fund, pursuant to statute.  We will continue to monitor the impact of potential cuts in federal spending on the State's economy and revenue base," said Kate Hackett, Managing Director, KBRA.

Key Rating Determinants

1. Management Structure, Budgeting Practices and Policies
KBRA views Connecticut's management structure and policies as providing a very strong framework for managing its financial operations and debt issuance compared to other states.  The procedures for tracking revenues and monitoring budget performance are among the strongest in the country, requiring monthly estimations of revenues and projections on financial performance. The State's statutes allow for broad revenue raising ability. In addition, Connecticut has no constitutional limit on its power to incur debt and is not a voter initiative State.

2. Debt and Additional Continuing Obligations
KBRA views Connecticut's level of State tax-supported debt as high, relative to other States, both on a per capita and personal income basis. This level of debt could potentially reduce financial flexibility and impact the State's ability to continue to provide its high level of services.  When aggregate state and local debt is compared to other states, Connecticut's debt to personal income ranks 25th among states.  

3.  Financial Performance and Liquidity Position
KBRA views the financial condition of Connecticut as comparable to many other states in the aftermath of the economic recession.  Going forward, the financial operations of the State are expected to be tight, with ongoing stability dependent on continued economic recovery and the willingness of the State's leadership to raise revenues and cut expenditures as needed to maintain balanced operations.  The State's finances are considered weaker than average in that there is no current plan in place to restore financial reserves, which may limit flexibility and put pressure on financial operations.  KBRA views the State's liquidity position as strong.

4. State Resource Base
KBRA views the strength of Connecticut's economy as comparable to the U.S. economy as a whole. Connecticut is the wealthiest State in the nation as measured by per capita personal income, at 137% of the national average in 2010.  The State has a well educated population and low levels of poverty.  Connecticut entered the latest recession approximately three months after the rest of the U.S. and is recovering at a slower pace than the nation.

You can read the full report here: http://www.krollbondratings.com/show_report/77

About Kroll Bond Rating Agency
Kroll Bond Rating Agency, Inc. (www.krollbondratings.com) is registered with the SEC as a nationally recognized statistical rating organization (NRSRO). Kroll Bond Rating Agency was established in 2010 to restore trust in credit ratings by establishing new standards for assessing risk and by offering accurate, clear, and transparent ratings.

SOURCE Kroll Bond Ratings