Connecticut's Fiscal Forecast Is More Rainy Days as Revenue Lagsby
State projects $259 million deficit for year that ends June 30
Connecticut's budget reserve funds below average, Moody's says
Connecticut, the wealthiest U.S. state, is cash poor.
The home to hedge funds, insurers and United Technologies Corp. said this month it faces a $259 million general-fund deficit in the year ending June 30, almost double what it forecast in late April, after August’s stock market crash caused income-tax collections to trail forecasts. With little room to maneuver, state officials, credit rating companies and bond investors predict Connecticut will have to dip into its $406 million rainy-day fund for the second year in a row.
It may not be the last time. Though Governor Dannel Malloy and lawmakers came to an agreement on how to close a nearly $1 billion hole in the 2017 budget, and may pass the revised spending plan as soon as this week, the state has persistently missed revenue forecasts, triggering layoffs and spending cuts. Moody’s Investors Service dropped the outlook on the state to negative in March after years of slow wage growth and the loss of residents to other states -- trends Malloy calls “Connecticut’s new economic reality.”
“The difficulties there are likely to get worse over the next two years,” said Tom McLoughlin, head of municipal research in New York at UBS Wealth Management Americas, which oversees about $85 billion of the debt. He expects Connecticut’s bond prices to weaken, relative to other states. “When we have the next recession, whenever that is, the problems that they’re looking at today are only going to get worse.”
Connecticut is the wealthiest U.S. state as measured by per-capita income, home to finance professionals who commute to New York. That makes its tax collections sensitive to market swings as revenue from capital gains falls. It’s also the most-indebted, with $6,155 of obligations per resident, according to Moody’s. And its pension fund has only 50.4 percent of assets needed to pay future liabilities, the third worst among U.S. states, though it’s making its annual contributions in full to catch up.
A Bloomberg index of 10-year Connecticut general-obligation bonds shows investors are demanding an extra 0.6 percentage point of yield to own the state’s debt rather than top-rated munis. That’s not far from a record-high 0.65 percentage point in March, when Connecticut issued debt for a yield 2.52 percent.
With little latitude to reduce debt-service and pension-contribution costs, the state has turned to layoffs as a way to offset the revenue shortfalls. More than 700 employees have lost their jobs this year from departments like human services, corrections and even the judicial branch, according to Ben Barnes, secretary of the Office of Policy and Management. More are on the way, he said.
After raising taxes in previous years, Malloy sought to balance next year’s budget solely with spending reductions. He’s even scaling back plans to ramp up transportation investments, one of the Democrat’s top priorities in his second term.
While the state won’t yet use the rainy-day fund to close next year’s shortfall, it likely will for the year ending June 30, Barnes said.
“The purpose of the rainy-day fund is exactly this -- when tax revenues come in unexpectedly short late in the year, you have very few choices and you need to have reserves available,” Barnes said in a telephone interview. “Depending on how revenue develops over the next year, we may have a similar problem next year that we have to address as well.”
Investors in the $3.7 trillion municipal market, particularly those in Connecticut, are more willing to look past the state’s deficits because of the tax-free yields and the lack of alternatives, said Craig Brandon at Eaton Vance Management. States and cities across the U.S. have been loathe to borrow more for new projects, instead opting to refinance, which is limiting the supply of debt.
“Everyone in the market is aware of the budget problems when they trade,” said Brandon, who oversees $32.5 billion as co-director of municipal investments in Boston. When it comes to borrowing costs, Connecticut officials “are lucky that they’re a high wealth state and there aren’t a lot of bonds around.”
High-paying jobs haven’t returned to Connecticut as quickly as expected since the end of the recession in June 2009, said Anne Cosgrove at Moody’s. Average wage growth from 2011 to 2015 was 5.6 percent, about one-third of the pace in the years before the financial crisis, she said in a telephone interview.
The number of jobs in finance, insurance, real estate and related fields has slumped to 130,800, or about 10 percent lower than the pre-recession peak. In January, General Electric Co., which had been headquartered in suburban Fairfield since 1974, delivered a blow to the state by deciding to relocate to Boston.
Connecticut home prices are down about 5 percent since the end of the recession, the biggest drop nationwide. It’s just one of six states with a decline over the period, according to data from the Federal Housing Finance Agency.
The state is also seeing an exodus. Its population fell by about 6,000 people as of July 2015 compared with a year earlier, to 3.59 million, Census Bureau estimates show.
Connecticut “is a leaky boat, but the question is how fast is the boat taking on water?” said Adam Stern, director of muni research in Boston at Breckinridge Capital Advisors, which oversees $22.5 billion in munis. “The payroll growth trend, the home price trend, the outmigration trend, what we see there is the same slow weakening pattern.”