Connecticut’s Budget Fix Does Little to Appease Muni Bond Buyers

Updated on
  • Premium hovering near record high before latest bond sale
  • Loss of ‘foundational momentum’ from financial sector: Moody’s

Bond investors aren’t taking much comfort in Connecticut’s most recent efforts to bridge its budget gap.

Buyers are demanding an almost record high yield premium to hold securities issued by the country’s wealthiest state as it prepares to sell $500 million of general-obligation bonds Wednesday. The offering is the first since lawmakers shrunk the deficit for the fiscal year that ended on June 30 with last-minute cost cutting and the proceeds from federal grants as tax-revenue collections continued to fall short of expectations.

In May, S&P Global Ratings and Fitch Ratings both downgraded Connecticut by one level to AA-, each company’s fourth-highest investment grade rank as the deficit swelled. The credit arbiters cited persistent revenue shortfalls that have drained reserves and left the Constitution State vulnerable to economic downturns.

Connecticut’s bonds yield about 0.63 percentage point more than 10-year benchmark securities, compared to an average spread of 0.45 percentage point over the past two year, data compiled by Bloomberg show. That’s the highest premium among U.S. states besides Illinois, New Jersey and Pennsylvania.

Connecticut has been slow to recover from the loss of high-paying jobs related to financial services since the 2008 recession. At the same time, weakening demographics have dampened Connecticut’s income, as recent population losses have amounted to a substantial loss in tax receipts. Such trends have strained the state’s budget, and with little flexibility due to high fixed costs, Connecticut will have to dip into its $406 million rainy day fund for the second year in a row, leaving what become known as the hedge-fund state with little cash to spare.

The slow recovery in the financial sector is a "loss of foundational momentum," according to Moody’s Investors Service senior analyst Marcia Van Wagner, who rates the state’s general obligations Aa3, with a negative outlook. Since the downturn, the sector had seen seven consecutive years of job losses in Connecticut until seeing some growth in 2013.

State officials anticipate strong demand for the bond issue. “Investing in Connecticut remains appealing to many investors who are committed to helping the state’s economy grow,” Treasurer Denise Nappier said in a statement.

As a result of the lack of growth in high-paying jobs, Connecticut’s revenues have been "disappointing," Van Wagner said. With General Electric Co. deciding to move its suburban Connecticut-based headquarters to Boston earlier this year, "They don’t have a growth engine at the moment," she said.

Revenue pressure has also proven a headwind to Connecticut’s pensions, as their unfunded liabilities and debt outstanding are among the highest, relative to revenue, in the country, according to S&P. The two biggest pension plans, for its state employees and teachers, have a combined unfunded liability of almost $26 billion, according to Boston College’s Center for Retirement Research.