Connecticut's outstanding special tax obligation bonds received a one-notch downgrade from Fitch Rating Friday, to AA-minus from AA
Fitch cited its revised U.S. tax-supported rating criteria for the downgrade, which affects $257 million in second-lien bonds and $4.2 billion in senior-lien bonds. Fitch, whose outlook on the bonds is stable, assigned an AA-minus rating to the state's $1 billion transportation infrastructure bonds, including a $200 million refunding, for which Connecticut has scheduled a negotiated sale the week of Sept. 13.
A gross lien on pledged revenues and other receipts deposited to the state's special transportation fund will secure the bonds.
The AA-minus rating parallels Fitch's rating for the state's general obligation bonds.
"Although pledged revenues supporting the STO bonds would warrant a higher rating, the credit quality of the STO bonds is limited by the exposure of the special transportation fund to general state operations, and hence limited by the AA-minus issuer default rating of the state," Fitch said in a statement.
Connecticut issues the STO bonds under senior and second liens, secured by pledged revenues deposited to the special transportation fund. Both senior and second liens carry an additional bonds test requiring 2 times coverage of aggregate principal and interest, according to Fitch.
"Moreover, the state covenants under the second lien that any senior issuance must meet all second lien requirements, both senior and second lien bonds are subject to an annual 2 times debt service coverage test," Fitch added.
The bonds are also backed by an aggregate debt service reserve funded at maximum annual debt service.
S&P Global Ratings and Kroll Bond Rating Agency also assign AA-minus ratings to Connecticut GOs, while Moody's Investors Service rates them Aa3. Moody's maintains a negative outlook while Fitch, S&P and Kroll assign stable outlooks.
According to state Comptroller Kevin Lembo, the transportation fund is projected to have a balance of $151.4 million.
State officials have scrambled the past two years to fill general fund budget deficits. They project having to withdraw $316 million from Connecticut's rainy-day fund, which would leave Connecticut with $90 million in that account.
"Volatility in capital markets and slower than expected growth in workers' wages were major contributing factors to sluggish revenue growth in fiscal year 2016," Lembo wrote Gov. Dannel Malloy, a fellow Democrat, on Thursday.
Several major revenue categories fell way short of budget targets, said Lembo.
"Our budgets are always out of balance," state Sen. Scott Frantz, R-Greenwich, said Friday. "There's a shortage of revenue and our forecasts have been too rosy for the last few years."
