Connecticut's memorandum of understanding with its labor unions to change various pension funding assumptions of the State Employees Retirement System has a mildly positive credit effect on the state, according to S&P Global Ratings.
In December, the State Employees Retirement Commission unanimously voted to lower the assumed rate of return for the State Employee Retirement System to 6.9% from 8%, one week after Gov. Dannel Malloy and the State Employees Bargaining Agent Coalition agreed to extend an amortization period for unfunded liability to 2046 from 2032.
"The agreement will allow the state to avoid a potential spike in pension contributions in 10 years by pushing out the amortization period of Connecticut's unfunded pension liabilities, but it does not significantly change near-term general fund pension contributions nor change any pension benefits," S&P credit analyst David Hitchcock wrote on Jan. 23.
Moody's Investors Service has called the deal a credit positive.
Bond rating agencies downgraded Connecticut's general obligation bonds three times last year. S&P, Fitch Ratings and Kroll Bond Rating Agency assign AA-minus ratings while Moody's assigns an equivalent Aa3 rating.
S&P and Moody's have negative outlooks while Fitch and Kroll have stable outlooks.
Malloy intends to release his biennial budget on Feb. 7, with more particulars on pension overhaul, agency cost-cutting and educational aid to cities and towns.
"We remain concerned with the high proportion of Connecticut's general fund budget devoted to debt service, pension and other post-employment benefit costs, which comprise a rising portion of the state budget," wrote Hitchcock.
Under the new agreement, for example, overall general-fund pension contributions will still rise by $79 million in fiscal 2017, to $1.6 billion.
