Standard & Poor's changed its outlook on Connecticut's general obligation bonds to negative from stable ahead of a $500 million GO bond sale this week.
"Today's news is bittersweet, no doubt," Treasurer Denise Nappier said in a statement late Monday after S&P and Fitch Ratings affirmed their AA ratings and Moody's Investors Service affirmed its Aa3 rating.
Kroll Bond Rating Agency, which also rates Connecticut AA, was expected to release its latest rating report Tuesday afternoon.
"While there is the good news that the state's ratings remain unchanged — which demonstrates continued confidence in our creditworthiness — the recent negative outlook further strengthens our resolve to fortify the state's fiscal footing," Nappier said.
Final pricing on the $500 million GO deal is slated for Thursday following a retail order period Wednesday.
The sale consists of $400 million of tax-exempt bonds and $100 million taxable.
Citi is senior manager for a 17-bank syndicate.
Acacia Financial Group, Inc. and A.C. Advisory are financial advisors.
The state has $16 billion of parity debt outstanding.
"I don't foresee this opinion by one agency impacting our upcoming bond sale," Nappier said. "While our state does have a way to go to achieve full, sustainable economic recovery over the long haul, we have nonetheless demonstrated a steadfast commitment to consistent and full funding of the State's longterm liabilities."
According to S&P credit analyst David Hitchcock, sluggish revenues have contributed to a $1.1 billion projected budget gap the state will need to close in its fiscal 2016 budget, or 6% of expenditures.
"The outlook revision reflects our view of increased budget pressure as the result of weak revenue growth," said Hitchcock. "We are concerned that structural budget balance is under pressure during a period of national economic growth."
Seven other states have negative outlooks from at least one bond rating agency.
"Unlike some of our neighboring states, which have been downgraded over the last year, we're grateful that we've retained our AA ratings in the face of what we've long known — that despite a rebounding economy, state revenue has been growing too slowly to keep up with expenditures," said budget Director Benjamin Barnes.
S&P could downgrade Connecticut, said Hitchcock, should it perceive budget pressure to significantly worsen during its two-year outlook horizon, or if "currently modest" reserves become drawn down significantly during a period of economic growth.
According to Barnes, Connecticut anticipates significant revenue when tax returns are filed in April.
"We will negotiate a responsible and balanced biennial budget with legislative leaders, including funding of [generally accepted accounting principles] and our pension liabilities," he said. "We expect these factors, along with continued prudent fiscal management and economic improvement, will brighten the outlook for Connecticut's credit."
The state converted to GAAP budgeting during Gov. Dannel Malloy's first term.
Malloy, a Democrat who won re-election last fall, made GAAP conversion a major talking point while campaigning in 2010. S&P cited the move, and the issuance of GAAP conversion bonds to provide liquidity for the transition, as a factor in assigning the AA rating, its third highest.
Sale proceeds will fund $122.8 million in local school construction grants, $105 million for miscellaneous state grant programs and $55.5 million for Department of Education grants.
Additionally, $50.8 million will fund the Jackson Laboratory genomic medicine research facility project in Farmington; $39 million is for various housing programs; $20 million goes to the Bioscience Connecticut initiative; $15 million is for town road aid projects and $15 million is for the Emergency Mortgage Assistance Program.
Other projects are $12 million to the Connecticut Regional Development Agency for the XL Center arena in downtown Hartford;, $11.5 million for brownfield loans; $10 million for manufacturing assistance grants; and $10 million for the local capital improvement program, with the $33.2 million balance for various state building projects.
