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Connecticut: Not What You Make, but What You Spend

Posted by Larry Doyle on June 7, 2010 10:44 AM |

I missed a story the other day that is a likely precursor to many similar stories in the weeks and months ahead. What is that? Downgrades in the municipal finance markets. Which municipality, or in this case which state, is being downgraded? The wealthiest state in the nation, Connecticut.

BusinessWeek highlights this story in reporting, Connecticut Rating Cut by Fitch Ahead of Debt Sale:

Connecticut, the state with the highest tax-supported debt, had its bond rating lowered one level to AA by Fitch Ratings as it prepares to borrow money to cover a budget deficit for a second straight year.

The state, whose residents are the wealthiest in the U.S., relies “on borrowing to address its ongoing fiscal challenges in the context of already high liabilities and large projected structural gaps,” Fitch analysts Doug Offerman and Laura Porter wrote in a press release today. The analysts didn’t immediately return calls seeking comment.

Connecticut is preparing to borrow $956 million to close a budget gap in the fiscal year beginning July 1, after borrowing money last year to cover a deficit of $947.6 million, the analysts said. Lawmakers also chose to draw down the state’s rainy-day fund and raise the top income tax for residents after tax collections fell almost 15 percent in the year ending June 30, 2009, according to Fitch.

“The downgrade reflects the state’s reduced financial flexibility, illustrated by its reliance on sizable debt issuances during the current biennium to close operating gaps in the context of already high liabilities,” Fitch said. A biennium refers to Connecticut’s two-year budgeting cycle.

The state has $13.7 billion of bonds outstanding, according to New York-based Fitch. It is preparing to borrow $600 million this month, according to data compiled by Bloomberg. Standard & Poor’s yesterday rated Connecticut AA, two steps below the top level, and Moody’s Investors Service ranked it an equivalent Aa2 on May 27. All three companies assigned a stable outlook to the credit.

Connecticut has the highest net tax-supported debt among the 50 states, according to Moody’s. The state is also the wealthiest with per capita personal income of $54,397 in 2009, according to Department of Commerce data.

So, the wealthiest state in the nation is getting downgraded. What is the lesson here? Real sense on cents mandates the following fiscal approach: it is not how much you make, but how much you spend and then save that determines real long term fiscal health and wealth. Connecticut is a prime example of an entity that is effectively ‘house rich, cash poor.’

Being a slave to debt is not a prudent approach as we navigate our personal economic landscapes.

Ask Connecticut.

LD

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  • fred

    LD,

    I thought states had a mandate that they balance their budget, how much debt is allowable toward that end and at what point does that debt become to much to service?

    Obviously with the rating downgrade of Conn, the rating agencies are pondering these same questions.

    It’s only a matter of time before the Feds come in and approve working capital subsidies (recurring) rather than capital expenditures (one time), to be paid for with the funny money printing press at the US treasury.

    I find it ironic that same taxpayers who can’t afford to pay down state liabilities are also responsible for paying down the “safest credit in the world” federal liabilities.

  • LD

    Fred,

    All states borrow funds as part of their financial management. I do not know how much indebtedness is allowed but with tax receipts declining the debt service is going to become more burdensome and the ability to maintain services will also be more burdensome.

    I have no doubt that the Feds will approve some sort of bailouts for the states and add those funds to the federal deficit.

    Aren’t all these bailouts headed in the same direction? No doubt.






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