The potential for Connecticut’s hefty debt burden to remain a drain on state finances for years to come prompted one major Wall Street rating agency Friday to downgrade the state’s credit rating. 

And while S&P Global Ratings cited the recent state commitment to pay down Hartford’s general obligation debt, it labeled that a “relatively small” burden for Connecticut compared with the state’s resources. But when coupled with several larger factors, including an already high level of bonded state debt and a need for more borrowing to fix an aging transportation system, Connecticut’s overall fiscal indebtedness remains a concern. 

A weaker bond rating could lead to higher interest costs as Connecticut seeks to finance capital projects in the future. 

“While we view Hartford as a unique situation and the city’s debt as a relatively small in relation to overall state resources, the assumption of debt, combined with other trends, leads us to conclude that Connecticut’s debt burden is not likely to shrink in the near term,” said S&P Global Ratings credit analyst David Hitchcock. We believe that other distressed cities might apply for state assistance (and) additional transportation debt remains a possibility if the legislature, increases transportation taxes. 

Connecticut ended the last fiscal year with nearly $24 billion in taxpayer-backed bonded debt, and has one of the highest per capita debt ratios in the nation. 

Hitchcock also noted that the state has been exploring several options to bolster its poorly funded pension program for municipal teachers, including diverting new General Fund resources such as lottery proceeds toward that system. 

“The state also has a history of deficit financing during recessions,” Hitchcock added. 

And though neither the state nor the nation are in recession now, the state’s emergency budget reserve holds just $210 million, or an amount just larger than 1 percent of annual General Fund operating costs. Comptroller Kevin P. Lembo recommends a reserve of 15 percent. 

From A+ to A

S & P, which lowered the state’s rating one notch, from A+ to A, also noted that Connecticut continues to struggle with a declining population and an economic recovery from the last recession that has lagged behind the region and the nation. 

“Considering the state went four months without a budget [in 2017] and has yet to address the current year deficit, it should come as no surprise Wall Street is taking note,” Meg Green, a spokeswoman for Gov. Dannel P. Malloy’s budget office, said Friday. “ … It’s important to note that Connecticut’s budget situation and historic underfunding of long term liabilities, not this recent action, are driving the state’s rating.” 

Malloy has not hid his frustration that legislators still have not closed a nearly $200 million hole in the current fiscal year — a gap he first identified in late November and submitted a plan to resolve in early December. 

The governor’s budget office and the legislature’s nonpartisan Office of Fiscal Analysis also say the preliminary budget for the fiscal year beginning July 1 — unless adjusted — would run about $265 million in deficit. 

“We hope to see swift action by the legislature to avoid further harm to our credit rating,” Green said. 

But one component of the current state budget, a debt assistance plan to keep Hartford out of insolvency, has been a source of contention at the state Capitol in recent weeks since it was signed by Malloy’s budget office and by state Treasurer Denise L. Nappier. 

Some legislation leaders have asserted the deal, through which Connecticut would pay off most of the city’s debt over the next two decades, went beyond the level of assistance legislators intended. The state would pay off about $550 million in principal and an undisclosed amount of interest likely to total in the hundreds of millions of dollars. 

The new, two-year state budget enacted last October provided two new forms of assistance to keep Hartford out of bankruptcy court. 

Lawmakers set aside $28 million in this fiscal year and again in 2018-19 for general aid to fiscally distressed communities that work with the new state Municipal Accountability Review Board. 

Legislative leaders from both parties said they anticipated Hartford would receive roughly $20 million of the $28 million to be distributed by the review board. 

Another $20 million was set aside in the budget — in both this fiscal year and next — to help Hartford cover payments on its general obligation debt. Lawmakers also agreed that the city would seek to refinance its debt over the long-term, and that the state would guarantee this refinancing. 

But Republican leaders in the House and GOP and Democratic leaders alike in the Senate said they didn’t envision the state making any debt payments on behalf of Hartford after the 2018-19 fiscal year. 

The only exception would be if the city defaulted on a payment. At that point, the state — as guarantor of the refinancing — would have to cover the defaulted payment. 

Hartford’s rating improved

S&P Global Ratings raised the city’s bond rating on Friday by several notices, from CCC to A, citing the new debt assistance agreement as one of the chief factors behind that improvement. CCC is considered junk bond status while A is considered a favorable rating. 

A second Wall Street rating agency, Moody’s Financial Services, similarly raised Hartford’s bond rating from junk bond status to a healthy ranking on April 5, also citing the debt assistance. 

“It is abundantly clear the contract assistance agreement, including the strict accountability measures it provides, was a much-needed intervention resulting in a strengthening of the city’s position in the bond market,” Green said. “ … While we know Hartford’s problems can’t be solved overnight, and there is still much more work to be done to stabilize the city and state’s financial futures, this is a positive sign for our capital city.”