Connecticut State Treasurer Denise Nappier is taking a run at the established credit ratings agencies, electing to have New York-based Kroll Bond Ratings rate $14 billion in outstanding general obligation bonds and those scheduled for sale in April.
“As a new rating agency, Kroll Bond Ratings brings a fresh perspective to public sector credit ratings,” Treasurer Nappier said in a press release. “Competition spurs innovation, and Kroll’s entry into this market can only enhance the evaluation of Connecticut’s credit by encouraging these agencies to be more accountable to issuers and investors alike.”
This is not the first time Nappier went to new kids on the street for a rating. Nappier was among the first public sector debt issuers to employ Fitch Ratings.
“Our research indicates investors would welcome new credit rating options following the collapse of the housing market that was caused, in part, by flawed AAA rated mortgage-backed securities,” Treasurer Nappier said, in the same release.
Kroll itself ran a banner announcement across the top of its website about rating Connecticut, announcing it as the first general obligation rating and its entry into the market.
Here is KRBRA’s view in brief on Connecticut’s credit:
“In determining the rating, KBRA concluded that Connecticut’s resource base is consistent with a AA rating. The State has a high income per capita and high GSP per capita relative to the region and the nation. Connecticut also has high levels of educational attainment and low levels of poverty. KBRA views the State’s employment growth of 1 percent in 2011, as well as declining unemployment rates as positive.
“There is no current plan in place to restore financial reserves, however, which may limit flexibility and put pressure on financial operations. Connecticut also continues to carry relatively high levels of direct tax-supported debt, unfunded pension liabilities and post-employment liabilities.
“We recognize that economic recovery in the U.S. as a whole is still fragile, but we also expect an ongoing commitment by the State’s leadership to fiscal discipline and that budget adjustments will be made to maintain budgetary balance,” said Jim Nadler, President, KBRA.
“This AA rating is based on KBRA’s U.S. State General Obligation Rating Methodology, published on March 28, 2012. In the process of assigning the rating, KBRA reviewed multiple sources of information and met with State management.
The report cites key rating strengths that factored into its report, including the following:
• Current leadership has demonstrated an ability and willingness to raise revenues and adjust expenditures.
• A strong financial management framework exists for tracking revenues and monitoring budget performance.
• The Biennial budget for FY 2012/ FY 2013 restores budgetary balance after several years of dependence on deficit financings and transfers from the Budget Reserve Fund.
However, several key ratings concerns cited include:
• Slower than expected economic recovery could impact revenue collection, threatening budget balance.
• Depletion of the Budget Reserve Fund over the last several years with no specific near-term plan to restore reserves, which will limit financial flexibility.
• Revenue base is volatile due to concentration in the financial services sector and progressive nature of the income tax structure.
“As Connecticut’s economy recovers and revenues increase, the State’s constitutional spending cap may work to generate surpluses which will then be used to fund the Budget Reserve Fund, pursuant to statute. We will continue to monitor the impact of potential cuts in federal spending on the State’s economy and revenue base,” said Kate Hackett, Managing Director, KBRA.
