State Dems, Republicans pointing fingers over latest bond rating news. But what does it really mean?

In a letter issued today to legislative leaders Republican Gov. M. Jodi Rell broke the news that Moody’s Investor Services downgraded the outlook of Connecticut’s general obligation bonds from stable to negative.

The state relies on favorable credit ratings from Moody’s, Fitch and Standard & Poor’s to help market its bonds, used to fund large projects, and to keep borrowing costs to a minimum.

Rell in her letter complained that Moody’s took action in response to the Democratic-majority legislature’s passing a new two-year budget “which relies excessively on borrowing and one-time fixes to close a deficit of about $8.5 billion.”

Rell, following a summer-long budget battle with the Democrats, allowed their budget to become law without her signature in September. She claimed it was done in protest, recognizing the state needed a budget two months into the current, 2009-10 fiscal year. Critics continue to argue it showed a lack of leadership.

Stamford Mayor and potential Democratic gubernatorial candidate Dannel Malloy shot out a press release blaming much of the situation on, obviously, Rell, who may or may not seek re-election in 2010.

“It was largely her inability to shepherd a smart fiscally-sound budget process from beginning to end that got us here,” Malloy said.

Sen. Minority Leader John McKinney, R-Fairfield, as expected, blamed the Democrats.

“By refusing to act with any sense of urgency to reduce the size and cost of state government, Democrats seem intent on leaving Connecticut in a perpetual financial crisis,” McKinney said in a press release.

Senate President Donald Williams, D-Brooklyn, of course, did not take kindly to the criticism.

“We all should be concerned about the structural holes in the budget and the challenges they represent. Now is not the time for the Governor to try to disown parts of the budget that she intially proposed – such as securitization, borrowing and one-time fixes.”

Oookkaaay. Now that you’ve all gotten that out of your systems, what does this really mean?

The most measured and informative response came from state Treasurer Denise Nappier, a Democrat, who back in July warned the state faced credit repercussions as the result of not having a two-year budget in place by the start of the fiscal year on July 1.

Instead of playing the blame game, Nappier said “in the final analysis both the Governor and the legislature struggled to strike a balance between what we need and what we can do without (in the budget). Moody’s perspective reinforces what the state already knows it must do, and that is head back to the drawing board and strengthen the state’s fiscal footing going forward.”

As for the immediate impact of Moody’s announcement, Nappier specified that the downgraded outlook from stable to negative does not necessarily mean Connecticut’s coveted Aa3 (excellent) credit-rating with Moody’s changes.

“A ‘negative outlook’ means that the state’s credit rating is under review by Moody’s for a possible change over a period of the next 18 to 24 months,” Nappier said. “It is not as signficant a step as placing a jurisdiction on a ‘watchlist,’ which implies that change in a credit rating is pending … It has been the history at Moody’s that a ‘negative outlook’ determination does not necessarily result in a credit downgrade.”

Or, as one insider at the capitol explained to me in layman’s terms, think of it in terms of someone who is considering breaking up with their signficant other, but first issues a letter that states “these are all the issues in the relationship. If you fix them maybe we can stay together.”

Although Malloy also took issue with Rell’s noting other states have been downgraded – “As if their shortcomings somehow excuse our own” – Nappier made the same point.

“Currently Moody’s has specifically placed a number of states on ‘negative outlook’: Arizona, Florida, Kentucky, Michigan, New Jersey, Ohio, Pennsylvania, Rhode Island and Wisconsin,” Nappier said. “This, obviously, is the result of the impact the Great Recession (as it is now referred to) has had on so many state budgets.”

The news about Moody’s comes just days ahead of Friday’s meeting of the Rell-chaired state Bond Commission, which will vote to authorize borrowing for a variety of projects the Governor in recent days has been touting in visits to Fairfield County and elsewhere.

Rell spokesman Rich Harris said he did not expect Moody’s decision to cause Rell or the commission to hold off on some of the projects.

“It’s important to remember the things that are being bonded, much of it is stuff we frankly simply have to do, like school construction,” Harris told me by phone. “The other projects on there are critical economic development projects or infrastructure investments that also have to be made simply for the maintenance of what we have.”

I did call over to Nappier’s office to find out if word about the downgrade might make it more difficult for Connecticut to market its bonds or in any way increase the state’s borrowing costs at this time, even if the credit-rating with Moody’s remains Aa3.

“We don’t think the outlook change will impact demand from a vast majority of our investors (but) it’s something investors will be watching,” Nappier spokesman Christine Shaw said.

As for impacting interest rates, Shaw said: “There’s so many variables which impact the state’s cost of borrowing we can’t even speculate. Often when official statements are released in Connecticut with bonds it is a representation of the state’s fiscal health at that time. But the price that we pay to borrow also depends on other transactions being marketed, investors’ liquidity, so the overall yield on our bonds really hinges on a number of factors that are very market specific. It’s very hard to anticipate.”

Brian Lockhart