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Connecticut’s Collapsing Credit Rating

Thursday May 18th, 2017   •   Posted by Craig Eyermann at 6:09am PDT   •  

23097403 - hand putting check mark with red marker on poor credit score evaluation form. The state of Connecticut’s fiscal outlook took a sharp turn for the worse this week. Following the state’s sharp plunge in income tax revenues earlier this month, which prompted the state to completely drain its rainy day fund and to modestly cut the state government’s budget, the state’s growing debt burden and pension liabilities have combined with poor economic growth prospects to prompt all three major U.S. credit rating agencies to downgrade the Nutmeg State’s credit rating.

S&P Global Ratings downgraded the state of Connecticut on Wednesday, becoming the final of the big three Wall Street credit rating agencies to drop the state into single-A territory because of a huge revenue slump and mounting economic weakness.

Moody’s Investors Service cut the state’s credit rating on Monday, and Fitch Ratings downgraded it on Friday.

That makes Connecticut one of the lowest-rated states in the country, with Fitch and Moody’s ranking only Illinois and New Jersey worse. For S&P, Connecticut is now rated A+ with a stable outlook, fourth worst behind Kentucky.

Connecticut Governor Daniel Malloy on Monday proposed slashing more expenses to help close a $390 million budget shortfall. He previously said the state would also need to drain its reserve fund and sweep in one-time revenues from other funds.

The downgrade to Connecticut’s credit rating means that it will cost the state more to borrow money because it will have to pay higher interest rates, which in turn means that it will have less money available to spend because it will have to dedicate a larger amount of its tax revenues to pay the interest it owes to the institutions that might loan the state money.

Connecticut offers an interesting case study because the state has sought to deal with its deteriorating fiscal condition by imposing increasingly higher and more progressive income taxes upon the state’s highest income earners without restraining the growth of its spending. In doing so, the state has become more and more dependent upon how well its top income earning residents do each year to fund the state government’s programs, which given how volatile the incomes are for top income earners, puts them at an increased risk of fiscal crises whenever they might have a bad year. Or if they or their employers move away for better economic prospects.

The question remains: After the U.S. territory of Puerto Rico’s precedent-setting bankruptcy filing, will it be Illinois or will it be Connecticut that becomes the next state-level government to follow suit?

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May 2017