Connecticut took a “nose dive” to last place in a report assessing the credit quality of all 50 states released Tuesday by Conning, Inc., a Hartford-based asset manager that does financial research for insurers and institutional investors.
The report took a scathing view on the state’s rising unemployment, declining home prices, high debt per capita and other factors, though state officials resisted the notion that Connecticut’s credit is the worst in the country.
“Connecticut is not on most lists of states in fiscal stress,” said Paul Mansour, managing director of Conning’s municipal credit research group and lead author of the report. “However, the reality is quite alarming. The state is among the worst in job creation, tax revenue growth, and has not yet seen a recovery in home prices. It has very high debt and retirement obligations, little budget flexibility and no rainy day fund balance.”
At stake is the value of debt the state issues to pay for capital projects.
Connecticut’s State Treasurer Denise L. Nappier responded to the report by saying the investing public continues to have confidence in the state’s creditworthiness “given our highest per capita income in the nation, and all four credit rating agencies have recently affirmed the state’s credit ratings with stable outlooks.”
Since 2007, Conning has published a State of the States Municipal Credit Research Report twice a year. It ranks all 50 states on credit quality based on factors such as revenue growth, year-over-year employment gains and foreclosure rates.
North Dakota was at the top of the list, along with other western states, while Connecticut fell from 37th in the last report issued in June to 50th place in the most recent ranking. New Jersey was 49th and New York was 48th.
“I don’t think this means there’s any meaningful increase in the risk of default of any Connecticut bonds … but I think what we’re seeing is that Connecticut’s credit outlook has weakened relative to other states over the past six months,” Mansour said.
The report relies on some factors that are beyond the control of state government — such as home prices — and state officials are doing “quite a bit” to address the factors they can control, said Benjamin Barnes, secretary of the Connecticut Office of Policy and Management.
Conning said that several credit indicators have “fallen significantly” since its last report earlier this year. Year-over-year home prices in the state dropped 4.7 percent, according to the Federal Housing Finance Agency, which is the worst performance of any state.
“Actually, I would prefer to have the suffering that Connecticut has had in the housing area, than what has happened in some western states that had a really catastrophic collapse followed by some levels of growth,” Barnes said. “We never had that catastrophic collapse, but we continue to have weakness, which is frustrating and we’d like to see things turn around. But, on the other hand, we didn’t suffer from levels of foreclosure that you saw in Nevada or California or some other states.”
Connecticut lost 14,700 jobs during the most recent 12-month period, and only Hawaii has lost more jobs as a percentage of overall employment during the same period, according to Conning’s report, which cites Census statistics as of August.
“Those numbers are highly suspect,” said Barnes, the secretary of the state’s Office of Policy and Management. “The numbers are all over the lot. There’s been huge volatility in the jobs numbers in Connecticut, which the (state) department of labor has said are difficult to reconcile with their experience in terms of unemployment claims and things like that. I am suspect about short-term job numbers. In the long run, we have struggled to produce as many jobs as we’d like. That’s why we’ve invested in economic development projects as well as infrastructure projects as heavily as we have.”
Connecticut also has the highest debt-per-capita burden for all states and is ranked 48th in terms of economic debt per personal income, according to the report.
“If one considers Connecticut’s high personal income levels, this low ranking is even more alarming,” wrote the authors of the report, Mansour and Conning’s assistant vice president Jon Rappaport.
Nappier, the state’s treasurer, said Conning’s “simplistic methodology fails to account for the unique manner in which Connecticut issues debt for school construction and other projects: it is centralized at the State level, unlike most other states that have county forms of government and greater debt issuance at the local level. Indeed, were Conning to make this more pragmatic comparison, state and local debt combined and compared to GDP puts Connecticut squarely in the middle of the pack, not at the bottom.”
Mansour maintains it is still debt that the state is responsible for paying while more of its residents are out of work and the value of homes are declining.
Connecticut sold general-obligation bonds at Aa3/AA/AA ratings, “which are considered very strong,” Mansour and Rappaport wrote. The rating agencies noted Connecticut’s wealth and its “history of solving budget problems” when assessing the ratings. Conning says Connecticut hasn’t recovered from the Great Recession and it is “very vulnerable” to federal budget cuts. The ongoing job losses and declining home values portend of future credit stress and the state’s credit ratings risk downgrades, Mansour and Rappaport wrote.
States are recovering from the Great Recession, Mansour said, and state expenditures are growing faster than revenues, particularly in terms of Medicaid and retirement costs. Efforts by the federal government to reduce the deficit “will likely hurt states as grants to state and local governments represent a high proportion of federal spending that is not protected from cuts,” he said.
“While the economic recovery combined with state budget actions is resulting in slowly improving state credit quality, that improvement has been very uneven,” Mansour said. “The reality is that more states remain vulnerable to another recession, and a federal government less certain in terms of providing more stimulus.”
A previous version of this blog post incorrectly attributed comments by Connecticut State Treasurer Denise L. Nappier to Deputy Treasurer Christine Shaw.