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Economics

Connecticut’s high unfunded pension liabilities leads to credit downgrade

S&P Global Ratings lowered its rating on Connecticut's approximately $18.5 billion of general obligation debt outstanding to A from A+ in part because of its high unfunded pension liabilities.

The ratings agency said in a report that "above-average debt, high unfunded pension liabilities and large unfunded other postemployment benefit liabilities," have created "significant and growing fixed-cost pressures that restrain Connecticut's budgetary flexibility."

The report added, "Should state tax revenue decline, or grow more slowly than currently projected, these large fixed costs will remain an impediment to solving future potential budget gaps."

Connecticut expects to have $5.4 billion of combined costs for debt service, and pension and OPEB contributions in fiscal 2018, totaling 29% of budgeted general fund expenditures, up slightly from 28% in 2017, the report said.

A pension reform agreement made with the state employees' union has helped control fixed-cost growth in the near term by smoothing out a potential spike in pension payments over the next few years and pushing amortization of some unfunded pension liabilities payments into later years, the report said.

Also, the State Employees' Retirement Fund's assumed rate of return was lowered to 6.9% from 8%. The lower return assumption, as well as a drop in the Teachers' Retirement Fund assumed rate of return to 8% from 8.5%, raised actuarial liabilities, which were offset by both plans returning about 16% in 2017.

The two plans are the main components of the $34.2 billion Connecticut Retirement Plans & Trust Funds, Hartford, which is about 45% funded.

Still, the ratings agency's outlook on the state is stable, reflecting an "anticipation that state debt, pension and OPEB ratios will remain high, but near current levels, during our two-year outlook horizon, while at the same time Connecticut's budget will likely remain near structural balance absent an economic downturn," the report said.

S&P Global Ratings also noted in its report that, despite its high unfunded pension liabilities, the state is currently funding its full annual actuarially determined pension contribution and has used limited one-time budget items in its current budget. However, the agency believes Connecticut still faces challenges in achieving long-term structural balance, based on the four-month delay in enacting a fiscal 2018-2019 biennium budget and pushback from lawmakers to additional budget cuts or tax increases.