Fitch Rates Connecticut's GO Bonds 'AA'; Outlook Negative

NEW YORK--(Business Wire)--
Fitch Ratings has assigned an 'AA' rating to the State of Connecticut's general
obligation (GO) bonds, (2009 series D). The bonds were sold earlier this week in
conjunction with the state's sale of GO economic recovery notes (ERNs). The
series D bonds will mature Jan. 1, 2012-2014, and are not subject to redemption
prior to maturity. Fitch also affirms the 'AA' rating on approximately $13
billion in GO bonds and $916 million in GO ERNs. The Rating Outlook is Negative.

The 'AA' long-term GO rating is based on Connecticut's high debt and long-term
liabilities and imbalanced operations offset by the state's vast wealth and
income resources. The Negative Outlook, which Fitch revised from Stable on Nov.
5, reflects the sizable fiscal challenges facing the state in the current
biennium and beyond. Revenue weakness due to the recession and continued
spending pressures are widening projected gaps. The state had temporarily
resolved the gaps through the fiscal 2010-2011 biennium primarily through
reliance on one-time revenues, including an ERN borrowing to address the entire
remaining deficit from fiscal 2009 and budgeting a $1.3 billion securitization
for the second year of the biennium.

Since the budget's enactment continued revenue erosion and higher spending needs
have reopened a current year gap; the state's comptroller now forecasts a
deficit of $624 million this year absent balancing measures. Further rating
action will be tied to the state's ability to make progress in closing emerging
gaps and addressing structural imbalances through recurring actions, as well as
minimizing reliance on planned borrowing for operations.

Connecticut's volatile revenue system periodically leads to budget imbalances.
The state's recent practice of setting aside large reserves had supported the
credit. With planned exhaustion of reserves and significant deficit borrowing
already budgeted during the fiscal 2010-2011 biennium, the state faces
diminished flexibility to respond to reopened near-term shortfalls, even as
longer-term structural gaps remain.

Connecticut's fixed debt burden is high, with net tax-supported debt as of Oct.
15 at $18 billion, including ERNs, or 9.2% of 2008 personal income.
Three-quarters of net tax-supported debt is GO, a large share of which is issued
for local schools; excluding $2.3 billion in GO pension bonds issued for the
teachers' retirement fund (TRF), the debt burden falls to a still high 8% of
2008 personal income. Funding levels for the state's major pension systems
remain a concern. As of June 30, 2008, the state employees' retirement system
was funded at 52%, and the TRF was funded at 70%, the latter following deposit
of pension bond proceeds.

Large surpluses through fiscal 2007 enabled the state to accrue a $1.38 billion
budget reserve fund (BRF), equal to 8% of fiscal 2009 appropriations. Net tax
receipts, particularly from personal income, eroded steadily in the course of
fiscal 2009. Initially forecasted to rise 3.6% over fiscal 2008 actuals, to
nearly $13 billion, forecast receipts were repeatedly lowered, ending the year
down 14.5%, or $10.7 billion. Despite balancing actions including transfers,
spending cuts and use of federal stimulus, the year ended with a $947.6 million
deficit, equal to 5.6% of appropriations. The state has opted to close the
deficit through sale of ERNs while preserving the BRF balance to resolve
forecast gaps in the current biennium. The state has issued ERNs in the past,
albeit after exhausting available BRF balances.

The fiscal 2010-2011 biennium budget, enacted late in August, achieved balance
largely through use of one-time resources, including planned borrowing, as well
as tax rate changes and spending cuts. Use of one-time resources included
drawing down the BRF by $1.04 billion in fiscal 2010 and $342 million in fiscal
2011, federal stimulus of $879 million in fiscal 2010 and $595 million in fiscal
2011, and an authorized $1.3 billion securitization in fiscal 2011. Recurring
measures included rate increases in multiple taxes and fees, including a new
personal income tax top rate at 6.5% for high earners and a temporary
corporation tax surcharge; tax changes were projected to yield $847 million in
fiscal 2010 and $335 million in fiscal 2011. With rate changes, net tax receipts
rise 2.1% in fiscal 2010, to $10.9 billion, and remain flat in fiscal 2011; the
revenue outlook since budget enactment has been lowered due to continued
underperformance. Spending reductions in the plan include measures to reduce
labor-related expenses going forward.

Connecticut has a wealthy, diverse economy, but is experiencing broad
recession-related weakness. The state is the wealthiest among the states
measured by personal income per capita, at 140% of the national average in 2008.
After peaking in mid-2008, employment levels are declining, with September 2009
down 4.3% in the state compared to September 2008; nationwide, employment levels
were down 4.2%. Losses are particularly severe in construction, down 18.4%,
manufacturing, down 8.3%, and professional and business services, down 8%.
Unemployment has risen to 8.4%, from 6% a year ago, but is 86% of the U.S. rate.
The state's large financial activities sector, with insurance concentration in
Hartford and banking in Fairfield County, was down 3.4% in September.

Additional information is available at www.fitchratings.com.

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Fitch Ratings, New York
Douglas Offerman, +1-212-908-0889
Laura Porter, +1-212-908-0575
Richard Raphael, +1-212-908-0506
Media Relations:
Cindy Stoller, +1-212-908-0526
cindy.stoller@fitchratings.com

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