As Connecticut prepared to market nearly $1 billion of deficit-financing securities, the state on Friday saw its AA rating from Standard & Poor's Corp. drop to AA-minus.
The new rating will apply to the state's $4 billion of outstanding general obligation and agency bonds, as well as to $965.7 million of deficit notes being priced by a Bear, Stearns & Co. syndicate today.
William H. Hayden, a senior managing director and co-department head of public finance at Bear Stearns, said he did not expect the downgrading from Standard & Poor's to affect the deal.
"Clearly, we're disappointed," Mr. Hayden said. But, he added, "we do not think that this will have an effect on the price."
Both Fitch Investors Service and Moody's Investors Service confirmed their ratings of Connecticut's GO debt, AA-plus and Aa, respectively. "The Standard & Poor's thing is really insignificant," Mr. Hayden said, characterizing Connecticut as "a strong double-A credit."
The pricing today could help show how investors perceive the state's new tax system, in which a 4.5% tax on income has replaced an 8% tax on sales as the main revenue generator.
George W. Leung, managing director for state ratings at Moody's, said the agency confirmed its Aa rating on Connecticut because "the new tax package, together with restraint in spending, does provide the means to restore fiscal balance." Mr. Leung added, however, that "we need to see that there be more action, frankly, on the spending side."
Mr. Hayden also emphasized that Connecticut officials, including state Treasurer Francisco L. Borges and Office of Policy and Management Secretary William J. Cibes Jr., have managed to promote the deal effectively.
"As a result of the investor meetings that the state officials have had," Mr. Hayden said, "we think [the bonds] will be well received in all the markets across the board." He also said the deal would come to market without insurance.
In its statement Friday, Standard & Poor's criticized Connecticut's budget, saying it "fails to fully correct continuing and lingering concerns." The rating agency at the same time removed Connecticut's bonds from CreditWatch, where they had been placed with negative implications Feb. 11.
Standard & Poor's said the income tax-based budget Connecticut passed just last month "although far-reaching in its goal of achieving long-term fiscal stability, prolongs the resolution of the fiscal 1991 cumulative deficit over a five-year period, rather than taking more immediate actions to address it, an action uncharacteristic of a double-A-rated credit."
Richard Marino, a vice president at the agency, said that if the budget gad provided for a deficit bond over three years, as initially recommended by Gov. Lowell P. Weicker Jr., rather than the five-year period the state eventually settled on, Connecticut might have escaped the downgrade.
"If they had done that, it would have been a better situation than what finally came out," Mr. Marino said. "From my viewpoint, it would have been more positive."
Other problems cited by the rating agency included the state's inability, especially with a new tax system, to predict its revenues accurately; its deferral of pension contributions; and its growing debt service and welfare case loads. A recently lowered debt cap, the agency said, would not affect the agency's debt service for some time.
"While these actions could have long-term positive implications they have yet to be tested," the rating agency said in its release.
State agencies whose debt was also lowered from AA to AA-minus included the Connecticut Resource Recovery Authority, the Connecticut Development Authority, and the Connecticut Higher Education Supplement Loan Authority. State-backed Bridgeport, Conn., Series 1989B bonds were also lowered.
For Mr. Borges, the news could not have come at a worse time. He was in the middle of making a presentation to Wall Street investors at a hotel in midtown Manhattan.
Nevertheless, Mr. Borges said, "I announced the AA-minus, and it did not seem to cause anyone to lose enthusiasm. Connecticut continues to be a gilt-edged credit."