Moody's lowered its rating of Connecticut general obligation debt from Aa2 to Aa3 earlier this week. The move was hardly surprising. Since coming into office, Connecticut governor Dan Malloy has hardly cut spending; instead he has worked with the legislature to raise already high state taxes. Further, even though Malloy worked out a deal with the state employee unions, it was more a way to protect everything the current union members had been promised rather than an attempt to bring state employees in line with the counterparts in the private sector. As a result, Connecticut remains one of only three states that have fewer people employed than was the case ten years ago, and the Connecticut economy is stagnant. On top of this, the bankers and other Wall Street people who make Fairfield County their home are having a very bad year with bonuses way below where they have been in the past. This means that the state's new high tax on incomes above $1 million will bring in much less than expected, so a hefty budget deficit remains on the horizon into the future. Given all of this, I am surprised that Moody's only lowered the rating by one notch.
So what is the response from the governor? You guessed it, Moody's is covering up their own past problems. According to Malloy's budget director, "Connecticut has done all the right things to shore up our finances, and Moody's has responded with a downgrade intended to satisfy their internal corporate need to deflect attention from their historic lack of credibility."
How sad is that? Connecticut gets a wake up call from the ratings agencies and the governor not only ignores it, he attacks the agencies. What will he say when they lower the state below investment grade in a few years? Will he call out the national guard to invade Moody's?
It is one thing to have different priorities with regard to spending levels and destinations. It is quite another thing to deny reality. Right now, Connecticut's governor Malloy has moved to Fantasyland.
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