Tuesday, March 05, 2024


Budget Fight Threatens Credit for a Third of CT Municipalities

By Keith M. Phaneuf


Wall Street today issued its loudest warning to date that Connecticut’s budget impasse will threaten credit to nearly one-third of all cities and towns.

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Moody’s Investors Service announced measures that could lead to lower bond ratings — and higher interest costs — for 51 municipalities and six regional school districts, affecting nearly $7 billion in outstanding debt. [Westport was not among them.]

The credit rating agency placed ratings for 26 cities and towns and three regional school districts under review for downgrade, potentially affecting $3.5 billion in outstanding debt.

At the same time Moody’s also assigned negative outlooks — often a precursor to a bond-rating downgrade — to an additional 25 municipalities and three more regional school districts that collectively have another $3.45 billion in outstanding debt.

“The current budget impasse highlights the ongoing vulnerability of funding that the state of Connecticut provides to its local governments,” Moody’s wrote in its statement.

Those municipalities and districts placed under review are facing cuts in state funding equal to or greater than their respective emergency reserves.

Fifteen of the municipalities and two of the regional school districts assigned a negative outlook face cuts in state aid equal to 75 percent to 100 percent of their respective emergency reserves.

And another 11 municipalities and one more school district that were assigned a negative outlook are deemed at risk of needing to boost local taxes by 10 percent of more to compensate for declining state aid.

“The reviews for downgrade and ongoing consideration of negative outlooks announced herein will focus on concrete steps taken to replace lost state funding with new revenues and to reduce costs to bring them in line with reduced revenues,” Moody’s added.

By this point one year ago, communities already had received about $430 million more in state aid than they’ve gotten this year in the absence of a new state budget.

Nearly three-quarters of that gap occurred by Oct. 1. Two major non-education grants due on Sept. 30 were not issued at all. And Education Cost Sharing grants released on Oct. 1 not only were reduced about 27 percent in the aggregate, but 85 of Connecticut’s 169 cities and towns received nothing.

The Education Cost Sharing grant is the state’s main vehicle for local school aid.

State finances, unless adjusted, are projected to run $1.6 billion in deficit this fiscal year. Absent a budget, town aid and social services must be cut, Gov. Dannel P. Malloy says, because the state contractually is obligated to cover big increases in spending on retirement benefits and other debt costs.

“It’s terrible news, and it’s coming at a terrible time,” Betsy Gara, executive director of the Connecticut Council of Small Towns, said of the latest announcement by Moody’s. “This is going to have a huge impact on local borrowing costs down the road and end up stalling local building and infrastructure projects.

“These towns that have done everything right are going to suffer through no fault of their own,” Gara added. “It just speaks to the need to get a budget adopted that doesn’t shift an untenable burden onto property taxpayers.”

“This announcement highlights the past nine months of failures by the governor and General Assembly to enact a state budget,” said Joe DeLong, executive director of the Connecticut Conference of Municipalities.

“These actions by Moody’s will have a devastating impact on nearly 60 communities across the state —  subjecting each of them to a credit downgrade that will increase their borrowing costs, potentially explode their property tax rates, and limit their ability to fund necessary municipal projects both in the short-term and long-term. Sadly this could have all been avoided.”

Municipalities and school districts under review for a possible downgrade include: Ashford, Bolton, Bridgeport, Colchester, Coventry, East Lyme, Ellington, Enfield, Groton, Hamden, Ledyard, Mansfield, Marlborough, New Haven, Scotland, Shelton, South Windsor, Sprague, Stafford, Stratford, Thompson, Torrington, Watertown, West Haven, Wolcott, Woodstock and Regional School Districts 8, 10 and 19.

Municipalities and school districts assigned a negative outlook include: Berlin, Bethany, Canton, Cheshire, Clinton, Columbia, Hartland, Lisbon, Montville, New Fairfield, New Hartford, New Milford, North Branford, Oxford, Plainfield, Portland, Salem, Somers, Sterling, Thomaston, Wallingford, West Hartford, Wethersfield, Willington, Windham, and Regional School Districts 4, 13 and 17.

Today’s announcement wasn’t the first alarm Wall Street sounded recently about the state budget impasse and its impact on cities and towns.

S&P Global Ratings, formerly known as Standard & Poors, put a negative outlook on the state’s general obligation bond rating last week.

S&P downgraded the city of Hartford’s general obligation bond rating in late September, citing the state budget gridlock and the increased likelihood the city could default on its obligations by early November.

Mayor Luke Bronin has estimated the capital city could reach insolvency by that point without the $40 million in additional, annual state aid he has requested.

S&P’s rating for Hartford, B-, falls within the range referred to as “junk bond” status, meaning the bonds carry a higher default risk compared with investment-grade bonds.

S&P also placed nine Connecticut municipalities and one school district on a “negative” credit watch on Sept. 28.

This could lead to a rating downgrade — and potentially higher borrowing costs — within 90 days unless the municipalities’ fiscal outlook improves, S&P warned.

This warning came just before Malloy ordered major reductions in local aid in late September and early October.

If the budget impasse continues, S&P credit analyst Victor Medeiros said back on Sept. 28, “ We believe the likely scenario is that these governments will use some portion of reserves to offset any loss in state aid, which would make their financial position all the more precarious, particularly since we believe weak credit conditions across local governments in Connecticut could persist for some time.”

The communities placed on a negative credit watch by S&P included: Bridgeport, Derby, Hamden, New Haven, New London, Plymouth, Stratford, Waterbury and West Haven. Regional School District 16, which serves Beacon Falls and Prospect, also was placed on a negative watch.

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