Moody's: State Budget Crisis Threatens Financial Health Of Dozens Of Connecticut Municipalities

Borrowing costs could rise for 51 municipalities and six regional school districts in Connecticut because of the state’s long-running budget standoff, a bond-rating agency said Monday.

Moody’s Investors Service placed ratings of 26 Connecticut municipalities and three regional school districts under review for downgrade. An additional 25 Connecticut municipalities and three regional school districts were assigned negative outlooks.

“It seems to be that the legislators in Hartford believe they can continue to engage in this financial staring contest for several more weeks or several more months before the impact is felt,” said Bryan Chodkowski, town manager of Enfield, which was placed under review. “The impact is already being felt.”

The news comes as Democratic and Republican legislators — in the face of a projected $3.5 billion deficit — have been unable to agree on a spending plan, making Connecticut the only state without a budget. Gov. Dannel P. Malloy vetoed a Republican budget approved by the General Assembly last month.

With municipalities facing cuts in education and municipal aid, Moody’s now says for nearly a third of municipalities it may cost more to borrow money for building schools, fixing roads and other local construction projects.

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

Moody’s said it would look closely at the “ongoing vulnerability to changes in state funding and individual local governments’ long term capacity to make up for possible declines in state support with local resources.”

Credit ratings represent the credit quality of a bond issue by grading the likelihood of timely payments of principal and interest. The lower the rating, the greater the indication of risk of a payment default — and the more a municipality could pay in interest costs.

Investors rely on these indicators of risk when they determine the value of municipal investments.

Last week, S&P Global Ratings downgraded the outlook for Connecticut’s general obligation bonds to negative.

The potential for higher interest costs comes at an inopportune time for East Lyme, where voters this year approved a $37.5 million project to renovate three elementary schools.

“We run efficiently, we run lean, we don’t borrow what we can’t pay back,” East Lyme First Selectman Mark Nickerson said. “Yet now we’re being forced and coerced into paying for the sins of the state.”

Elizabeth Gara, executive director of the Connecticut Council of Small Towns, called the news "very troubling" and predicted it would cause a great deal of additional strain for municipalities that are already struggling with state budget cuts.

For small towns with tiny tax bases, opportunities to raise additional revenue are limited. "They don't have a lot of options,'' Gara said.

“If our legislators need further proof that their inaction is hurting Connecticut, they need to look no further than Moody’s action,” said West Hartford Mayor Shari Cantor, whose town was assigned a negative outlook.

“It’s not fair that we should even be put in this light,” said Carolyn Mirek, mayor of South Windsor, which faces a possible downgrade by Moody’s. ”Our bond rating should be excellent.”

Mirek said the town is about to embark on a $70 million project to build two new elementary schools paid for by the sale of bonds.

In Enfield, the threat of a possible downgrade comes on top of the town already being forced to take “austerity measures” such as a hiring freeze and reducing overtime, Chodkowski said. For example, the reduction in overtime has forced Enfield to limit resident access to the local landfill, he said.

“We’ve been good stewards with the money from the state,” Chodkowski said. “Having our ratings under review is for nothing that we have done.”

Officials in New Haven and Bridgeport — both of which were placed under review — said it’s gotten harder to maintain their strong bond ratings due to continued uncertainty about state aid.

“Mayor Toni Harp and Controller Daryl Jones repeatedly tout New Haven’s financial stability in terms of four consecutive year-end balanced budgets, stable property tax rates,and steady growth of the grand list and still, absent a state budget, it’s been difficult for them to argue against an uncertain, even negative fiscal outlook,” said Laurence Grotheer, a Harp spokesman.

Av Harris, a spokesman for Bridgeport Mayor Joe Ganim said: “This report should underscore the urgent nature of the task at hand faced by Connecticut’s legislative leaders and Governor Malloy as they try to compromise on a spending plan for the coming biennium.”

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

The ratings from Moody’s came the same day Gov. Dannel P. Malloy released his fourth budget proposal of the year in an attempt to cajole legislative leaders — who have been holding closed-door budget talks for the past two weeks without the governor — into action.

“This warning by Moody’s is yet another clarion call that we need an adopted budget and we need it now,’’ said Chris McClure, a Malloy spokesman. “Just today, Governor Malloy presented the General Assembly with a budget that is balanced reasonably and responsibly — and could help mitigate the harm to our cities of continuing without a budget. We cannot continue to pretend that inaction is inconsequential.”

Among municipal leaders, Sprague First Selectwoman Cathy Osten has a unique perspective on the potential downgrade of her community's bond rating: She is also a state senator and co-chairwoman of the legislature's appropriations committee.

“I knew this was going to happen all along,'' said Osten, a Democrat. “We need a budget so we can effectively fund both small towns and our urban areas."

Like many small towns, Sprague already runs on a lean budget. The eastern Connecticut community of about 2,900 people has just seven full town employees, down from 12 when Osten took office a decade ago.

Osten said she stands ready to vote for a budget that will resolve the state's fiscal crisis and provide stability to cities and towns. "I've been willing to vote on a budget since Day 1 and I continue to be ready.''\

Courant staff writers Stephen Singer and Daniela Altimari contributed to this report.

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