Connecticut Finances Stable But Moody's Warns Of Long-Term Fiscal Challenges

A bipartisan state budget adopted last month has helped Connecticut avoid a fiscal cliff, but a new report from Moody’s Investors Service suggests trouble ahead.

“Long term, Connecticut will continue to face significant fiscal challenges, including looming budget gaps starting in fiscal 2020 and high fixed costs,’’ Moody’s stated in its weekly credit outlook, published Thursday. “These pressures, in turn, raise the prospect of potential future cuts to local government and higher education funding, as the state seeks to achieve structurally balanced operations. This could create significant credit challenges for local governments and higher education institutions.’’

After a protracted political standoff that resulted in fiscal turmoil and cuts in municipal aid, lawmakers last month approved a two-year, $41.3 billion budget. The measure, signed into law by Gov. Dannel P. Malloy on Halloween, seeks to stabilize the state’s finances and close a $3.5 billion deficit without large-scale income tax hikes. It also provides financial aid to Hartford, which is contemplating bankruptcy and created a new municipal oversight board.

Moody’s deemed the budget “credit positive” for the state and its municipalities. “For the state, the budget restores revenue and expenditure predictability and implements improved financial management measures,’’ the credit rating agency said.

“After enduring the threat of funding cuts during the impasse, cities and school districts will receive funding at similar levels to the last budget and will benefit from improved oversight mechanisms for fiscally distressed municipalities,’’ the report states.

The forecast is less positive for the University of Connecticut and other public institutions of higher education in the state. The budget approved by lawmakers would cut the allocation for UConn and UConn Health by $143 million over two years, university spokeswoman Stephanie Reitz said last month.

The reduction would add to the university’s “near-term operating challengers,’’ Moody’s states. “We downgraded the university to Aa3 negative in July reflecting its financial reliance on the state and anticipated pressure on its already thin operating cash flow from potential additional state funding cuts. The $107 million reduction for the biennium is higher than the $70 million assumed in UConn’s approved fiscal 2018 budget, reflecting the university's planning.”

Legislative leaders said they were not surprised by the Moody’s report. “The news by Moody’s certainly underscores the work we’ve been doing not just this year but over the last seven years to reduce long-term debt, reduce the size of government and grow our tax base,’’ said Senate Majority Leader Bob Duff, a Norwalk Democrat. “This year I think we sent a very strong signal by having a bipartisan budget but that certainly doesn’t allow us to escape decades and decades of bad decisions.”

Senate Republican Leader Len Fasano said the budget signifies a new era at the Capitol. But it can’t undo “the years of short-sighted budgeting [that] are going to continue to plague this state for many years.”

“The bipartisan budget was a good step in the right direction, but I’ve always maintained it’s not the panacea,’’ added Fasano, R-North Haven.

He said lawmakers will likely have to make some budgetary adjustments “if my hunch is correct that the revenue numbers will continue to decay.’’

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