State government has emptied its savings to reduce the budget deficit, and Gov. M. Jodi Rell’s budget chief said this week it’s time for cities and towns to do the same.

But municipal officials said their budget reserves already have been reduced to compensate for shrinking state aid. More importantly, they added, communities can’t exhaust their reserves the way the state has without risking a dramatic increase in financing costs.

“Should the state borrow money so municipalities can preserve their fund balances?” Office of Policy and Management Secretary Robert L. Genuario asked Wednesday as he testified before the legislature’s Appropriations Committee.

Connecticut amassed a record $1.38 billion in its emergency reserve, commonly known as the “Rainy Day Fund,” between 2004 and 2008. That savings, equal to roughly 8 percent of state government’s annual operating costs, now is gone. Rell and the legislature agreed last fall to use the entire reserve to shore up declining tax revenues both this fiscal year and next.

Rell’s latest plan to close out this year’s $518.4 million deficit relies on moving into the current budget nearly $220 million in Rainy Day Funds originally assigned to 2010-11. To help offset that switch, the governor has suggested reducing town grants by $45 million next fiscal year.

Genuario said the administration believes several non-education programs could be cut, adding that towns could cover the lost by looking within their savings accounts.

But town leaders and their representatives disagreed.

“It would be insanity to think the towns could spend down their reserves,” Bart Russell, executive director of the Connecticut Council of Small Towns, said Thursday.

State government’s ability to borrow funds on Wall Street at low interest rates hasn’t changed so far despite its financial problems, including the vanished reserve. That’s largely because of the legislature’s many revenue-raising options, particularly an income tax that yielded over $7.5 billion at its peak just two years ago.

But Russell, whose group represents 130 communities with populations under 30,000, said communities have just one major source of local revenue:  the property tax. And with tax hikes off the political agenda in most towns, the only thing standing between them and a poor report card from the Wall Street rating agencies is a healthy reserve.

Robert Curry, New Britain’s finance director and the former president of the Connecticut Government Finance Officers Association, said many communities already are struggling to keep their reserves in the 5 to 10 percent range that bond rating agencies look for. “Cities and towns don’t have a revenue engine like the income tax,” he said. “They have to be careful.

Curry added that New Britain’s reserves haven’t reached 4 percent of its annual operating costs for the past four years, despite a town policy that mandates yearly deposits into the fund balance whenever it dips below 5 percent.

Legislative leaders said the Appropriations and Finance committees are developing an alternative to Rell’s deficit-mitigation plan, and Sen. Toni Harp, D-New Haven, co-chairwoman of the appropriations panel, told Genuario she fears cutting town aid would translate directly into increased property taxes.

Municipalities are slated to receive about $2.8 billion in state grants this fiscal year, down about $50 million below 2008-09 levels.

James Finley, executive director of the Connecticut Conference of Municipalities, said many communities already have dipped too deeply into their reserves to offset that loss.

“Cities and towns already have done the hard work that the state has yet to address,” Finley said. “They’ve laid people off, they’ve negotiated major concessions, they’ve cut positions and they’ve cut programs.”

Finley added that “the property tax is killing people right now. Towns are trying not to raise it. The property tax isn’t like the income tax. It doesn’t care whether you have a job or not.”

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Keith M. PhaneufState Budget Reporter

Keith has spent most of his 31 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut’s transportation and social services networks. He has been the state finances reporter at CT Mirror since it launched in 2010. Prior to joining CT Mirror Keith was State Capitol bureau chief for The Journal Inquirer of Manchester, a reporter for the Day of New London, and a former contributing writer to The New York Times. Keith is a graduate of and a former journalism instructor at the University of Connecticut.

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