A major Wall Street credit rating agency warned Thursday that Connecticut’s state budget woes and “dim economic growth” could make it more costly for its cities and towns to get credit.

In a new report titled “Connecticut Budgetary Pressures and Dim Economic Growth Dampen Local Government Credit,” S&P Global Ratings cited high property tax burdens, potential cuts in municipal aid and rising pension costs in municipal budgets as additional factors that could boost borrowing costs or otherwise make it harder for communities to get credit.

“While credit conditions among local governments in the state are stable, there are substantial headwinds creating budgetary challenges, particularly for larger cities and towns with high service costs, reliance on state revenue, or (with) limited budget flexibility,” S&P ratings analyst Timothy Little said, adding this was evident in a recent credit rating downgrade for Hartford.

The report cites a number of factors that will threaten municipalities’ fiscal health. “In our view, local governments that lack forward-looking policies and budgetary planning and reserves will be the most vulnerable to potential downgrades.”

Connecticut’s wealth greatly shielded municipal governments after past recessions, the report states. Even after the downturn of 2008 through early 2010, dubbed “The Great Recession” by some economists, cities and towns were willing to boost property tax rates.

And Gov. Dannel P. Malloy and the General Assembly not only averted cuts, but modestly increased municipal aid — particularly education grants — during the early years of the recovery.

But Connecticut municipalities still rely too heavily on property tax receipts as their primary revenue source, the report states, adding that the burden puts them at “a competitive disadvantage.”

A December 2014 analysis conducted by the state Department of Revenue Services found that in some Connecticut households, property taxes represent 40 percent of the entire tax burden.

Connecticut’s largest cities have very high property tax rates, including: Hartford at 74.20 mills; Waterbury, 60.21 mills; Bridgeport, 54.37 mills; and New Haven, 41.55 mills. A mill represents $1 of tax revenue for each $1,000 of assessed property value.

“This high tax burden has constrained budgetary flexibility, in our view, because many of these communities have demonstrated limited capacity to raise revenues or have faced political resistance in this area,” S&P wrote.

Thursday’s policy report came on the heels of downgrades for Connecticut’s capital city by two of Wall Street’s four major credit rating agencies.

S&P lowered Hartford’s bond rating on Sept. 22, and Moody’s Investors Service followed on Oct. 7.

“S&P’s warning only serves to reinforce the importance of maintaining the state’s funding commitments to towns and cities and especially the distressed urban centers,” said Kevin Maloney, spokesman for the Connecticut Conference of Municipalities. “Lowering credit ratings may well result in increased borrowing costs for local governments that are already under significant fiscal stress.”

“The S&P report correctly points out the challenges facing local governments in a slow-growth economy,” Chris McClure, spokesman for Malloy’s budget office, said Thursday. “Governor Malloy and the legislature have been highly supportive of local budgets during some tough years for the state budget, and I expect that we will continue to protect overburdened property taxpayers as well as possible in the coming years.”

Another major challenge Connecticut faces is “a slow recovery from the last recession and [the fact that] many of the new post-recovery jobs pay less than the jobs that were lost,” the report states. For example, it added, only 17 percent of lost Connecticut jobs that paid more than $80,000 annually have been recovered.

The announcement earlier this year that General Electric would move its headquarters from Fairfield to Boston also “underscores the economic challenges facing” Connecticut — particularly in relation to neighboring states, S&P wrote.

Connecticut’s population is static, it’s labor force is growing slowly and it’s economy is projected to grow slowly — below the national average — through 2018 or 2019, the report states.

“Looking ahead, increased competition from neighboring states and the state’s ability to retain its predominant industries in insurance and various manufacturing sectors given a high cost of doing business will remain key risks,” according to the report.

A sluggish economy is one of the contributing factors to a state budget that has finished modestly in deficit in each of the previous two fiscal years.

And state finances, which are projected to remain under heavy stress for at least another two decades because of surging debt costs, also may come under increasing pressure to expand education spending.

Hartford Superior Court Judge Thomas G. Moukawsher ruled last month that the way Connecticut distributes education aid and oversees local schools is unconstitutional. The state is challenging that decision, and the Connecticut Supreme Court recently agreed to expedite an appeal.

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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