A major Wall Street credit rating agency issued back-to-back critical analyses this week of Gov. Dannel P. Malloy’s new, two-year budget proposal.
S&P Global Ratings warned Thursday that Malloy’s proposals to shift one-third of the cost of the teachers’ pension program onto cities and towns, and to realign other grants, “creates budgetary uncertainty for local governments.”
“If implemented, these proposals will create winners and losers,” said S&P Global Ratings credit analyst Victor Medeiros. “Although we view the ability of a state to pass budget pressures on to lower levels of government in times of state budgetary stress as a credit positive for the state, the credit impact on local governments could be negative should they not be able to adequately adjust to this new funding paradigm.”
S&P has been urging Connecticut to pay closer attention to the financial condition of its municipalities.
In a report titled “Connecticut Budgetary Pressures and Dim Economic Growth Dampen Local Government Credit,” S&P warned last October that high property tax burdens, potential cuts in municipal aid and rising pension costs in municipal budgets could boost borrowing costs or otherwise make it harder for communities to get credit.
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 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 with surging retirement benefit and other debt costs driving major projected deficits in the upcoming fiscal year, Malloy said in his Feb. 8 budget presentation that communities must bear a portion of the cost of providing pensions to municipal teachers.
Municipal leaders responded that the cost-shift is unfair, and that teacher pension costs are set to spike because state officials failed to make sufficient contributions to the system for more than 70 years.
Also this week, S&P issued a statement saying Malloy’s new budget proposal is “consistent” with the agency’s bond rating for the state, particularly the “negative outlook” it assigned to Connecticut’s rating.
The negative outlook represents a warning that the agency will be paying particularly close attention to state finances over the next year or two, and that a rating downgrade is possible during that period.
“Rising state pension and other post-employment benefit payments are colliding with weak revenue growth because of poor economic performance in the state’s financial sector,” the agency wrote in its statement Wednesday. “Nevertheless, the governor proposes to largely maintain structural budget balance through ongoing budget cuts, reduced local aid, and various minor revenue adjustments.”
These steps could keep the budget in balance if “weak revenue trends” at least remain constant, but “high fixed costs could quickly throw the budget out of balance should the economy take a downturn,” the report added.
“The S&P analysis echoes much of what Governor Malloy has been saying: the slow growth in our economy and tax revenues has forced painful discretionary expenditure reductions, especially as our fixed costs continue to rise — soon consuming more than 50 percent of our projected revenues,” Malloy spokesman Chris McClure said Thursday. “The challenges ahead are daunting, and it will take serious work from serious people to resolve them. The time for partisanship, denial and wishful thinking is past. We should take the analysis by S&P as a call to action.”