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Despite legislative approval of a bipartisan state budget, a major Wall Street credit rating agency warned Friday municipalities still will struggle to get affordable credit.

S&P Global Ratings also indicated it would review the state’s faltering bond rating if and when the budget becomes law. Gov. Dannel P. Malloy hasn’t said whether he would sign the deal, though it did pass both the House and Senate on Tuesday with veto-proof margins.

“We note that virtually all local governments will see some reductions to state aid, while only a few — typically those with the greatest economic challenges — will see flat year-over-year state aid,” the rating agency wrote in a report.

The budget passed on Tuesday would cut the Education Cost Sharing Grant — the primary state grant that cities and towns receive to help run their schools — by $31.4 million this fiscal year, a 1.6 percent cut. However, next year, that money is almost entirely restored and distributed using an updated formula that more heavily favors the state’s lowest-performing school districts.

Legislators also balked at Malloy’s proposal to ask cities and towns to absorb a portion of the state’s skyrocketing contributions to the teachers’ pension fund.

But communities would feel the pinch in the new budget when it comes to non-education aid.

A 2015 plan to share sales tax receipts with cities and towns is all but eliminated in this budget, which officially ends the diversion of these receipts into a special account.

The last remnants of a program which was supposed to distribute more than $300 million per year in sales tax receipts are:

  • A “municipal transition grant” worth $13 million this fiscal year and $15 million in 2018-19.
  • And a $36.5 million payment this year to offset a portion of the funds communities with high property tax rates lose because of a state-imposed cap on motor vehicle taxes.

The new budget would cut $19 million in each year from grants that reimburse communities for taxes they cannot collect on exempt property owned by the state and by private colleges, hospitals and other nonprofit entities.

But it also would revise the prevailing wage and binding arbitration systems. Towns would have more flexibility to launch more publicly financed capital projects without having to pay union-level construction wages. And arbiters would have more options when ruling on wage and other contract issues involving municipalities and their employees.

Connecticut has gone nearly four months into the new fiscal year without an approved budget, and this also poses a problem even if the latest plan becomes law.

“Since new state revenue measures would have less than a year to be collected, this may leave the state without the available resources to fully appropriate for these” municipal grants, the rating agency added. “The length of the budget impasse underscores the state’s struggling financial health.”

The state’s budget impasse already has threatened the credit of its cities and towns.

S&P placed nine Connecticut municipalities and one school district on a “negative” credit watch on Sept. 28, warning it could lead to a rating downgrade — and potentially higher borrowing costs — within 90 days unless their fiscal outlook improves.

The uncertainty of the state’s ability to maintain existing levels of municipal aid was one of the chief reasons cited.

Another major credit rating agency, Moody’s Investors Service, made a similar argument on Oct. 16 when it announced measures that could lead to lower bond ratings for 51 municipalities and six regional school districts.

Moody’s placed ratings for 26 cities and towns and three regional school districts under review for downgrade, and assigned negative outlooks to an additional 25 municipalities and three more regional school districts.

State finances are projected to be under heavy pressure for the next decade and a half, or longer, as retirement benefit costs surge dramatically after decades of inadequate savings,

“In the end, if state fiscal pressures persist, all local governments in Connecticut will continue to be affected,” S&P added, “and the degree of credit deterioration will depend on each government’s level [of] budgetary reserves and ability to adapt.”

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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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