Wall Street firm: CT schools ruling helps state, hurts cities

The recent Connecticut Supreme Court ruling that the state provides at least a minimally adequate education in all school districts struck a positive chord Thursday on Wall Street as far as state government is concerned.

But at the same time, it could pose a problem for the state’s urban centers as they seek to finance capital projects in the future.

Moody’s Investors Service, one of four major credit rating agencies, declared the ruling — probably spares the state from being forced to make major new investments in education in the near future — “a credit positive.”

David Rosen, an attorney representing the coalition of labor groups and municipalities behind the lawsuit, said Thursday that the plaintiffs intend to ask the Supreme Court to reconsider their decision. The group has until next Wednesday to file a memorandum making its case.

Moody’s also declared that for the state’s largest cities — which receive a sizable share of state education aid — this is “a credit negative.”

Neither of these announcements represent changes in bond ratings for the state or for its cities. Rather they recognize a distinct event with the potential to affect future ratings.

Both the state and most cities and towns finance many capital projects by issuing bonds on Wall Street. Credit ratings play an important role in determining the interest rate Connecticut and its municipalities must pay to bond investors.

The Supreme Court ruling represents a positive for a state government “which is challenged by a declining economy and high fixed costs, because the decision removes a potential expenditure-cutting obstacle,” Moody’s wrote.

Moody’s and other rating agencies have noted on several occasions in recent years that public-sector retirement benefit programs — which suffer from decades of inadequate funding — are projected to surge in costs over the next 15 years, putting significant pressure on state finances.

But for cities like Hartford, Bridgeport and New Haven, which also have struggled with downgrades in recent years, “the ruling is credit negative because the removal of a judicial mandate makes their education funding more vulnerable to the state’s political and financial uncertainties,” Moody’s wrote.

“The largest cities are constrained by practical limits on revenue-raising opportunities,” the rating agency added. “Despite an unlimited ability to raise local property taxes for operations, Connecticut’s large cities are commonly constrained by low wealth levels and high equalized mill rates, leaving little cushion to make up for declines in state funding.