Another day, another rating agency hit to Connecticut.

Moody's Investors Service late Monday placed ratings of 26 Connecticut municipalities and three Connecticut regional school districts under review for downgrade, citing state aid cuts in the absence of a budget.

The move affects roughly $3.5 billion in debt.

Moody's said those issuers face cuts in state funding equal to 100% or more of available fund balance or cash.

Moody's has also assigned negative outlooks to ratings of an additional 25 Connecticut cities and towns, and three other regional school districts, while maintaining the existing negative outlook on the rating of one town. This action, aimed at municipal issuers in the 75% to 100% threshold, affects about $3.45 billion in additional debt.

“This is devastating news for our state,” said Senate Republican Leader Len Fasano, R-North Haven.

The list of affected governments did not include state capital Hartford, whose bonds are already deep into junk and whose mayor, Luke Bronin, has threatened so seek Chapter 9 bankruptcy protection.

Cities under downgrade review include Bridgeport, New Haven, Shelton, Torrington and West Haven.

“Hartford is not the only Connecticut community closely watching state budget machinations for insight into future state aid amounts,” said Alan Schankel, a managing director with Janney Capital Markets.

Connecticut has operated without an approved budget since July 1, with Gov. Dannel Malloy running the state by executive order. The order includes provisions to pay bond debt service subject to state appropriation.

Democrat Malloy earlier Monday submitted his fourth fiscal 2018-19 budget to lawmakers, a $41.3 billion spending plan. He vetoed a Republican-approved budget last month, which passed after a handful of moderate Democrat broke ranks.

“The governor’s decision to reject the only budget that passed the legislature, along with years of failed policies, created the instability our towns and cities face today,” said Fasano.

The Senate is split 18-18 between Democrats and Republicans while the Democrats hold a narrow 79-72 advantage in the House of Representatives.

Malloy said his latest plan scuttles some controversial revenue proposals, including new taxes on second homes, cell phone surcharges, ridesharing fees and daily fantasy sports. He said it cuts an additional $150 million in spending over the biennium, while simplifying the implementer language.

Under the executive order now in effect, said Moody’s, state funding of local governments is lower than in the last fiscal year by $928 million.

Connecticut traditionally has provided significant funding to its local governments, largely through education cost sharing grants, but also through payments in lieu of taxes and other smaller governmental grants.

“The current budget impasse highlights the ongoing vulnerability of funding that Connecticut provides to its local governments,” said Moody’s.

On Friday, S&P Global Ratings lowered its outlook on Connecticut general obligation bonds to negative from stable while affirming its A-plus rating. The move affects roughly $19 billion in GO debt. S&P said Connecticut's four-month delay in passing a biennial budget highlights the state's constraints at reaching long-term fiscal balance.

Fitch Ratings also rates Connecticut GOs A-plus. Moody’s Investors Service rates them A1 while Kroll Bond Rating Agency assigns its AA-minus rating.

Connecticut’s GO bond prices have deteriorated with 10-year credit spreads around 80 basis points, well above historical levels, said Janney Capital Markets managing director Alan Schankel.

“A state’s fiscal stress tends to flow downstream to local governments and Connecticut is no exception,” Schankel said.

The state’s post-recession struggles contrast starkly with its high per capita wealth metrics. Connecticut’s debt, at 9.2% of gross state product, is highest among the states.

According to Schankel, only Illinois, at 33.7%, must allocate more of its spending to fixed costs – debt service, pension contributions and retiree health insurance – than Connecticut’s 30.7%.

Schankel advised Connecticut investors seeking to diversity portfolios within the state to consider issuers less dependent on the state itself for revenue support.

He identified Connecticut Special Tax Obligations; Connecticut Housing Finance Agency; Connecticut Health and Educational Facilities Authority bonds issued for Yale University, Yale New Haven Health and Trinity Health Credit Group; Connecticut State Revolving Fund revenue bonds; and the South Central Connecticut Regional Water Authority.

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Paul Burton

Paul Burton

Paul Burton is the Northeast Regional Editor for The Bond Buyer and the author of the book "Tales from the Newsrooms." He is a sought-after public speaker and has appeared on radio and TV shows, including former CBS News White House correspondent Sharyl Attkisson’s public-affairs program, “Full Measure.”