Connecticut lawmakers, as Wednesday’s midnight adjournment deadline hovered, passed a $20.8 billion second-year budget adjustment for the fiscal 2018-19 biennium.

The House of Representatives approved the package 142-8 at 11:22 p.m., after a 36-0 Senate passage. The new plan, which involves no tax increases, will take effect July 1.

“We have fought many battles,” lame-duck Gov. Dannel Malloy, a Democrat, said in an 11-minute speech – his final before the General Assembly – that began shortly after midnight Thursday. "I think the night is late enough."

Malloy said he would examine the budget over the next few days.

This marked the second budget agreement in seven months. The General Assembly last October passed a $41.3 billion spending plan four months late, which triggered a backlash from bond rating agencies.

Connecicut Gov. Dannel Malloy.
"We have fought many battles," said Connecticut Gov. Dannel Malloy.


The agreement includes a deposit of roughly $1.1 billion in the stabilization, or rainy-day fund. “There was nothing in the rainy-fund in 2011,” said Malloy, referencing his first year as governor.

Compromises include the restoration of funding for a Medicare savings program for more than 150,000 elderly and disabled persons, and the blocking of bus and train fare increases. Malloy had warned of such hikes if funding was insufficient.

Proposed changes to collective bargaining agreements and state worker pensions failed.

Democratic and Republican leaders defused some drama earlier in the day saying they had reached agreement. Political division has been prevalent at the capitol, where the Senate is deadlocked 18-18 and Democrats hold an 80-71 advantage in the House.

A boost in personal income tax collections provided the state welcome relief. Projections call for more than $1.3 billion more than what the enacted budget assumed.

"The revenue boost is unalloyed good news for the state," said Moody's Investors Service. "[It] will provide the state with needed cushion."

According to Moody's, even with an expected withdrawal to cover an estimated current-year budget of $380 million, the rainy-day fund balance would be at its highest level since the 2009 financial crisis.

"With California also seeing abundant income tax collections, this may portend positive news for income tax-dependent states as they near the end of fiscal 2018," said Moody's.

All four bond rating agencies downgraded Connecticut over the past year, Moody's rates Connecticut's general obligation bonds A1, while Fitch Ratings and Kroll Bond Rating Agency assign A-plus and AA-minus, respectively.

S&P, which assigns an A rating, last month downgraded the state from A-plus, citing the additional debt Connecticut must carry as guarantor of capital city Hartford's $540 million of GO debt over 20 to 30 years.

Meanwhile, a bill enabling Connecticut to claw back emergency debt assistance for capital city Hartford through aid cuts beginning in mid-2022 has stalled in the House. Bridgeport and New Haven representatives objected, saying such a measure could someday hurt their cities.

The debt deal, to which state and Hartford officials agreed in late March, piggybacked on Connecticut's passage of a municipal-assistance mechanism in October.

That law, and the Hartford agreement, reflect the strength of state management, according to Kroll Bond Rating Agency.

"Though KBRA recognizes that the state’s debt levels are high, KBRA does not view the assumption of the city’s general obligation debt as significantly increasing the state’s debt burden," Kroll said.

Last year's law provides oversight by the new Municipal Accountability Review Board. Under the MARB legislation, municipalities seeking assistance are designated as Tier I through Tier IV, with Tier IV indicating the highest stress level.

Hartford is considered a Tier III municipality. As a result, it must submit its fiscal 2019 budget for approval by the board and provide ongoing financial reports, including monthly cash-flow details and a rolling three-year financial plan that shows balanced operations.

According to Kroll, about 20 states have a legislative structure that provides for intervention in distressed local governments. In some states, intervention may only involve oversight on municipal recovery plan development while in others, the state could replace municipal officials with a financial manager or control board, which directly manages municipal finances.

The presence of such programs cannot guarantee a positive outcome for bondholders in the event of bankruptcy, said Kroll.

"In recent high-profile municipal bankruptcies and debt restructurings such as those of Detroit, and in the developing process thus far in Puerto Rico, the framework has taken on the character of corporate bankruptcies," said Kroll. "KBRA no longer finds the interest in favorable recoveries from higher levels of government to be a controlling factor.

"Municipal bondholders are particularly vulnerable in this more adversarial, zero-sum environment.”

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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.”