As Connecticut lawmakers work out a long-delayed budget, many of its communities brace for further aid reductions.

The state’s need to close a deficit that has already reached $94 million just barely into fiscal 2018 and to shift more resources to its poorest cities, notably bankruptcy candidate Hartford and teetering West Haven, pose a double whammy.

“As a result, many Connecticut locals, in particular middle income communities that depend heavily on transfers from the state, will experience at least modest credit deterioration, potentially made worse where local policy choices turn to less sustainable solutions,” Municipal Market Analytics said in a commentary.

Gov. Dannel Malloy has been running the state by executive order since July 1, when the new biennium commenced. With fixed costs high, he has had to make cuts to schools and social service agencies.

State budget director Benjamin Barnes said Monday that lacking budget approval, Connecticut’s legislature would need to transfer $94 million of unspent from a municipal revenue sharing account funded by half a percent of the state sales tax.

State Sen. Scott Frantz, R-Greenwich

State Comptroller Kevin Lembo is scheduled to provide a further update on Sept. 1.

“It is not surprising that we are already seeing a relatively large deficit for the fiscal year that just began a scant seven weeks ago,” said state Sen. Scott Frantz, R-Greenwich. “The $93.9 million number tells you one thing but does not tell you how many people are suffering as a result of significant cuts to social programs and education as a result of inaction on the budget and poor revenue numbers.”

Bond rating agencies are watching every move in Connecticut, home to six general obligation downgrades straddling 2016 and 2017, including three in one week in May alone. Moody’s Investors Service rates Connecticut GOs A1, while S&P Global Ratings and Fitch Ratings assign A-plus ratings. Kroll Bond Rating Agency rates them AA-minus.

Lawmakers met Tuesday at the State Capitol in Hartford with an increase to the sales tax a contention point. House of Representatives Democratic leaders expect to release a budget on Wednesday that would raise the sales tax to 6.85% -- down from their proposed 6.99% two weeks ago – from the current 6.35%.

Malloy is said to oppose both hikes and has rejected a proposed Republican budget.

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

MMA said most Connecticut communities can raise revenues, draw down reserves, and-or borrow for cash flow in the near term, while maneuvering to stabilize their fiscal situations long-term.

“However, local bond ratings across the state are apt to suffer, potentially to the detriment of evaluations and, albeit to a lesser extent, actual bond prices,” MMA added.

The budget uncertainty has cast an additional shadow over state capital Hartford. S&P and Moody’s both rate the city’s bonds junk and Mayor Luke Bronin hired law firm Greenberg Traurig LLP to weigh restructuring options, including bankruptcy.

Malloy is working on a plan to steer the city the additional $40 million in aid that Bronin has requested. “We have to do something and they have to do something,” the governor said in July at a Municipal Forum of New York luncheon.

A Hartford bankruptcy filing is unlikely, according to MMA.

“A Hartford bankruptcy would only worsen the city’s other largest challenge: the relocation of the city’s insurance industry elsewhere and general economic decline,” MMA said, noting insurance giant Aetna Inc’s recent decision to vacate its longtime home for New York.

“Chapter 9 would reasonably do little to help the city reduce its employee related expenses,” said MMA.

“Bankruptcy might help cut the city’s debt obligations, but with only $550 million of outstanding GO bonds, a far larger and more persistent cash flow savings would likely be available through a more traditional scoop and toss, market-based restructuring transaction.”

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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.”