Maintaining future stability depends on continued discipline, continued partnership with the State, and most of all on achieving real economic growth in the years ahead," says Hartford Mayor Luke Bronin.
“We can’t cut our way through this problem and we can’t tax our way through it,” said Hartford Mayor Luke Bronin.

On the same afternoon that two bond rating agencies downgraded Connecticut, a third chimed in about the effect of state budget woes on municipalities.

S&P Global Ratings and Fitch Ratings delivered haymakers almost simultaneously on Thursday, both lowering Connecticut's general obligation bonds to AA-minus from AA. S&P revised its outlook to stable from negative at the new rating, while Fitch maintained its stable outlook.

Later Thursday, Moody's Investors Service warned that three of the state's biggest cities – Bridgeport, Hartford and New Haven – were exposed to the state's fiscal stress because of their reliance on state aid.

S&P and Fitch called out Connecticut for its budgetary stress, which could further impair the state in an economic downturn.

Moody's and Kroll Bond Rating Agency assign Aa3 and AA ratings, respectively, for Connecticut GOs, both with continued negative outlooks. The rating reviews, all of which called out Connecticut for a lagging economy, high fixed costs relative to the budget and vulnerability to a downturn, preceded the state's plans to sell roughly $511 million of refunding GOs the week of May 23.

State aid, said Moody's, accounts for an average 47% of revenues for Connecticut's three biggest cities, all of which are highly leveraged with debt per capita above $4,000, well beyond the state average of $2,324.

"Although the amended fiscal 2017 budget is favorable to these cities, future declines in state aid would be troublesome … given their sluggish tax base growth, lagging economies, low income levels, and challenges to property tax increases," said Moody's.

Intergovernmental aid accounted for about half of Hartford's revenues, said Moody's, which culled January 2016 data from the state Office of Policy and Management's Municipal Fiscal Indicators database, and from Comprehensive Annual Financial Reports.

Hartford Mayor Luke Bronin acknowledged that the state's problems and those of his city are intertwined.

"The state has made some very difficult decisions and very painful cuts to adjust to a new fiscal reality," he said in an interview. "Obviously, Hartford's fiscal stability is closely tied to the state's. Both the city and the state are facing big challenges that are going to continue to require tough decisions."

Hartford, the state capital, received two downgrades this spring. S&P lowered its GOs to A-plus from AA-minus while Moody's dropped it to Baa1 from A3.

Bronin submitted a bare-bones $557 million budget last month to Common Council, which would close a $48.5 million deficit through $16.5 million in union concessions and $15.5 million in service cuts, an $11.5 million depletion of the state's rainy-day fund and a $5 million land transfer.

"We're not afraid of doing the tough things we have to do, but that said, we have reached our limit on our ability to raise money within our revenue structure," Bronin said.

The city's property tax mill rate stands at a high 74.29.

"It's not a lack of political will," said Bronin. "We can't cut our way through this problem and we can't tax our way through it."

Bronin, the former chief counsel to Gov. Dannel Malloy, succeeded five-year Mayor Pedro Segarra in January.

"Neither the downgrades nor the comments surprised us," Bronin said. "We expected them. We were all looking at the same numbers."

He and his staff immediately found the numbers were much worse than imagined.

"A few things jumped out at us, notably, the previous administration lowballed some numbers like police overtime costs. They also reported built-in savings that weren't real, like health care."

Also worrisome, he said, was the dramatic rise in debt service from previous restructurings. The city, according to Bronin, is on the hook for $30 million in fiscal 2017 followed by $45 million and $58 million in the immediate out years.

By contrast to the biggest cities, said Moody's, the majority of Connecticut's local governments should weather state budgetary challenges because of property tax stability and reliance on state aid. Most derive more than 70% of their revenues from property taxes, which Moody's called "a stable and generally predictable revenue source."

In addition, said Moody's, most municipalities rely far less – 22% on average – on government aid, mostly from the state. "This largely insulates them from declines in the state's primary sources, income and sales taxes, which are heavily exposed to an economic downturn."

Thursday's double downgrade for Connecticut triggered a variety of responses.

"We wonder if Pennsylvania is next up in the state downgrade column," said Alan Schankel, a managing director at Janney Capital Markets, noting that ratings reviews of the Keystone State will precede its planned June 1 GO sale.

Connecticut Treasurer Denise Nappier said her office expects no significant effect on pricing for the upcoming sale, "given that investors already have factored in the negative outlooks in place since last summer."

According to state budget director Benjamin Barnes, two of the four bond agencies affirming their ratings provided encouraging news.

"We have worked hard to strengthen the state's fiscal picture as Connecticut adjusts to the new economic reality," he said. "The budget adopted by the General Assembly last week helps move us in that direction."

State Sen. Scott Frantz, R-Greenwich, a frequent critic of the Malloy administration, said the downgrades came "as no surprise in the context of continuously poor budgeting in the state capitol and a refusal to address serious long term structural issues. "

He added: "After the two highest tax increases in state history, the last two budgets have been out of balance by nearly a billion dollars each year because the tax base is eroding due to high rates."

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