S&P Global Ratings has revised its assessment of Connecticut's institutional framework to strong from very strong.

"The action is based on our view that Connecticut municipalities are operating in a less predictable environment with regard to their ability to forecast and budget state revenues, and that the recent budget impasse has reduced time for planning and adjustment, to the detriment of municipalities," said credit analyst Victor Medeiros.

According to S&P, the framework represents 10% of the overall rating for local governments and is its measure of the effects of state frameworks on a local government's ability to respond to financial and economic challenges.

Gov. Dannel Malloy and the Connecticut legislature are stalled over the fiscal 2018-19 budget. Bloomberg News

Connecticut is two weeks late with its biennial budget with Democratic Gov. Dannel Malloy and lawmakers at a standstill. The Senate’s 18-18 split between Democrats and Republicans has hardened the deadlock. Democrats hold a slim 79-72 advantage in the House of Representatives.

One possible breakthrough came this week when members of the state employees unions overwhelmingly ratified a $1.5 billion concession package, which the legislature must now approve.

The state is staring at a deficit of up to $5 billion for its fiscal 2018-19 spending plan. Connecticut has received a series of downgrades over the past year, with bond rating agencies citing budget imbalance.

Moody’s Investors Service rates Connecticut general obligation bonds A1, while S&P Global Ratings and Fitch Ratings assign A-plus ratings. Kroll Bond Rating Agency rates them AA-minus.

“The ability of a state to pass budget pressures on to lower levels of government in times of state budgetary stress, while a credit positive for the state, would be a credit negative for local governments, particularly if they are not able to adequately adjust in a timely manner to a potentially new funding paradigm,” said Medeiros.

Capital city Hartford, which has hired law firm Greenberg Traurig LLP to explore restructuring options including bankruptcy, is asking for an additional $40 million in aid to fill its own budget gap.

Over the last few months, local governments adopted their 2018 budgets amid significant uncertainty, including debate over Malloy’s proposal to transfer teacher pension costs to localities.

“Given that the state has not yet adopted its budget for the fiscal year beginning July 1, we believe the amount of time that a municipal manager has to adjust and react to any state aid shift is limited,” said Medeiros.

“Currently, in the absence of a state budget, aid to local governments will be reduced, particularly the longer the budget is delayed.”

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