Operating in the shadow of a bankruptcy threat by capital city Hartford, Connecticut Gov. Dannel Malloy offered a compromise fiscal 2018-19 biennial budget to lawmakers Friday.

Malloy a day earlier outlined his plan, which called for more aid to cities and towns and lessened by half his request for municipalities to absorb teacher pension costs.

The governor, hoping to break a three-month stalemate that resulted in his operating the state by executive order, said it makes “significant adjustments and compromises.”

Malloy said his plan would increase various municipal aid by more than $136.8 million in fiscal 2018 and $89 million in fiscal 2019 from his revised May 15 budget proposal, and by roughly $900 million in fiscal 2018 over the current executive order allocation plan he signed late last month.

Connecticut Governor Dannel Malloy
"There are no easy answers left or rabbits that we can pull out of a magical hat," said Connecticut Gov. Dannel Malloy. Bloomberg News

On teacher pension costs, which the state now shoulders alone, Malloy is asking localities to contribute only the employer share of educator pension payments for their current employees, and phase in those payments over two years. His original budget proposal would have required towns to pay one-third of the full actuarially determined employer contribution, which includes the unfunded liability.

Relative to Malloy’s original proposal, these changes reduce the amount municipalities would pay by $315.7 million in FY18 and $231.2 million in FY19.

As political bickering intensified – the Senate is split 18-18 between Democrats and Republicans while Democrats hold a slim 79-72 edge in the House of Representatives – the bond rating agencies belted the state with three downgrades in a week in May.

Moody’s Investors Service rates Connecticut’s 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 reality is that in an extremely difficult budget year, no one is going to achieve all of their priorities,” said Malloy. “There are no easy answers left or rabbits that we can pull out of a magical hat. We have to meet one another in the middle.”

A few blocks from the capitol, Hartford Mayor Luke Bronin said the 123,000-population city could file for Chapter 9 protection in two months if the state cannot pass a full budget or its aid package from the city is insufficient. Over the summer, the city hired law firm Greenberg Traurig LLP to consider restructuring options, including bankruptcy.

Hartford has already done enough, said Bronin, who was chief counsel to Malloy until his election as mayor in November 2015.

“The extraordinary measures that other towns are now contemplating in response to the state’s budget crisis – use of fund balance, large numbers of layoffs and painful service reductions – are measures that he city of Hartford has already taken over the past 18 months,” Bronin said in a letter to Malloy and top lawmakers.

City Treasurer Adam Cloud and Court of Common Council President Thomas Clarke co-signed the letter.

Bronin, who earlier this year asked the state for an additional $40 million in aid, called on the state to undertake a series of initiatives, including concessions from bondholders and reimbursement for a disproportionate share of non-taxable property.

Hartford’s bonds are junk. Moody’s and S&P Global Ratings rate the city B2 and BB, respectively, after recent downgrades.

The city is staring at a nearly $50 million deficit – nearly 10% of its revenue -- and projects a roughly $83 million shortfall for fiscal 2023. Under Malloy’s executive order, FY18 state aid is down $62 million, to $213 million from $275 million.

City reserves dropped 34% between 2006 and 2015 while its debt per capita has risen 77.9%. It has one of the highest poverty rates and business declines in the U.S.

Malloy has proposed a four-tiered distressed municipalities oversight, supervision and financing board, empowered to approve debt restructurings and deficit financing backed by the state’s capital reserve fund, function as an arbitration panel on labor disputes, approve budget functions and appoint a financial manager.

“Historically, Connecticut has an ad hoc approach to municipal financial distress with state receivers,” said James Spiotto, a managing director at Chapman Strategic Advisors in Chicago. He cited Waterbury, Bridgeport and West Haven.

Bridgeport declared bankruptcy in 1991, but a federal judge negated the filing, saying the city could pay its bills.

New refinancing ability is another option for Hartford, thanks to an under-the-radar amendment to an omnibus bill Malloy signed on July 8. House Bill 7312 -- which bundled laws about tax preparers, a mental health investment account and other measures and which the Senate passed around 3 a.m. on June 7 -- allows municipalities to issue 30-year deficit financing bonds for five years commencing July 1, 2017, rather than the 20-year bonds now allowed.

“This may allow Hartford to refinance or make a tender or exchange offer for present public debt obligations backed by the strong credit of a statutory lien on all revenues,” said Spiotto.

While it could reduce annual debt payments, such moves would increase long-term borrowing costs.
Pushed-out refundings, in fact, largely account for Hartford’s high debt levels. The city projects debt at $44 million and $57 million for fiscal 2018 and 2019, respectively.

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