While Gov. Dannel Malloy signed Connecticut's $41 billion biennial budget -- ending a five-month impasse that harmed the state's reputation in the capital markets -- work still remains at the capitol.

Malloy on Tuesday used his line-item powers to veto a controversial hospital tax that lawmakers approved as part of the fiscal 2018-19 spending plan. The governor in doing so cited "its unsound legal basis" in federal law.

Connecticut Governor Dannel Malloy
“It is time to sign this bipartisan bill into law," said Connecticut Gov. Dannel Malloy. Bloomberg News

The spending bill calls for the hospital provider tax to increase to 8% from 6%, while the hospitals under a complex arrangement would receive millions of dollars more in federal Medicaid funding.

Malloy urged makers to pass language he considered workable. Otherwise, the governor agreed on the spending plan after 123 days of gridlock.

“It is time to sign this bipartisan bill into law and continue the steady and significant progress our state has made over the past several years,” Malloy said.

Democrat Malloy had vetoed a Republican-crafted budget that passed Sept. 16 after a handful of Democrats broke ranks, unhappy with implementer language in the budget bill. Caucuses of both parties froze Malloy out of negotiations thereafter.

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

The budget, while providing an additional $40 million in aid to struggling capital city Hartford, creates a Municipal Accountability Review Board that Malloy said would "play a significant role" in reviving Hartford from the brink of bankruptcy, while benefiting other struggling municipalities such as West Haven.

According to Hartford Mayor Luke Bronin, negotiations for concessions from bondholders and labor groups are still necessary.

"The budget creates tools that make it possible to put the city on a path to sustainability outside of Chapter 9, so long as all of our stakeholders are prepared to be a real part of the solution," Bronin said late Tuesday.

"With the new Connecticut budget signed into law, the city of Hartford now appears to have sufficient funding to remove the immediate threat of bankruptcy or an imminent default," Nick Lehman, the lead Moody's Investors Service analyst for Hartford, said in a statement. "However, Hartford continues to have very high credit risk with significant long-term structural issues that need to be addressed. The state aid provides the city time to pursue a financial recovery plan, which will likely include some type of debt restructuring, possibly with a loss to bondholders."

Bond insurers Build America Mutual and Assured Guaranty Municipal Corp. wrap a combined 80% of the city's bonds.

"BAM looks forward to participating alongside a coalition of stakeholders as the mayor and the City Council take full advantage of the debt-management tools included in the budget," BAM chief credit officer Suzanne Finnegan said in a statement.

"BAM’s guaranty may be a part of the solution by allowing Hartford to expand the investor base for its bonds and reduce the city’s future interest payments, as well as accelerating the bond-underwriting process – recognizing that acting without delay maximizes the potential for substantial budgetary relief in the current fiscal year," she said.

The budget also makes the full actuarially required contribution payments to the state employee and teachers’ pension systems and restores much of the higher education funding cuts to the University of Connecticut and the Connecticut state colleges and universities system.

in addition, the final plan eliminates sweeps to energy funds, which require the state to take ratepayer funds that were collected in order to lower energy costs overall through investments in efficiency and clean energy. An earlier Republican plan had favored the sweeps.

Bond rating agencies have lowered the boom on Connecticut over the past year. Most recently, S&P Global Ratings on Oct. 13 lowered its outlook on the state's general obligation bonds to negative from stable while affirming its A-plus rating.

Fitch Ratings also rates Connecticut GOs A-plus. Moody’s and Kroll Bond Rating Agency rate them A1 and AA-minus, respectively.

After last week's veto-proof budget approval by the legislature, S&P said the new plan would provide needed certainty to local governments.

"However, weak credit conditions across local governments due to reduced amounts of state aid and a stagnant statewide economy could persist for some time," it said.

S&P expects to fully review the new budget after the state issues an anticipated new-money GO bond to fund delayed projects.

"Our recent outlook revision," said S&P, "reflects our view of the state's long-term financial flexibility and rising fixed costs, concerns that extend beyond the current biennium, and which will be evaluated in any coming review."

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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.”