Gov. Dannel Malloy submitted another biennial budget to lawmakers on Monday, after Connecticut received the latest hit to its credit profile.
“This is a lean, no-frills, no-nonsense budget,” Malloy said of the $41.3 billion plan, his fourth attempt for fiscal 2018 and 2019. The plan would cut spending even further with an additional $150 million in reductions over the biennium.
On Friday, S&P Global Ratings lowered its general obligation outlook on the state to negative from stable while affirming its A-plus rating.
The S&P move affects roughly $19 billion in GO debt. It said Connecticut's four-month delay in passing a biennial budget highlights the state's constraints at reaching long-term fiscal balance.
The state's challenges, said S&P, include stagnant economic growth; the loss of high-profile businesses such as Aetna, Inc.; and high fixed costs such as debt, pension liability and other post-employment benefit obligations.
Connecticut has received a multitude of downgrades over the past two years. Fitch Ratings also rates Connecticut GOs A-plus. Moody’s Investors Service rates them A1 while Kroll Bond Rating Agency assigns its AA-minus rating.
Malloy since July 1 has run Connecticut by executive order, which includes provisions to pay bond debt service that is subject to state appropriation.
"We do not expect such debt to default in the absence of a budget," said S&P analyst David Hitchcock.
Lawmakers met throughout last week, trying to work out a compromise budget one month after Democrat Malloy vetoed a Republican-crafted plan. The state is also staring at a projected $3.5 billion biennial deficit.
Malloy said the new budget bill strips more than 130 pages of implementing language from a previous version by paring sections into two key categories: items that provide structural relief for the state and municipalities, and language necessary to actually implement the biennial budget. It also removes language for a new transportation authority.
The new proposal, he said, also includes an updated education cost-sharing formula that maintains its focus on the neediest school districts, but phases it in more gradually to ease the impact on municipalities.
The budget, he said, also contains municipal mandate relief for Connecticut towns and cities, as well as the municipal accountability review board to ensure that aid to Hartford and other struggling municipalities is paired with oversight and accountability.
Hartford Mayor Luke Bronin has threatened to file for bankruptcy. Malloy must approve any such request.
State Treasurer Denise Nappier said the only way for Connecticut to halt the deterioration of its credit rating is to "adopt structural and sustainable policies that, among other things, would rebuild our budget reserve fund and address our long-term obligations while continuing to fully fund our actuarially required contributions to our pension funds."
She repeated her call for the General Assembly to consider her proposal for tax-secured revenue bonds, which she said could improve state credit and lower its borrowing costs by as much as $980 million over 12 years.
"This legislation provides a clear-cut approach to improving the state’s fiscal health," she said.
S&P's move was "completely predictable for a long time," said state Sen. Scott Frantz, R-Greenwich.
"I believe the ratings and outlook will get worse every day that the governor does not lift the veto on the bipartisan approved budget. Towns and cities will suffer as will the overall economy. Revenues will continue to decline as taxpayers leave the state for greener pastures."
Bond rating agencies have hit Connecticut with several general obligation downgrades over the past 18 months, citing late and imbalanced budgets, and high debt.
S&P Global Ratings and Fitch Ratings rate Connecticut GOs A-plus. Moody’s Investors Service rates them A1 while Kroll Bond Rating Agency assigns AA-minus.
A handful of moderate Democrats broke from party leadership last month to pass the Republican budget. The Senate is split 18-18 while Democrats hold a slim 79-72 advantage in the House of Representatives.
Speaking at a Municipal Analysts Group of New York luncheon Friday, state budget director Benjamin Barnes said he expects municipal distress to become the budgetary tipping point.
“Towns are going to start doing more drastic things," he saId at the Yale Club in Manhattan.
Barnes hopes Malloy and lawmakers come to terms by year’s end. “There will be a lot of ill will at the state capitol and I would not bring small children on capitol tours."
Upcoming debt service payments for bonds subject to appropriation include certificates of participation with next debt service due Dec. 15, and Connecticut Health and Education Facilities Authority Childcare Facilities bond debt service due Jan. 1.
Despite its headlined problems, Connecticut does not pose a greater risk to bondholders, said Gurtin Municipal Bond Management.
"The state is attempting to solve its problems through incremental policy tweaks while an increasingly anxious press and market look for progress," said Gurtin. "Connecticut has problems that demand solutions; however, it is in a position in which it can still afford to muddle its way through, in our opinion."