Even though the state said it would appeal the ruling, a Wall Street ratings firm said the Sept. 7 decision in Connecticut’s landmark education lawsuit would “benefit financially troubled cities” and boost their sagging bond ratings.
Moody’s Investors Service reported Friday that the ruling, which said in part that the state should fund lower performing school districts at a higher rate than other schools, is “credit positive for low-income cities with underperforming schools.”
Bridgeport currently has a A2 negative rating, New Haven has a Baa1 stable rating and Hartford has a Baa1 negative rating from Moody’s.
“The ruling takes pains not to prescribe increased funding to address funding inequities, instead seeking only a way to ensure the state ‘rationally, substantially, and verifiably connects education spending with educational need’. But, we believe a reform plan will provide additional aid for Bridgeport, New Haven, and Hartford given the overhaul the court is seeking and the financial disparities between municipalities cited in the opinion,” the report state.
If the court’s ruling holds up in Connecticut Coalition for Justice in Education Funding v. Rell, Moody’s believes that state money for schools in low-income communities will increase either through a reallocation of funds from more affluent municipalities or the state could expand the amount of money it plans to spend on education, while maintaining funds for affluent communities.
Moody’s also cautions that increasing funding is “unlikely to improve the financial health of the cities, such as Bridgeport, New Haven, or Hartford. But, the funds can provide some additional operating flexibility and help alleviate school spending pressure.”
While there’s no cap on the amount of money cities and towns can levy to make up the amount of state aid, the three cities have less flexibility in raising property taxes due to weak wealth and income levels. The cities were in the bottom 10 of the state’s 169 cities and towns in per capita income in 2014, according to the report.
In addition, Moody’s found that because, on average, the state provides almost half of the cities’ revenues and most of that is in the form of school funding, the cities struggle with putting money aside for a rainy day. New Haven’s rainy day fund is 0.3 percent of its budget, while Bridgeport’s is 2.4 percent and Hartford’s is 3.7 percent. On average, all Connecticut municipalities have 12.9 percent in reserve.
At the same time, Moody’s points out that a proposal to shift funds that currently go to more affluent municipalities will be “politically difficult.”
If more affluent communities were to lose state funding, they are generally well positioned to absorb losses, according to Moody’s, because of their heavy reliance on property taxes for revenue and the potential room to raise levies to offset the lost aid.
Even a 50-percent reduction in aid for affluent communities would result in a 4.4 percent decline in revenue, which is a level Moody’s feels would be “absorbable.”
The prospect of increasing the overall amount of state aid for education would put pressure on the state budget, which faces “weak reserves, high fixed costs, and a lagging economy, exacerbated by unfavorable demographic trends.”
The rating agency concluded that the cities would benefit if the state looked to implement a functional school funding formula which was largely abandoned in 2013.
House Speaker Brendan Sharkey, D-Hamden, pointed out last week that unless the state decides it wants to pick up the entire cost of public education, municipalities will have to use the property tax to foot the remainder.
As for the property tax system, Sharkey said the General Assembly in 2015 made progress in changing how extra funding for non-taxable property is distributed, in addition to setting aside half a percent of the sale tax for redistribution to municipalities.
Sharkey, who isn’t running for re-election, said he thinks the legislature will have to come up with a “more transparent system that’s not subject to tinkering by politicians.”
Exactly how that’s done won’t be up to Sharkey and it may have to wait until an appeal of the lawsuit is completed.
As for the property tax system, “I think we’re stuck with the reality of property tax and its inequities,” Sharkey said.