Courtesy of Moody's Investor Services

HARTFORD, CT— A Wall Street rating agency says Gov. Dannel P. Malloy’s revised executive order that would reduce municipal aid is “credit negative for Connecticut local governments.”

An analyst for Moody’s Investor Services said the revised order reduces municipal aid by $928 million from 2017 levels.

The new revised Aug. 18 executive order, which will go into effect on Oct. 1 if the General Assembly fails to pass a budget, reduces Education Cost Sharing grants by $557 million relative to the fiscal year 2017 disbursement. The largest reduction in Education Cost Sharing grants are to Stratford, Southington, and Enfield. Stratford would lose $21.5 million, Southington $20.3 million, and Enfield $20 million, according to Moody’s.

The revised executive order eliminates ECS funding for 85 Connecticut towns and reduces funding to an additional 54 communities. It restores to 2017 levels funding for Connecticut’s 30 lowest-performing school districts, including Hartford, Bridgeport, Waterbury, and New Haven.

The executive order also eliminates $182 million in PILOT funding and reduces smaller municipal revenue-sharing grants by approximately $131 million.

“Barring passage of a state budget, the projected cuts will likely force municipalities to take emergency action through supplemental tax hikes or mid-year expenditure cuts,” Moody’s analyst Joseph Manoleas wrote. “Use of reserves to address budgetary shortfalls is a challenge in Connecticut because the median fund balance in the state for towns and cities of 13 percent is already lower the national median of 31 percent of revenues.”

Malloy’s budget office is expected to release a report in the near future that details the reserves in each municipality.

Chris McClure, a spokesman for Malloy, said it’s no surprise a rating agency would not look favorably on operating government in the absence of a state budget.

“Knowing how much deeper the cuts to services for residents and aid to town would be, if forced to allocate funding by executive order, the Governor has been clear that this was not his preferred path,” McClure said. “This reality has forced the state to make some nearly impossible spending decisions across state government — all of which would have been avoidable if the General Assembly had passed a budget before the start of the current fiscal year. We recognize this is difficult for the municipalities as many communities will face cash shortfalls if we continue forward without a state budget, but we continue to hope to have a full, responsibly budget adopted without delay.”

Last week, the Malloy administration released a report detailing how the state spends $5.1 billion per year on municipalities through various programs. Organizations representing municipalities said it’s an unfair way to frame the debate. They said there are over 1,300 state mandates on towns that dictate nearly 50 percent of municipal spending.

“Unfortunately, holding towns harmless and even increasing aid while we make excruciating cuts across state government is not sustainable in the long-term,” Malloy has said. “It’s clear that if we want to put Connecticut’s budget on stable footing, we must modernize the relationship between the state and local municipalities.”

The report shows, according to the Malloy administration, that “over the last five fiscal years the state’s support to towns and cities has grown by nearly $1 billion, an increase of more than 21 percent. This has taken place while the state’s population has remained largely flat and student enrollment in public schools is down.”

Education funding and teacher pensions are the two primary drivers of the 21 percent increase in state aid to municipalities.

Malloy has said education funding through the Education Cost Sharing grant has outpaced transportation, corrections, and regulation and protection as functions of government.

Meanwhile, House Democrats have proposed a budget that focuses on increasing the sales tax from 6.35 percent to 6.85 percent.

Senate President Martin Looney, D-New Haven, said a sales tax increase is one option under consideration, but it’s not the final option to be considered. Moderate members of Looney’s caucus have expressed concern about raising the sales tax.

Looney said it would be fair to say the governor’s proposal will likely increase property taxes and it’s fair to say that the budget debate is over what types of revenue the state should raise to balance the budget.

“The debate is in many ways are we going to go with traditional or non-traditional revenue forms,” Looney said last week.