HARTFORD, CT — Connecticut’s cities and towns will continue to feel financial pressure based on their exposure to fiscal uncertainties and adverse economic and demographic trends, according to a new report released by Moody’s Investors Service.
However, cities and towns will experience that financial stress differently. Towns in the suburbs of Fairfield County with bigger fund balances and a more stable tax base will be more insulated than cities like Hartford, New Britain, and Waterbury.
Towns and cities with healthy fund balances, lower property tax millage rates, and a lesser reliance on state aid are more financially nimble, the report states.
But towns with high property tax rates may face “practical revenue-raising limitations.”
“Connecticut local governments receive a median 68 percent of revenues from property taxes, 20 percent from the state and 12 percent from other sources,” Joe Manoleas Moody’s analyst and lead author of the report said.
Manoleas added: “Towns and cities with less reliance on state funding are less vulnerable to the financial and political swings of the state and therefore have more financial flexibility than peers with a greater reliance on the state.”
Last year, the median reduction in state aid was 10.9 percent, but funding for high-need cities and towns was left largely intact. The 2019 budget reduces municipal aid another $32 million. That’s on top of the 4.6 percent reduction to $2.45 billion from the $2.57 billion in the previous fiscal year.
The report also warns that state payments for teachers’ pensions have been a significant source of state support for local governments, but a shift of these costs to towns and cities could have an adverse impact on municipal finances. Gov. Dannel P. Malloy made that proposal in 2018, but did not revive it for the 2019 budget when it failed to gain any traction among legislators.
Though some local economies benefit from the defense industry and proximity to New York City, corporate out-migration remains a challenge. Connecticut’s population loss (down annually from 2014-16) and its older median age are negative demographic trends, according to the report.
“Moody’s new report clearly depicts how Connecticut towns and cities are caught between a rock and a hard place in 2018,” Kevin Maloney, Connecticut Conference of Municipalities spokesman said.
“Local governments are being squeezed by declining state aid and little relief from onerous state mandates, as municipal costs continue to climb,” Maloney added. “And the specter of teachers’ retirement payments being passed onto towns, along with discussions about eliminating the property tax on motor vehicles, are yet two more dark fiscal clouds hovering over municipalities.”
Maloney said the Moody’s report underlines the importance of the state adopting a recent report compiled by Commission on Fiscal Stability and Economic Growth to stabilize Connecticut’s economy.
In that report recommendations involving local revenues include:
• Empowering municipal coalitions to add one-half of 1 percentage point to the sales tax rate to fund regional services and diversify local budgets that rely excessively on property taxes.
• Allowing regional coalitions of municipalities to raise supplemental taxes for capital projects by special referendum.
• Allowing communities, through regional councils of government, to charge fees on nonprofit colleges and hospitals, which currently are exempt from local property taxation.
• Permitting towns to increase fees for use of the public rights of way, stormwater fees, hotels, car rentals, restaurants, and other services.
• Urging the state to increase the grants it already provides to restore some of the funds communities lose because state property is exempt from local taxation.
Of Moody’s findings, Coventry Town Manager John Elsesser said, “It is imperative that everyone work together to steady the state’s financial condition.”
Elsesser, who is also first vice president of the Council of Small Towns, added that “Without a strong and stable state, our town’s fiscal health remain in jeopardy of financial downgrades and the repercussions of higher interest rates. Tremors at the Capitol create huge aftershocks for towns.”
An independent bond analyst warned last year of shared bond rating consequences if the state allows its capital city to go bankrupt.
The analyst said that if the city of Hartford files bankruptcy, it could have a “contagion” effect on other cities.
Last October when lawmakers were still struggling to pass a budget four months after their deadline, Moody’s placed the ratings of 26 municipalities and three regional school districts under review for a credit downgrade.
“Many towns have had their bond ratings affected because of uncertainty regarding municipal aid levels,” Connecticut Council of Small Towns Executive Director Betsy Gara said.
Gara noted that some towns have had to draw down their fund balances to address mid-year cuts in education and other funding.
“Bond rating companies have advised many towns that despite strong local management and stable finances, their bond ratings have been downgraded,” Gara said.
“To improve their bond rating, bond rating companies are advising towns that they need to reduce reliance on state funding, increase the reserves in their fund balance, and expand their tax base,” Gara said. “As a result of the downgraded bond ratings, towns will face higher borrowing costs.”
She said this is why they are calling for structural reforms to put Connecticut and municipalities on solid fiscal ground.