Connecticut's Budget Solution: State Capital Gets More, Small Towns Get Less

By Heather Gillers Features Dow Jones Newswires

The road that runs past town hall in Beacon Falls, Conn., has cracks and bumps. But plans to repave it will likely have to wait another year because of less aid from one of America's richest states.

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"It's probably been more than two decades since the last time it was refurbished," said Beacon Falls First Selectman Christopher Bielik.

Many cities in Connecticut are reconsidering their spending decisions as they prepare to fill new funding gaps following a two-year, $41 billion budget approved last week by state legislators. Beacon Falls received a $200,000 cut, meaning that repairs to the road or the water pipes that run under Maple Avenue will have to wait for another year, according to Mr. Bielik.

Before last week Connecticut was one of just a few states in the U.S. without a package of spending and taxes for the current fiscal year. It is home to one of the wealthiest populations in the U.S. but has been struggling with a way to afford mounting debt and pension obligations.

The new budget agreement, which cleared enough votes in the state House and Senate to survive a veto from Gov. Dan Malloy, provided the state's capital of Hartford with $40 million designed to help that city avoid bankruptcy. But it left other cities with at least $30 million less than the previous budget, according to a partial tally of cuts by the Connecticut Conference of Municipalities.

That means some will likely have to resort to service cuts or tax increases. One major ratings firm, S&P Global Ratings, said Friday that "weak credit conditions across local governments...could persist for some time" due to reduced amounts of state aid and a stagnant statewide economy.

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The ratings firm last month placed nine Connecticut municipalities and one school district on negative watch, meaning they have a 50% chance of a downgrade. S&P Global Ratings said Friday that it is waiting to see how those governments address aid reductions in the new budget before deciding whether to change their ratings. The cities include Bridgeport, New Haven, New London and Waterbury.

The cuts are less severe than what Mr. Malloy had originally proposed, and no Connecticut town will have its state aid cut by more than 5%. But most small towns have already had their state funding drop or remain flat over the past decade while the cost of services has increased, said Betsy Gara, executive director of Connecticut Council of Small Towns.

"It has made it more difficult to provide services without relying on property-tax increases," Ms. Gara said. A lack of significant commercial development in many areas has left some Connecticut towns particularly dependent on homeowners to raise revenue, she said.

Nearly half of the Connecticut municipalities rated by Moody's Investors Service have already had their credit affected by the state budget crisis. Moody's earlier this month put 26 Connecticut towns and three school districts on review for downgrades and gave another 25 towns and three school districts a negative outlook, citing "the ongoing vulnerability" of state funding to local governments.

Trading prices of Connecticut town and school bonds have so far been largely unaffected. But there is evidence that a state fiscal crisis can force local borrowing costs higher.

In Illinois, during a two-year budget standoff that was resolved in July, local governments often paid an additional quarter of a percent -- or more -- to borrow money, said Richard Ciccarone, president and chief executive of Merritt Research Services LLC, a research firm that tracks municipal bonds. Investors were concerned distress at the state level could spread to municipalities.

"Historically it does happen that there is guilt by association," Mr. Ciccarone said.

Some cities have already taken action to account for less money from the state. The 8,200-person town of Brooklyn, Conn., raised taxes in June in anticipation of cuts. Last year it received $111,000 from the state to compensate for the fact that the town is home to a jail and a state university office on which Brooklyn cannot collect taxes. This year, that payment is expected to fall to $79,000, according to the Connecticut Conference of Municipalities analysis.

"That's tax dollars that we have to make up," said First Selectman Rick Ives, noting that the payment had already fallen from $300,000 five years ago, even though the value of the state-owned properties remains about the same. "We've got to find ways to not be so reliant on state revenue because we can't do anything until we know what they're doing, and it's getting harder and harder to know that."

In Madison, Conn., where state education aid fell from nearly $450,000 to about $420,000, according to the Connecticut Conference of Municipalities analysis, First Selectman Tom Banisch said the town's short-term solution will be to dip into its general fund. In the long term, he said, he hopes to expand the town's property tax base.

"We're being killed by a thousand cuts," Mr. Banisch said.

Write to Heather Gillers at heather.gillers@wsj.com

(END) Dow Jones Newswires

October 30, 2017 08:29 ET (12:29 GMT)