Hartford Suffers Downgrade, as Connecticut Struggles With Its Budget

Hartford, Connecticut

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Uncertainty about state aid has analysts concerned about capital city’s general obligation and stadium bonds.

Connecticut’s capital city suffered a credit downgrade Tuesday in the latest sign of the state’s deteriorating public finances.

On the same day, Democrats and Republican leaders in the state legislature released their fiscal 2018 proposals. Among ideas they surfaced were deep cuts in funding for municipal aid and public colleges and universities, legalizing and taxing marijuana, opening a new casino to boost gambling receipts and capping state borrowing. Each group also demanded a big increase in the already-deep concessions Gov. Dannel Malloy has demanded from unions representing public employees.

The various budget proposals are unlikely to give comfort to investors in the bonds of Hartford or its Stadium Authority, which has financed an over-budget $71 million minor-league baseball stadium called Dunkin’ Donuts Park.

On opening day, April 13, at the brand-new stadium, the capacity crowd of 6,200 fans was disappointed when the local Double-A team, the Yard Goats, lost a 7-2 contest against the New Hampshire Fisher Cats. But their fleeting chagrin was minor-league, so to speak, when compared to that of the many interests that stand to suffer in the city and state budget morass.

Hartford’s Downgrade

The Hartford downgrades were announced by S&P Global Ratings, which has closely followed the finances of Connecticut and its municipalities in recent years. S&P Global reduced its rating on the city’s general obligation bonds to BBB- from BBB. It cut its rating on the Stadium Authority’s lease revenue bonds to BB+ from BBB-. The ratings agency placed both on a 90-day “CreditWatch with negative implications.”

The state’s own budget woes contributed significantly to S&P Global’s decisions on Hartford’s situation. State leaders were taken aback when, early this month, the state’s Office of Policy and Management declared that revenues were falling far below anticipated levels. That, as Route Fifty reported recently, put the state $5 billion in the hole against a $39 billion spending plan for 2018-19. As S&P Global said in its new report, the downgrades “reflect the heightened uncertainty on whether the state will increase intergovernmental aid or otherwise lend the necessary state support to enable Hartford to achieve structural balance and prevent it from further fiscal deterioration.” That uncertainty, the ratings company said, likely lay behind city fathers’ decision to advertise for the services of a bankruptcy lawyer.

Hartford, with a population of 124,000, has a solid economic base. It hosts 53,000 government workers, is home to several colleges and also to the headquarters of two Fortune 500 companies: insurance giants Aetna and The Hartford. Still, unemployment has been high, in excess of 10 percent in recent years, and household incomes are low—“among the weakest in the state and nationally,” said the S&P report. Many mid-to-high-income workers live in the city’s suburbs and exurbs.

The city budget that’s such an issue is for fiscal 2018, which begins on July 1. The city has recommended spending $612 million, and increase of 11 percent from 2017. Debt service, rising contributions to employee pension plans, and health care cost inflation account for the increase. But even assuming $20 million in revenue increases and $4 million in union concessions, the city is facing a $50 million gap—about 8 percent of budgeted expenditures.

Malloy’s proposed budget for 2018 would increase aid to Hartford, and would also give the city authority to tax nonprofit hospitals. But there are at least two flies in this ointment.

To take the obvious first, hospitals are fighting with all their might to avoid taxation by Hartford and other municipalities. Second, increased state aid for Hartford would come at the expense of relatively wealthy smaller towns. This Robin Hood idea relies mainly on making towns contribute to the costs of teacher pension plans, with money redirected toward low-income Hartford, Bridgeport, New Haven and Waterbury.

The big jump in the state’s projected revenue shortfall will greatly complicate the task of reaching agreement on a Connecticut budget for 2018, S&P analysts believe—“with the final impact on aid to localities uncertain.”

The report notes that the city has little budgetary flexibility inasmuch as city revenues are derived principally from state subventions (51 percent) and property tax receipts (46 percent). The property tax burden, at a mill rate of 7.4 percent, is among the highest in the state, affording little opportunity for an increase.

Hartford is carrying a high debt load and is also suffering from expensive, unfunded obligations to employee retirement systems. Debt service now equals about 8 percent of city expenditures. The city and its Sports Authority have outstanding debt totaling $770 million.

Combined pension and other postemployment benefit (principally health care) contributions consume another 8 percent of expenditures. These line items are slated to rise, and at an accelerating rate if Malloy’s proposal that cities pick up a third of teacher retirement costs is enacted.

Budget Negotiations

Malloy’s budget would hold Hartford, Waterbury, Bridgeport and New Haven harmless against the added teacher retirement payments, by adjusting educational aid and other subventions. Indeed, Hartford would gain state aid if the governor has his way. But that prospect had smaller, wealthier communities up in arms, as residents protested giving their tax dollars to what they view as inefficient bigger-city governments.

Malloy on May 15 released a revised budget, with a concession of sorts to the towns. He continues to advocate teacher pension contributions by the municipalities, but would cap the amount at $400 million instead of allowing it to increase by hundreds of millions in future years. His revised budget would make added spending cuts sufficient to actually cut spending from $19.7 in 2017 to $19.5 billion in 2018.

Both Democratic and Republican leaders this week released their own budget proposals, and both groups separately advocated some $650 billion in additional savings deriving from labor union concessions. Malloy’s budget has assumed about $1.6 billion in labor savings; the legislators would increase that amount to about $2.2 billion. Union leaders, needless to say, are strongly opposed, noting that they already made substantial concessions earlier in Malloy’s administration.

The Democrats’ May 16 budget proposal rejected two of Malloy’s ideas: requiring cities and towns to contribute to teacher pension costs, and to subject nonprofit hospitals’ real property to municipal taxation. But they endorsed deep cuts in municipal aid and in support for public colleges and universities to help cut spending.

The Democrats also proposed to legalize marijuana and to authorize opening of a new casino, both with positive revenue consequences.

The Republican leaders the same day released their budget proposal, advocating a series of additional cuts, including eliminating a sales tax revenue-sharing program with cities and towns; dramatically reducing the state’s Earned Income Tax Credit (EITC) for the working poor and capping state borrowing.

Historians might note that today’s politicians are having a hard time living up to a state motto, “Qui transtulit sustinet,” adopted by their predecessors in 1788. Those Latin words, emblazoned on the state flag, mean “He who transplanted sustains.” But as the Hartford follies testify, it’s a tough slog to maintain a less-than-risible public sector in what was originally known as the Constitution State.

Timothy B. Clark is Editor at Large at Government Executive’s Route Fifty.

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