Reader’s note: Officials of The Hartford Financial Services Group initially declined comment on its municipal bond holdings in a particular state. However, The Hartford subsequently disclosed that it had increased its holdings in municipal bonds from Connecticut in 2010 while decreasing its holdings in other states. The Hartford declined to identify the states where it had reduced its holdings.
The chief executive officer of Boston-based insurer Liberty Mutual Holding Co. recently announced his company has reduced its holdings of municipal debt in several states including Connecticut, one of the surest signs yet that the state’s budget woes are weighing heavily on the minds of investors.
It’s a decision that has been replicated by others — including The Hartford Financial Services Group — as weary investors are pulling back on bets in troubled state and local governments, fearing that some may default on their obligations.
Is a Connecticut city or town in danger of defaulting on a bond obligation?
Industry experts say it’s unlikely a Connecticut municipality will go belly-up. But that doesn’t mean their financial pictures are rosy, especially since most cities and towns rely heavily on state funding.
In fact, two local governments are on the state’s closely-held “watch list” of financially troubled municipalities.
But experts say towns and cities as a whole are in a much better financial shape than the state itself.
“Everyone seems to be aware that the state’s budget situation is a potential issue, but generally speaking municipalities have strong reserves,” said Kevin Dolan, director public finance at Fitch Ratings, which tracks the credit ratings of about 30 municipalities in Connecticut.
Dolan said cities and towns in the state have done a good job reducing expenses or keeping reserves in place to guard against financial problems. They also have the flexibility to handle slight declines in state aid by raising taxes.
And historically, Dolan said, the market has had a “very strong” appetite for municipal debt from Connecticut. And he said he hasn’t seen that change much lately.
But in many ways, the fate of cities and towns are closely linked to the financial well-being of the state, which is facing a crippling $3.6 billion budget deficit and whose unfunded pension and medical liabilities are close to $42 billion.
Marcia Marien, president of the Connecticut Society of Certified Public Accountants, and whose firm, Marien & Co. provides accounting services to municipalities, agrees that most cities and towns have been responsible with their budgets.
But they are also likely to face challenges as state lawmakers deal with the deficit.
Marien said at best it’s likely municipalities are going to be flat funded this year from the state, or possibly even take a haircut. That means most cities and towns will have to either cut services or raise taxes since their average annual expenses typically increase 3 percent.
Municipalities that rely more heavily on state aid — including larger cities and small, rural towns — will be hit harder.
About 40 municipalities in Connecticut rely on the state for at least 40 percent of their budget.
Putnam, Windham and New Haven all rely on the state for more than 60 percent of their budgets, while Hartford relies on the state for about 58 percent of its budget, Marien said.
There’s also little discretionary spending in local budgets, which makes it harder to find spending cuts.
Marien said the bulk of local budgets — about 75 percent in most cases — goes toward education. And state law forbids municipalities from decreasing budget expenditures on education from one year to the next.
That means any cuts in state aid will likely lead to tax increases.
“A lot of their hands are tied,” said Marien, who added that many municipalities have reserves to tap if things get tough, providing a much needed buffer.
All Connecticut municipalities will turn their attention to Gov. Dannel P. Malloy this week as he delivers his budget address. Malloy has promised not to balance the state budget on the backs of municipalities, and said last week he will make cities and towns whole on education grants. But even flat funding for Connecticut’s 169 cities and towns would require increased state spending from a year ago, since lawmakers used one-time federal stimulus dollars to fill budget holes over the past two years.
Among the cities facing the most difficulties is West Haven, which is one of two municipalities on the Municipal Finance Advisory Commission’s watch list. The commission is part of the State Office of Policy and Management, and is responsible for working with troubled municipalities.
West Haven has been in rough financial shape for years. The city recently saw its long-term general obligation bond rating downgraded by Moody’s Investors Services from A2 to Baa1.
That is the lowest rating of any municipality in Connecticut and it affects about $142.9 million in outstanding general obligation debt.
West Haven’s “growing negative general fund balance position, a weak cash position and increasing Internal Service Fund deficit,” were the reasons for the downgrade, according to Moody’s.
West Haven Mayor John Picard, who took office in late 2005, said he inherited a fiscal mess, but has been working to drive down the city’s deficits and debt by resisting more borrowing and cutting expenses.
It hasn’t been easy and a cut in state aid would make the situation worse, he said.
Picard said the city has an annual budget of about $144 million, but faces a general fund balance deficit of $6.5 million to $9 million.
Of equal concern is West Haven’s $203 million in outstanding short-and long-term debt. Picard said the city, which collects $90 million in local taxes and receives about $50 million in state aid, pays nearly $20 million annually in debt service alone. That includes $6 million in interest payments in 2010.
He said the Municipal Finance Advisory Commission has advised him to borrow more money or raise taxes to cover the deficit but he’s been resisting doing either.
“All people do is borrow more money,” Picard said. “We can’t borrow more money to balance the budget.” Picard said the city has no plans to borrow more money any time soon and he hopes to eliminate the deficit by 2012.
Picard said the city did borrow $800,000 in short-term debt last year, but got a favorable rate of only 1 percent interest. He said his plans to close the deficit include selling off city-owned land and invoking other cost cutting measures. The city has already closed some schools, cut workforce positions, and increased health care contributions among city workers.
Jewett City is also on the state’s watch list, but only because of its past fiscal woes. The tiny borough in Griswold received a bailout from the state in the 1990s after it defaulted on a loan and was nearing financial collapse.
Local officials said they are not having financial difficulties today.
State Support City/Town State reveue as % of total budget Putnam 64.70% Windham 60.40% New Haven 60.40% New Britain 58.60% Hartford 58% Griswold 57.80% Ansonia 55.30% New London 54.70% Thompson 53.40% Killingly 53.40% Source: The Connecticut Society of Certified Public Accountants
