Wall Street Says Budget Is Good for Connecticut, But Bad for UConn
HARTFORD, CT — Finally having a two-year state budget in place is “credit positive” for the state of Connecticut and its municipalities, but it’s a “credit negative” for the University of Connecticut.
Moody’s Investor Services noted in a recent analysis that having a state budget in place “restores revenue and expenditure predictability and implements improved financial management measures.”
However, “with approximately $107 million in cuts, the adopted budget is credit negative for UConn because it adds to near-term operating challenges.”
University of Connecticut President Susan Herbst has said the university will cope with the cuts, which it estimates at $143 million, by implementing a “strategic” hiring freeze, reducing services, and halting some projects, including the renovation of the Gant Science Complex.
The major cut comes after $32 million in state funding reductions in both fiscal 2016 and 2017.
Moody’s Investor Services downgraded the university to Aa3 in July because of its reliance on the state and the anticipated revenue pressure on “its already thin operating cash flow from potential additional state funding cuts.” The $107 million reduction over two years is much higher than the $70 million the university assumed when it approved its 2018 budget.
On the positive side, the Wall Street rating agency said passage of the budget is good news for the state.
“It’s no surprise that creditors look favorably on Connecticut having a state budget in place,” Kelly Donnelly, a spokeswoman for Gov. Dannel P. Malloy, said. “To be frank, an adopted budget is long overdue and it is wise for us all to heed their warnings that there is more work to be done to shore up our long term outlook. But with that said, the positive outlook is welcomed news.”
The state’s largest form of local government aid, the Education Cost Sharing grant (ECS), will experience modest cuts in fiscal 2018 before restoration to 2017 levels in 2019. The majority of municipalities will see their ECS grants cut by 5 percent in 2018 and then see a modest increase in funding in 2019.
Over the two-year budget, ECS funding for the state’s 33 lowest-performing districts will remain at 2017 levels for 2018 before increasing 1 percent to 4 percent in 2019.
The adopted budget also creates a Municipal Accountability Review Board designed to provide oversight and additional fiscal and administrative resources for fiscally distressed municipalities, like Hartford, which was looking at bankruptcy as an option before the budget passed.
However, analysts for Moody’s point out that Connecticut is still facing a potential fiscal crisis.
While the recent budget solves the problem for 2018 and 2019, “budget gaps” start forming again in 2020 because of “high fixed costs.”
Analysts warn that these pressures, “raise the prospect of potential future cuts to local government and higher education funding, as the state seeks to achieve structurally balanced operations. This could create significant credit challenges for local governments and higher education institutions.”
The bipartisan budget that passed included a built-in $1.87 billion deficit in 2020 and a $2.59 billion deficit in 2021.
Both parties have acknowledged that the deficits are daunting, but said they did what was necessary to pass a budget.
Malloy, who is not seeking re-election, had been running the state through an executive order for more than four months before he signed the bipartisan budget on Oct. 31. The executive order severely cut funding to cities and towns.