Connecticut and Pennsylvania are still without budgets four months into their fiscal years. It’s too soon to compare either state with Illinois, which recently went two years without a budget. But municipal market investors should be aware that prolonged disputes of this type are can be a harbinger of longer- term credit decline.
For many years, Connecticut was well-regarded by investors and had bond ratings solidly in the double-A range. The state even had plans just over two years ago to strengthen its “rainy day” fund. Those plans didn’t last, however, as revenues weren’t received as expected and state officials concluded its “rainy day” had arrived. In 2015, Connecticut’s rainy day fund contained $519 million but now holds only $171 million.
Adding to Connecticut’s woes is the weakened state of its capital, Hartford, where Mayor Luke Bronin has threatened to file for Chapter 9 municipal bankruptcy if the state doesn’t provide “substantial and sustained” aid to the city. Connecticut’s problems make it unlikely to provide that level of assistance, and a bankruptcy filing or default by Hartford could damage investor perceptions of the state’s creditworthiness. A default on city cash-flow notes could occur on Oct. 31.
A different situation exists in Pennsylvania, which has adopted a spending plan for fiscal year 2018 but no corresponding revenues to pay for it. The political dynamic in Pennsylvania pits Governor Tom Wolf, a Democrat, against a Republican-controlled state legislature.
Revenue proposals have included a state hotel tax, commercial storage tax, and gambling expansion. The most controversial proposal however has been a severance tax on natural gas production.