The State of Connecticut (A1 stable) has recently attempted to increase the level of municipal oversight through the creation of the Municipal Accountability Review Board (MARB). The idea behind the creation of the board is to assist in preventing financial distress within municipalities before they occur. The board’s first project is Hartford (B2 stable) which has been in a critically distressed state for some time. Connecticut recently bailed out the municipality last March in an effort to save the ailing municipality from default. Nevertheless, the aid package comes with a surrender by the municipality to the State to control their finances.
The creation of the Municipal Accountability Review Board is also a deviation from the state’s prior case-by-case method of dealing with failing municipalities. It has now introduced a codified system with four tiers of oversight to designate the level of distress a municipality is facing. If assistance is given, it will be determined by the board which will consider factors such as a municipality’s fund balance, bond rating, equalizing mill rate and the amount of state aid as a percent of the total budget. For the municipalities of Hartford and West Haven (Baa3 negative), strict oversight will be given by the board as well as the development of recovery plans.
These efforts demonstrate a positive attempt by the state of Connecticut to stem the tide of fiscal insolvency that overshadows the state. Nevertheless, all of these efforts will not reduce the risk of default unless they include policies to overcome challenges such as a stagnant tax base, sluggish economy and limited revenue growth. Although the Hartford bailout reduces the city’s long-term liabilities by nearly 40%, the sustainability and longevity of this action will be hampered if costs afflicting the budget are not adequately reduced. The result will just be a repeat of what brought the municipality to its knees and seeking aide in the first place.