Towns bear a significant responsibility for providing public services, most notably education, fire protection, police, and public road maintenance. Their ability to deliver these services depends on their fiscal capacity, that is, their ability to generate the revenue needed to pay for them. A town's fiscal capacity depends on its (1) property wealth, (2) demand for services, and (3) residents' income. The interplay between these three factors affects a town's ability to meet the needs of its residents.

Affecting that interplay are cyclical and structural factors. Cyclical factors are periodic trends that affect local budgets. For example, layoffs, business closings, and drops in property value make it harder for towns to fund services without increasing taxes. These same cyclical factors also affect state revenue flows, as businesses and people cut back on spending and make other adjustments to ride out the downturn. As revenues fall during a downturn, the demand for public assistance programs increases. Decreases in state revenues affect the state's ability to fund municipal grants-in-aid.

Structural factors, on the other hand, are things that affect a town's long-term ability to fund services without overburdening taxpayers. State law is a structural factor because it specifies the things towns must do and how they may raise revenue to pay for them. The law allows towns to levy only property taxes and specific fees, such as those for obtaining building permits. The property tax, as a revenue source, is not responsive to spending needs that change along with economic, demographic, and technological changes.

Towns' reliance on the property tax affects the state budget and how the state and towns get along. As the cost of municipal services has increased, towns have turned to the state for assistance. In time, state aid has constituted a growing share of town budgets, making towns vulnerable to the cyclical and structural forces that affect the state's fiscal capacity. Besides adjusting to fluctuations in state aid, towns also had to adjust to the strings – the controls – that accompany that aid. The ballooning state deficit and the pressure to cut spending could force towns to either increase property taxes to maintain services or reduce or eliminate them.

This report looks at municipal fiscal conditions by examining six indicators that measure different aspects of municipal fiscal capacity. As a whole, the indicators are a barometer of fiscal health and can be used to identify the most fiscally distressed towns. The indicators show each town's (1) equalized net grand list (ENGL) per capita, (2) education cost sharing town wealth rank, (3) ratio of debt to ENGL, (4) ratio of intergovernmental aid to total revenues, (5) bond rating, and (6) unemployment rate. Using these indicators, the report identifies the towns experiencing the most distress.

Attachment 1 shows how each town scored on each indicator. The italicized scores indicate the 25 towns that rank highest or lowest on the indicator, depending on the type of distress it measures.

When measured on a per capita basis, ENGL represents the amount of property wealth available in a town to support each resident. It is an estimate of the market value of a town's taxable property, equalized to reflect each town's taxable real and personal property at 100 percent fair market value.

In general, towns with greater per capita property wealth have a greater capacity to generate revenue and, in turn, a greater ability to fund the services residents demand. The opposite is true for those with less property wealth. (In both cases, the capacity to generate revenue without overburdening taxpayers depends on their incomes or their ability to afford municipal services.)

The median ENGL per capita across all Connecticut cities and towns is $152,875. Table 1 shows the 25 towns that rank lowest in ENGL per capita. The state's three largest cities – Bridgeport, Hartford, and New Haven – are in the bottom 10. Hartford's ENGL per capita is the lowest ($45,280), less than one third of the median amount. This stands in stark contrast to Greenwich, which has the highest ENGL per capita in the state at $845,224 (see attachment 1).

By combining property wealth and income, the Education Cost Sharing formula (ECS) measures a town's capacity to fund services. The State Department of Education includes town wealth in the formula, which it uses to calculate the state's education equalization aid grants. ECS town wealth is based on a town's property tax base (ENGL three-year average) and the income of its residents.

Towns with substantial property wealth and high incomes have more capacity to generate revenue without overburdening their residents. Those with little wealth and low incomes have less capacity to do so. The capacity of towns that fall between these extremes depends on the relationship between property values and income. In theory, towns with great property wealth may struggle to sustain funding for services if their residents have relatively low incomes. Likewise, towns with less property wealth might have the capacity to maintain funding for services if their residents have relatively high incomes.

Table 2 shows the 25 towns that rank the lowest in ECS town wealth. With the exception of six towns, the towns that ranked in the bottom 25 for ENGL per capita also rank at the bottom of ECS town wealth. The six towns from Table 1 are not among the bottom 25 in Table 2 because they have relatively higher incomes. They are Chaplin, Enfield, Hampton, Manchester, Vernon, and West Hartford. They are replaced by Plainfield, Sterling, Killingly, Stafford, Sprague, and Thompson.

Another way to measure a town's fiscal capacity is to determine the amount of debt it owes relative to its property wealth. This ratio indicates a town's capacity to repay its debt without affecting services. But it should be used cautiously when generalizing about fiscal capacity because a town's debt level could temporarily jump as it does when a town issues bonds for major capital improvements.

The ratio also indicates the share of local revenue that must go toward paying debt instead of services. As a town's debt to ENGL ratio increases, a town may have to cut services or forgo capital improvements to make its debt payments.

Table 3 lists the 25 towns with the highest ratio of debt to ENGL. New Haven has the highest ratio, with debt equal to 7.9% of its ENGL. Bridgeport and Hartford are the next highest with ratios of 5.8% and 5.2%, respectively.

The share of intergovernmental aid in a town's total budget indicates the extent to which it depends on revenue from the state and federal governments to fund services. State aid consists of (1) statutory formula grants and (2) discretionary grants. The formula grants include funds for education and school transportation, payments in lieu of taxes (i.e., PILOTs), and aid for town road projects (known as Town Aid Road or TAR). The state also awards discretionary grants-in-aid to municipalities for various purposes, including economic development and infrastructure projects. Federal aid to municipalities includes funds for community development and other discretionary purposes.

Table 4 lists the 25 towns with the highest ratios of intergovernmental aid to total revenues. These towns receive more aid in part because they have less property wealth, more lower-income residents, and a greater percentage of tax-exempt property within their boundaries. These factors make it more difficult for towns to raise their own tax revenue to fill budget gaps caused by cuts in aid.

Windham is at the top of the list, with nearly 60% of its FY 08 revenue coming from state and federal sources. Hartford and Putnam follow with a ratio of nearly 57%.

A town's bond rating reflects the rating agency's view of the town's relative credit risk. It is based on a town's financial and economic position, debt levels, and management capacity. Consequently, it is a measure of a town's assets and liabilities and its ability to generate revenue. The rating reflects the risk for investors in lending money to the town and affects the interest a town must pay to borrow money.

Table 5 shows the rating system for Moody's Investors Service, which rates the majority of Connecticut towns' bond issues. (Other rating agencies have similar rating systems.) Moody's rating designations go below Baa, but these investments are not considered “investment grade.” No Connecticut towns have such ratings. Twelve Connecticut towns have a Aaa rating, the highest grade. These towns pay the lowest interest rates to borrow and have the easiest time selling their bonds because they are considered the safest.

Table 6 shows the October 2009 Moody's bond ratings for the 31 towns with Baa2, Baa1, and A3 ratings. Among the six towns in the Baa category, West Haven ranks the lowest with a rating of Baa2. The other towns (Bozrah, Bridgeport, Deep River, East Haven, and Waterbury) have a Baa1 rating. The remaining 25 towns have an A3 rating.

A town's unemployment rate is an indirect measure of its residents' ability to pay for services. Table 7 shows the 26 towns with the highest unemployment rates for September 2010. (It includes 26 towns, rather than 25, since two towns tied at 9.6%.) Hartford tops the list with 15.8% unemployment, two percentage points ahead of the next highest town (Waterbury). The statewide unemployment rate for the same month was 8.8%. In all, there are 38 towns with September 2010 unemployment rates above the state's average rate.

The six indicators measure different aspects of fiscal capacity, namely property wealth, demand for services, and income. Together, the indicators serve as a barometer of municipal fiscal health that can be used to identify cities and towns experiencing the greatest amount of fiscal stress.

Table 8 shows the towns that appeared at the bottom of at least three of the six indicators. Bridgeport, New Britain, and New Haven ranked in the bottom for all six indicators. Six other cities and towns (Ansonia, Hartford, Meriden, Putnam, Waterbury, and West Haven) ranked in the bottom for five indicators.

As the table shows, fiscal stress is not limited to the large cities. The diverse mix of municipalities suggests that the causes of stress vary from town to town and that there is no one-size-fits-all policy solution. Knowing the specific causes of a town's fiscal distress could help policymakers tailor policies and programs that address those specific causes. For example, highly developed inner-ring suburbs with little or no developable land may respond better to policies and programs aimed at reducing municipal costs than those aimed at attracting new businesses.

^* Blank cell indicates that Moody's had not issued a bond rating for the town as of October 2009

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