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OLR Bill Analysis
sHB 5427 (as amended by House "A")*
AN ACT CONCERNING THE RECOMMENDATIONS OF THE OFFICE
OF FINANCE WITHIN THE OFFICE OF POLICY AND
MANAGEMENT.
SUMMARY
This bill changes the criteria for designating, and terminating the
designation of, municipalities as tier I, II, III, or IV for purposes of state
fiscal oversight and control by the Municipal Finance Advisory
Commission (MFAC) or Municipal Accountability Review Board
(MARB), as applicable (see BACKGROUND). In doing so, it generally
establishes new criteria for detecting municipal fiscal distress. As under
existing law, the municipality’s degree of distress determines its
designated tier.
Currently, municipalities must request designation as a tier I or II
municipality. The bill establishes criteria for the Office of Policy and
Management (OPM) secretary to designate them as such, without them
requesting it (e.g., for failing to submit an audit or being in a condition
that would trigger eligibility for voluntary designation). The bill also
establishes conditions under which MFAC may recommend to the OPM
secretary that a designated tier I municipality that it is working with be
redesignated as tier II or III, making the municipality subject to MARB’s
oversight.
The bill subjects all designated municipalities to the same criteria for
determining whether their designation terminates. The revised criteria
are similar to the criteria currently used. The bill also makes it easier to
re-designate a municipality as tier I-IV after its initial designation
terminates.
Regarding MARB’s oversight, the bill also does the following:
1. specifies that the OPM secretary must consult with it to 2022HB-05427-R010684-BA.DOCX
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determine whether any Municipal Restructuring Fund assistance
funds should be provided as a loan (§§ 6 & 14) and
2. limits the municipalities for which MARB is authorized to
approve or reject a municipal or board of education collective
bargaining agreement or amendment (§ 10).
This bill also makes the following changes in other municipal finance
laws:
1. requires municipalities, before issuing pension deficient bonds,
to submit a five-year, instead of a three-year, financial plan (§ 1);
2. requires certain municipal entities, such as special taxing
districts, to annually file a financial statement with the OPM
secretary upon request (§ 2);
3. allows the OPM secretary to refer a municipality to MFAC,
instead of or in addition to assessing a penalty, if it does not file
its audit in a timely manner (§ 3); and
4. requires municipalities to file financial reports electronically,
using a uniform reporting template (§ 5).
The bill also makes technical and conforming changes.
*House Amendment “A” replaces two references in the underlying
bill to “current year audited” revenues with “most recent audited
financial statement” revenues, to clarify designation criteria.
EFFECTIVE DATE: October 1, 2022
§ 1— MUNICIPAL PENSION DEFICIENT BONDS
Under current law, before issuing pension deficient bonds (to fund
some or all of an unfunded past benefit obligation) under the statutes, a
municipality must submit a three-year financial plan to the OPM
secretary for him and the state treasurer to review. The bill instead
requires this plan, which under existing law includes the major
assumptions and financial plan for the bonds, to cover a five-year 2022HB-05427-R010684-BA.DOCX
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period.
§ 2 — FILING FINANCIAL STATEMENTS WITH OPM
Municipal entities with annual receipts of up to $1 million are exempt
from the requirement applicable to other municipal entities that they
annually submit an audit to the OPM secretary (CGS § 7-393). Instead,
existing law requires these municipal entities, such as special taxing
districts, to annually file a financial statement with the local town clerk
within 90 days after the end of the fiscal year. The bill additionally
requires the statement to be filed with the OPM secretary upon his
request. The bill extends existing law’s penalty for failing to file the
statement with the town clerk ($500 per statement not filed) to include
failure to file with the OPM secretary.
§ 3 — MFAC REFERRAL AFTER LATE AUDIT SUBMISSION
Municipal entities that are required to file an audit with the OPM
secretary must do so within six months of the end of the fiscal year
unless they apply for and are granted one or more extensions. Currently,
municipal entities that miss the regular or extended deadlines are
assessed a civil penalty ranging from $1,000 to $10,000 unless it is
waived by the OPM secretary.
The bill instead requires the OPM secretary to refer an entity that
misses the filing deadline to MFAC, assess the civil penalty, or do both.
As under current law, the secretary can generally waive these penalties
if there was reasonable cause for the delay (see § 4, below, requiring
MFAC referrals when audits are more than a year overdue).
§ 4 — MANDATORY MFAC REFERRAL AND TIER I DESIGNATION
The bill changes the criteria the OPM secretary uses to refer a
potentially fiscally distressed municipality to MFAC if it has not been
referred previously. If a municipality is referred under this set of
criteria, it is designated tier I (see § 7, below).
Under current law, the secretary must refer a municipality to MFAC
if it has done any of the following:
1. reported a declining fund balance trend in the two immediately 2022HB-05427-R010684-BA.DOCX
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preceding fiscal years;
2. had a general fund annual operating budget deficit of at least
1.5% of its general fund revenues in the immediately preceding
fiscal year; or
3. had a general fund annual operating budget deficit of at least 2%
of its average general fund revenues in the two immediately
preceding fiscal years.
The bill replaces these three triggers with a requirement that the
secretary refer a municipality that reported (1) an operating deficit in
the two immediately preceding fiscal years and (2) a fund balance
percentage of less than 5% in the immediately preceding fiscal year.
Under current law, the secretary must also refer a municipality if it
issued tax or bond anticipation notes in the three immediately preceding
fiscal years to meet cash liquidity. The bill instead requires a referral if
it issued tax or revenue anticipation notes for this purpose.
The bill also adds two new referral criteria. The secretary must refer
the municipality if it has done either of the following: (1) reported an
annual audit that included at least one material or significant audit
finding that was reported in the annual audits of the two immediately
preceding fiscal years or (2) was at least 12 months late in filing its audit.
Under existing law and unchanged by the bill, the secretary must
refer a municipality if it (1) has a negative fund balance percentage; (2)
reported a fund balance percentage of less than 5% in the three
immediately preceding fiscal years; or (3) received a bond rating below
A.
§ 5 — FILING MUNICIPAL FINANCIAL DATA ELECTRONICALLY
Beginning by January 31, 2023, and annually thereafter, the bill
requires municipalities (including school districts and special taxing
districts) to electronically file with OPM their audited financial
statements and any other requested information on their financial
condition. (Presumably, this requirement is related to OPM’s 2022HB-05427-R010684-BA.DOCX
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implementation of the Fiscal Health Monitoring System).
Currently, these municipalities must use the uniform chart of
accounts that OPM’s secretary developed. The bill specifies that
financial reports using this uniform reporting template must be filed
annually by January 31. In practice, this is already occurring.
§§ 6 & 14 — MUNICIPAL RESTRUCTURING FUND LOAN
The law establishes the nonlapsing Municipal Restructuring Fund to
provide financial assistance to designated tier II, III, and IV
municipalities (i.e., those subject to MARB oversight). To receive
assistance, an eligible municipality must submit a plan for approval to
the OPM secretary that details the municipality’s overall restructuring
plan, including the local actions it will take and how it will use the
funds.
In deciding whether to fund the plan, the secretary must consult with
MARB about the amount and timing of the fund distributions and the
conditions on how the funds can be used. The bill specifies that the
secretary must consult with MARB to determine whether any funds
should be provided as a loan.
§§ 7-8 & 11-12 — FINANCIAL PLANS COVERING FIVE -YEAR
PERIOD
Currently, if the OPM secretary refers a tier I designated municipality
to MFAC, it must prepare and present a three-year financial plan to the
commission for its review and approval. The bill instead requires
municipalities to prepare and present a five-year plan.
Current law allows MARB to require designated tier II municipalities
to prepare three-year financial plans and submit them to MARB for its
review and approval. The bill instead allows MARB to require a five-
year financial plan.
The bill also makes related conforming changes (§§ 11 & 12).
§ 7 — DESIGNATION AS TIER I MUNICIPALITY
By Request 2022HB-05427-R010684-BA.DOCX
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Under current law, a municipality’s chief elected official (CEO) may
apply to the OPM secretary to have the municipality designated as tier
I if it meets one of the three sets of criteria as shown in Table 1 below.
The bill eliminates these criteria and instead allows a municipality to
be designed as tier I if the CEO (1) expects, in the next 24-month period,
that the municipality will meet at least one condition requiring the OPM
secretary to refer it to MFAC (see § 4 above) and (2) submits a report to
MFAC, in a form and manner it prescribes, that confirms this.
Table 1: Tier I Designation Criteria in Current Law
Measures Set 1 Set 2 Set 3
Bond rating No rating or its
highest rating is
A or above, so
long as all of its
ratings are
investment
grade
No rating or its
highest rating is
A, so long as all
of its ratings are
investment grade
Bond rating is AA or
above, so long as
all of its ratings are
investment grade
State municipal aid
as percentage of
current year general
fund budget
Less than 30% Less than 30% 30% or more
Fund balance Positive Positive fund
balance of less
than 5%
Positive
FY 18 municipal
revenue increase as
a percentage of
revenue
At least 2% Not applicable At least 2%
Equalized mill rate Not applicable Not applicable Equalized mill rate
less than 30 mills
Mandatory Designation Related to Audit Issues
If the OPM secretary refers a municipality to MFAC after reviewing
its audit, or for failure to file an audit as described above (see § 4), it is
designated a tier I municipality automatically under the bill.
§ 8 — DESIGNATION AS TIER II MUNICIPALITY 2022HB-05427-R010684-BA.DOCX
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By Request
Under current law, a municipality’s CEO may apply to the OPM
secretary to have the municipality designated as a tier II municipality if
it meets one of the five sets of criteria as shown in table 2 below.
Table 2: Tier II Designation Criteria in Current law
Measures Set 1 Set 2 Set 3 Set 4 Set 5
Bond
Rating
No rating
from a bond
rating
agency or
its highest
rating is A,
so long as
all of its
ratings are
investment
grade
No rating
from a bond
rating
agency or
its highest
rating is A,
so long as
all of its
ratings are
investment
grade
Highest
bond rating
is AA or
higher, so
long as all
of its
ratings are
investment
grade
Highest
bond rating
is AA or
higher, so
long as all
of its
ratings are
investment
grade
Highest
rating is
Baa or
BBB, so
long as all
of its
ratings are
investment
grade
State aid as
percent of
prior or
current
fiscal year
general
fund budget
30% or
more
30% or
more
30% or
more
Not
applicable
Not
applicable
Fund
balance
Positive
fund
balance of
at least 5%
Positive
fund
balance of
less than
5%
Not
applicable
Negative Positive
FY 18
municipal
revenue
increase as
a
percentage
of revenue
At least 2% Not
applicable
Not
applicable
Not
applicable
Not
applicable
Equalized
mill rate
Less than
30 mills
Less than
30 mills
30 or more
mills
Not
applicable
Less than
30 mills
The bill replaces the current criteria with a requirement that the
municipality be designated as tier I, have held at least one meeting with 2022HB-05427-R010684-BA.DOCX
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MFAC, and either (1) has an equalized mill rate of at least 30 mills or (2)
received 30% or more of its most recent audited financial statement
revenues in the form of state aid.
Under the bill, if a CEO applies to OPM for tier II designation, it must
provide a copy of the application to MFAC within 10 days.
Under the bill, the OPM secretary must designate the municipality as
tier II, as requested, and refer it to MARB if he determines its financial
condition warrants it, based on his review of MFAC’s reports and
findings. Currently, he must refer to MARB any municipality that
requests tier II designation.
Designation Upon MFAC’s Recommendation
The bill establishes a procedure for MFAC to recommend a
municipality be designated tier II. (See § 9 for a discussion on MFAC’s
authority to recommend a tier III designation for a tier I municipality.)
After MFAC holds at least one meeting with a designated tier I
municipality, it may recommend to the OPM secretary that the
municipality be designated tier II based on its financial condition, which
MFAC must document in a report it submits to the secretary. MFAC
must also provide a copy of the report to the municipality within 10
days.
Within 45 days of receiving the report, the OPM secretary may
approve or reject MFAC’s recommendation; if no decision is made, it is
deemed rejected.
§ 9 — TIER III MUNICIPALITY DESIGNATION
Current law provides two paths for designating a municipality as tier
III: (1) the municipality (through the CEO or legislative body) requests
it because it meets specified bonding capacity and fiscal distress criteria
or (2) the secretary designates the municipality as tier III based on
specified distress criteria.
By Request
Current law allows a municipality to request designation as tier III if 2022HB-05427-R010684-BA.DOCX
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it meets one of the following criteria:
1. the municipality has at least one bond rating from a bond rating
agency that is below investment grade or
2. the municipality has no bond rating from a bond rating agency,
or its highest bond rating is A, Baa, or BBB, so long as all of its
ratings are investment grade, and it has either (a) a negative fund
balance percentage or (b) an equalized mill rate of 30 or more,
and it receives 30% or more of its current or prior fiscal year
general fund budget revenues in state municipal aid.
The bill replaces these bonding-capacity criteria with different fiscal
distress criteria and specifies that a tier I municipality can request
designation as tier III after holding at least one meeting with MFAC if it
(1) has an equalized mill rate of at least thirty mills or (2) received 30%
or more of its most recent audited financial statement revenues as
municipal aid from the state.
As under current law, the OPM secretary must designate a
municipality as tier III if the information MFAC provides supports the
designation.
Under current law, if the municipal CEO is making the request, he or
she must give the local legislative body at least 30 days to approve or
reject the request, after which, if no action is taken, it is deemed
approved. The bill extends this waiting period to 45 days.
Under the bill, if a municipality applies to OPM for tier III
designation, it must also provide a copy of the application to MFAC
within 10 days.
Designation by OPM Secretary
Under current law, the OPM secretary must designate any
municipality as tier III, regardless of whether it applied for such
designation, if it meets the criteria for voluntary tier III designation (see
above) or it issues either of the following: 2022HB-05427-R010684-BA.DOCX
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1. a deficit funding bond or issued one between July 1, 2012, and
July 1, 2017; or
2. refunding bonds with over 25-year terms that fail to achieve net
present value savings as the law requires, and its total annual
debt obligations, including the refunding bonds, exceed the
obligations for the refunding bonds for the first full year after
they were issued.
The bill retains these criteria (except for the component on deficit
funding bonds issued before July 1, 2017) and additionally requires the
OPM secretary to designate a municipality as tier III if it receives a bond
rating below investment grade.
The bill requires municipalities that are eligible for designation under
any of these criteria to notify OPM within 10 days after the triggering
condition occurred.
Designation Upon MFAC’s Recommendation
The bill establishes a process for MFAC to recommend to the OPM
secretary that a tier I municipality, with which it has met at least once,
be designated as tier III due to its fiscal condition. MFAC must
document the municipality’s fiscal condition in a report it gives to the
OPM secretary. The secretary must approve or reject the
recommendation within 45 days after receiving the report. His failure to
act is deemed a rejection.
§ 10 — MARB ACTION ON LABOR CONTRACTS
In addition to reviewing and commenting on municipal budgets,
existing law authorizes MARB to approve or reject any municipal or
board of education collective bargaining agreement or amendment, to
the extent the local legislative body can. The bill limits MARB’s
authority to do so by specifying that it only has this authority over
municipalities that are referred to it on or after October 1, 2022.
Under current law, MARB must act on agreements within 30 days
after their submission to MARB. The bill instead specifies that
agreements are deemed approved after 30 days if MARB has not 2022HB-05427-R010684-BA.DOCX
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approved or rejected them.
§ 12 — DESIGNATION AS TIER IV MUNICIPALITY
The bill makes a minor change to the criteria MARB uses to designate
a tier III municipality as a tier IV municipality. It extends, from three
years to five, MARB’s lookback period when it reviews a municipality’s
budget projects. This conforms to other changes in the bill requiring
municipalities to prepare five-year, instead of three-year, financial plans
(see above).
§§ 13 & 15 — CONDITIONS FOR ENDING DESIGNATION
The bill subjects all designated municipalities to the same criteria for
determining whether their designation terminates. The revised criteria
are similar to the criteria currently used.
The bill also (1) alternatively allows MFAC, by unanimous vote, to
end a municipality’s designation as tier I after evaluating its financial
condition; and (2) makes it easier to re-designate a municipality as tier
I-IV after its initial designation terminates.
Criteria for Ending Designation
Under current law, a municipality designated as tier I or II must
generally retain this designation until, in the fiscal years after its
designation, it meets four criteria as listed in Table 3. The bill modifies
these criteria and makes them applicable to tier I-IV municipalities, as
shown in Table 3. The currently applicable criteria for tiers III and IV are
also shown in Table 3.
Table 3: Ending Designation Under Current Law and the Bill
Current Law The Bill
Tiers I & II Tiers III & IV Tiers I - IV
There have been no
annual operating deficits
in the municipality’s
general fund for two
consecutive fiscal years
There have been no
annual operating
deficits in the
municipality’s general
fund for three
consecutive fiscal years
There have been no audited
operating deficits in the
municipality’s general fund for
two consecutive fiscal years
The municipality’s bond The municipality’s bond The municipality’s bond rating 2022HB-05427-R010684-BA.DOCX
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rating has either
improved or remained
unchanged since its
most current designation
rating has either
improved or remained
unchanged since its
most current
designation, so long as
it has no bond ratings
that are below
investment grade
has either improved or
remained unchanged since
its most current designation
The municipality has
presented, and MFAC or
MARB has approved, a
financial plan that
projects a positive
unreserved fund
balance for the three
succeeding consecutive
fiscal years
The municipality has
presented, and MARB
has approved, a
financial plan that
projects a positive
unreserved fund
balance for three
succeeding consecutive
fiscal years
The municipality has
presented, and MFAC or
MARB has approved, a
financial plan that projects a
positive fund balance for the
three succeeding consecutive
fiscal years, and in which a
positive fund balance of at
least 5% is projected for the
third fiscal year
The municipality’s audits for these consecutive fiscal years have been completed
and contain no general fund deficit
Under existing law and unchanged by the bill, a tier IV municipality
retains its designation if it issues bonds or other debt to fund a general
fund deficit after being designated.
Re-designating a Municipality
The bill makes it easier to re-designate a municipality as tier I-IV after
its initial designation terminates. It does so by repealing provisions
specifying that a municipality whose designation was removed must
remain undesignated unless:
1. for a tier I or II municipality, a change in circumstances requires
it to be designated in a higher tier than its most recent designation
and
2. for a tier III or IV municipality, it (a) has an annual operating
deficit in its general fund equal to 1% or more of its annual
general fund budget; (b) experiences an annual operating deficit
in its general fund in consecutive years of any amount; or (c) has
one or more bond ratings that are below investment grade. 2022HB-05427-R010684-BA.DOCX
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BACKGROUND
MFAC and MARB
MFAC oversees the two-tier certification system that predates the
four-tier designation system for classifying financially distressed
municipalities as established by MARB legislation (PA 17-2). MFAC
oversees certified tier I and II municipalities and designated tier I
municipalities. MARB oversees designated tier II, III, and IV
municipalities. (The higher numbered tiers relay higher levels of fiscal
distress and oversight.)
Generally, MARB may, among other things and depending on the
tier designation, (1) require monthly status reports and monitor
compliance with financial plans and budgets; (2) review and comment
on budgets and approve revenue assumptions; (3) review and comment
on, or approve, debt obligations; (4) recommend efficiency measures
and hire consultants or a financial manager; and (5) set an interim
budget.
The law allows municipalities working with (1) MFAC or MARB to
issue deficit financing bonds and (2) MARB to obtain state financial
assistance in the form of funds to repay outstanding debt (i.e., contract
assistance) and restructure finances (i.e., municipal restructuring).
COMMITTEE ACTION
Planning and Development Committee
Joint Favorable Substitute Change of Reference - FIN
Yea 26 Nay 0 (03/25/2022)
Finance, Revenue and Bonding Committee
Joint Favorable
Yea 51 Nay 0 (04/06/2022)