O F F I C E O F L E G I S L A T I V E R E S E A R C H
P U B L I C A C T S U M M A R Y
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PA 22-35—sHB 5427
Planning and Development Committee
Finance, Revenue and Bonding Committee
AN ACT CONCERNING TH E RECOMMENDATIONS OF THE OFFICE
OF FINANCE WITHIN THE OFFICE OF POLICY AND MANAGEME NT
SUMMARY: This act changes the criteria for designating, and ending the
designation of, municipalities as tier I, II, III, or IV for 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.
Under prior law, municipalities had to request designation as a tier I or II
municipality. The act 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 act 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 act subjects all designated municipalities to the same criteria for
determining whether their designation ends. The revised criteria are similar to the
criteria previously used. The act also makes it easier to re-designate a municipality
as tier I-IV after its initial designation ends.
Regarding MARB’s oversight, the act also does the following:
1. specifies that the OPM secretary must consult with MARB to determine
whether any Municipal Restructuring Fund assistance funds should be
provided as a loan (§§ 6 & 14) and
2. limits the municipalities for which MARB may approve or reject a
municipal or board of education collective bargaining agreement or
amendment (§ 10).
The act 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 to OPM (§ 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 or municipal entity to
MFAC, instead of or in addition to assessing a penalty, if it does not file its
audit on time (§ 3); and
4. requires municipalities to file financial reports electronically, using a O L R P U B L I C A C T S U M M A R Y
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uniform reporting system (§ 5).
The act also makes technical and conforming changes.
EFFECTIVE DATE: October 1, 2022
§ 1 — MUNICIPAL PENSION DEFICIENT BONDS
Under prior law, before issuing pension deficient bonds (to partially or fully
fund an unfunded past benefit obligation) under the statutes, a municipality had to
submit a three-year financial plan to the OPM secretary for him and the state
treasurer to review. The act instead requires this plan, which under existing law
includes the major assumptions and financial plan for the bonds, to cover a five-
year period.
§ 2 — FILING FINANCIAL STATEMENTS WITH OPM
Municipal entities with annual receipts of up to $1 million are exempt from the
requirement to 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 fiscal year ends. The act additionally requires them to file the
statement with the OPM secretary upon his request. It 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 must file an audit with the OPM secretary must do so
within six months after the fiscal year ends unless they are granted an extension.
Under prior law, those that missed the regular or extended deadlines were assessed
a civil penalty ranging from $1,000 to $10,000 unless the OPM secretary waived
it.
The act 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 prior 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 act 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 criteria, it is designated tier I (see § 7, below).
Under prior law, the secretary had to refer a municipality to MFAC if it had
done any of the following:
1. reported a declining fund balance trend in the two immediately preceding
fiscal years; O L R P U B L I C A C T S U M M A R Y
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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 act 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 prior law, the secretary also had to refer a municipality if it issued tax or
bond anticipation notes in the three immediately preceding fiscal years to meet cash
liquidity. The act instead requires a referral if it issued tax or revenue anticipation
notes for this purpose.
The act 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 act, 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, the act requires municipalities (including
school districts and special taxing districts) to annually file their audited financial
statements, and any other requested information on their financial condition, with
OPM electronically.
Currently, these municipalities must use the uniform chart of accounts that
OPM’s secretary developed. The act specifies that financial reports using this
uniform reporting system must be filed annually by January 31, conforming to
current practice.
§§ 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 may be used. The act specifies that the secretary must consult with MARB
to determine whether any funds should be provided as a loan. O L R P U B L I C A C T S U M M A R Y
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§§ 7-8 & 11-12 — FINANCIAL PLANS COVERING FIVE-YEAR PERIOD
Under prior law, if the OPM secretary referred a tier I designated municipality
to MFAC, it had to prepare and present a three-year financial plan to the
commission for its review and approval. The act instead requires municipalities to
prepare and present a five-year plan.
Prior law allowed MARB to require designated tier II municipalities to prepare
three-year financial plans and submit them to MARB for its review and approval.
The act instead allows MARB to require a five-year financial plan.
The act also makes related conforming changes (§§ 11 & 12).
§ 7 — DESIGNATION AS TIER I MUNICIPALITY
By Request
Under prior law, a municipality’s chief elected official (CEO) could 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 the table below.
The act eliminates these criteria and instead allows a municipality to be
designated 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.
Tier I Designation Criteria in Prior 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
O L R P U B L I C A C T S U M M A R Y
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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 act.
§ 8 — DESIGNATION AS TIER II MUNICIPALITY
By Request
Under prior law, a municipality’s CEO had to apply to the OPM secretary to
have the municipality designated as a tier II municipality if it met one of the five
sets of criteria as shown in the table below.
Tier II Designation Criteria in Prior 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 act replaces the prior criteria with a requirement that the municipality be
designated as tier I, have held at least one meeting with 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 act, if a CEO applies to OPM for tier II designation, it must provide
a copy of the application to MFAC within 10 days. The OPM secretary must O L R P U B L I C A C T S U M M A R Y
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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. Under prior law, he had to refer to MARB any municipality
that requested tier II designation.
Designation Upon MFAC’s Recommendation
The act 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 after 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
Prior law provided two paths for designating a municipality as tier III: (1) the
municipality (through the CEO or legislative body) requested it because it met
specified bonding capacity and fiscal distress criteria or (2) the secretary designated
the municipality as tier III based on specified distress criteria. The act maintains
these two paths, but changes some of their applicable criteria, and creates a third
path to tier III designation through MFAC recommendation.
By Request
Prior law allowed a municipality to request designation as tier III if it had:
1. at least one bond rating from a bond rating agency that is below investment
grade or
2. 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 at least 30% of its current or prior fiscal year
general fund budget revenues in state municipal aid.
The act replaces these bonding-capacity criteria with different fiscal distress
criteria by specifying 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 at least 30% of its most recent audited financial
statement revenues as municipal aid from the state.
As under existing law, the OPM secretary must designate a municipality as tier
III if the information MFAC provides supports the designation.
Under prior law, if the municipal CEO was making the request, he or she had
to give the local legislative body at least 30 days to approve or reject the request, O L R P U B L I C A C T S U M M A R Y
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after which, if no action is taken, it was deemed approved. The act extends this
waiting period to 45 days.
Under the act, 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 prior law, the OPM secretary had to designate any municipality as tier
III, regardless of whether it applied for the designation, if it met the criteria for
voluntary tier III designation (see above) or it issued either of the following:
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 act 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 act 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 act 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 act 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.
Prior law required MARB to act on agreements within 30 days after their
submission to MARB. The act instead specifies that agreements are deemed
approved after 30 days if MARB has not approved or rejected them.
§ 12 — DESIGNATION AS TIER IV MUNICIPALITY
The act makes a minor change to the criteria MARB uses to designate a tier III O L R P U B L I C A C T S U M M A R Y
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municipality as a tier IV municipality. It extends, from three years to five, the term
for a municipality’s budget projections that MARB must consider when making its
determination. This conforms to other changes in the act requiring municipalities
to prepare five-year, instead of three-year, financial plans (see above).
§§ 13 & 15 — CONDITIONS FOR ENDING DESIGNATION
The act subjects all designated municipalities to the same criteria for
determining whether their designation ends. The revised criteria are similar to the
criteria previously used.
The act 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 existing law, a municipality designated as tier I or II generally retains
this designation until, in the fiscal years after its designation, it meets four criteria
as listed in Table 3. The act modifies these criteria and applies them to tier I-IV
municipalities, as shown in the table below. The previously applicable criteria for
tiers III and IV are also shown in the table.
Ending Designation Under Prior Law and the Act
Prior Law The Act
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
rating has either improved
or remained unchanged
since its most current
designation
The municipality’s bond
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
The municipality’s bond
rating 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
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, O L R P U B L I C A C T S U M M A R Y
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Prior Law The Act
Tiers I & II Tiers III & IV Tiers I - IV
fiscal years with a positive fund
balance of at least 5%
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 act, 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 act makes it easier to re-designate a municipality as tier I-IV after its initial
designation ends. 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 at least 1% of its annual general fund budget; (b)
experiences an annual operating deficit in its general fund in consecutive
years; or (c) has at least one bond rating below investment grade.
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, June Special Session). 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
indicate higher levels of fiscal distress and oversight.)
Depending on the tier designation, MARB may generally (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).