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OLR Bill Analysis
sHB 5472
AN ACT CONCERNING MUNICIPAL FINANCE AND AUDITS.
SUMMARY
This bill makes various changes to the Municipal Accountability
Review Board (MARB) law, including:
1. changing the procedure for designating municipalities referred
by the Office of Policy and Management (OPM) to the Municipal
Finance Advisory Commission (MFAC) as tier I municipalities,
2. modifying the criteria and procedure used for determining
whether a municipality retains its tier designation,
3. authorizing Municipal Restructuring Fund distributions to be
used to pay an arbitrator selected under MARB’s existing binding
arbitration requirements, and
4. expanding the criteria MARB must use in determining whether
to designate a tier III municipality as a tier IV municipality.
The bill also amends the law on municipal audits to, among other
things, (1) increase the maximum civil penalty the OPM secretary can
assess a municipality, regional school district, audited agency, or
auditor that misses the audit filing deadline and (2) allow him to assess
the penalty by reducing state grants awarded to the entity.
EFFECTIVE DATE: July 1, 2024
§ 1 — DESIGNATION AS TIER I MUNICIPALITY
The bill gives MFAC discretion to designate a municipality referred
to it by OPM as a tier I municipality, rather than automatically
designating these referred municipalities as tier I. Under the bill, MFAC 2024HB-05472-R000462-BA.DOCX
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must base its decision on an evaluation of the municipality’s financial
condition and practices. As under existing law, designated tier I
municipalities must prepare and present a five-year financial plan to
MFAC for its review and approval.
By law, OPM must refer a municipality to MFAC if it (1) was not
referred previously (e.g., because of evidence of unsound or irregular
financial practices or specified deficiencies in its audit report) and (2)
meets one of several fiscal distress criteria (e.g., if it has a negative fund
balance, reported a fund balance percentage of less than 5% in the three
immediately preceding fiscal years, or received a bond rating below A).
§ 2 — CONDITIONS FOR RETAINING TIER DESIGNATION
The bill changes the criteria for determining whether a municipality
retains its tier designation. Under current law, a municipality in any tier
retains its designation (regardless of any positive changes in the factors
that led to its designation) until it meets the following four criteria in the
fiscal years after its designation:
1. it had no audited general fund operating deficits for two
consecutive fiscal years;
2. its bond rating either improved or remained unchanged since its
most current designation;
3. it presented, and either MFAC or MARB approved, a financial
plan that projects a positive fund balance for the next three fiscal
years, with a positive fund balance of at least 5% projected for the
third fiscal year; and
4. its audits for these three years have been completed and have no
general fund deficit.
The bill eliminates these requirements for tier I municipalities and
instead requires that they retain their designation until MFAC
unanimously votes to end it based on its evaluation of the municipality’s
financial condition and practices. 2024HB-05472-R000462-BA.DOCX
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For tier II, III, and IV municipalities, the bill authorizes MARB to
determine whether a municipality must retain its designation, but
allows it to do so at its own discretion or at a municipality’s request.
MARB must do so using the current criteria described above, with the
following changes:
1. additionally requires that the municipality have a long-term
bond rating from one or more rating agencies that is investment
grade or higher,
2. additionally requires (a) each fiscal year of the municipality’s
approved financial plan be based on recurring revenue and
expenses and (b) the plan exclude funding received as contract
assistance or from the Municipal Restructuring Fund,
3. requires the audits to report an audited fund balance for the
municipality’s general fund of at least 5%, and
4. additionally requires that there be no evidence that the
municipality has engaged in unsound or irregular financial
practices related to commonly accepted municipal finance
standards.
Under the bill, if MARB determines that a municipality meets these
criteria, the OPM secretary must end the municipality’s designation or
redesignate it to a lower tier, but not tier I. (This effectively allows
MARB to redesignate only tier III and IV municipalities to a lower tier.)
The secretary must do this at his discretion and considering the
municipality’s fiscal condition and state’s best interests. Within 60 days
after MARB’s determination, the OPM secretary must notify the
municipality of his decision to redesignate or end the municipality’s
designation. A municipality must keep its existing designation until it
receives this notice. If the secretary does not provide it within the 60-
day period, the municipality’s tier designation terminates on the next
day.
Any tier III or IV municipality redesignated to a lower tier (1) must
meet the statutory requirements for that tier and (2) may only ask MARB 2024HB-05472-R000462-BA.DOCX
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to determine whether it should be ended after a year has passed.
§ 3 — MUNICIPAL RESTRUCTURING FUND
By law, the Municipal Restructuring Fund provides financial
assistance to designated tier II, III, and IV municipalities. 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.
The bill authorizes (1) the OPM secretary to distribute money from
the Municipal Restructuring Fund to a third party on behalf of a
designated tier II, III, or IV municipality and (2) these funds to be used
to pay an arbitrator selected under MARB’s existing binding arbitration
requirements.
§ 4 — TIER IV DESIGNATION
The bill expands the criteria MARB must use in determining whether
to designate a tier III municipality as a tier IV municipality to include
whether there is evidence of unsound or irregular financial practices
related to commonly accepted municipal finance standards that MARB
believes may materially affect the municipality’s financial condition.
As under existing law, MARB may designate a tier III municipality
as a tier IV municipality based on its finding that the municipality’s
fiscal condition warrants it, based on its evaluation of specified criteria
(e.g., the municipality’s reserve fund balance, liabilities, economic
outlook, access to capital, and budget projections for the next five years).
§ 5 — MUNICIPAL AUDITING ACT
By law, municipalities, regional school districts, and other local and
regional entities (i.e., audited entities) must have their financial
statements and accounts audited by an independent auditor at least
once every year and submit the audit reports to various local officials
and the OPM secretary. (These audited entities include special taxing
districts, municipal utilities, the Metropolitan District Commission,
regional councils of government, and other local entities with more than 2024HB-05472-R000462-BA.DOCX
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$1 million in annual revenues.)
The bill makes the following changes to these auditing requirements:
1. limits the amount of additional time the OPM secretary may
grant an audited entity to file its required audit report to six
months from the date it was due;
2. increases, from three to five years after the filing date, the length
of time auditors must preserve the working papers they used to
prepare the audit and make them available to OPM for
inspection;
3. increases, from $10,000 to $50,000, the maximum civil penalty the
OPM secretary can assess an entity or auditor that misses the
filing deadline; and
4. allows the secretary to assess the penalty as a reduction in one or
more grants he awards to the entity, including a payment in lieu
of taxes (PILOT) grant.
Under current law, this civil penalty must be between $1,000 and
$10,000. By law, unchanged by the bill, the secretary can waive the
penalty for reasonable cause if the auditor or an official of the audited
entity request it in writing.
BACKGROUND
MARB
MARB is an 11-member board charged with providing technical,
financial, and other assistance and oversight to municipalities
experiencing fiscal distress. It is composed of state officials and
members with business, labor, and municipal government expertise
appointed by the governor or legislative leaders. Under the MARB law,
distressed municipalities are designated as tier I, II, III, or IV, based on
specified factors, including their fund balance, bond rating, equalized
mill rate, and levels of state aid. The higher numbered tiers indicate
higher levels of fiscal distress and MARB oversight. 2024HB-05472-R000462-BA.DOCX
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MFAC
MFAC is an eight-member commission that advises the OPM
secretary about standards and practices for preparing and submitting
audits and that works with any municipality referred to it by OPM to
improve its fiscal condition. Its members include the secretary and
finance experts, including four municipal executive or fiscal officers.
COMMITTEE ACTION
Planning and Development Committee
Joint Favorable Substitute
Yea 21 Nay 0 (03/22/2024)