With the state budget at an impasse, Moody's has announced that 26 municipalities in the state, including East Lyme, Groton and Ledyard, are being reviewed for a potential downgrading of their credit ratings, while 25 more, including Montville and Salem, have been assigned a "negative credit outlook."

"Under the executive order currently in effect, state funding of local governments is lower than it was in the last fiscal year by a total of $928 million," the credit ratings service wrote in the announcement Monday. "Historically, the State of Connecticut has provided significant funding to its local governments. ... The current budget impasse highlights the ongoing vulnerability of funding that the State of Connecticut provides to its local governments."

Reacting to Moody's announcement, local officials — some whose communities are planning for major school renovation and construction projects — renewed their calls for the state to pass a budget.

S&P Global Ratings also announced in a news release last week that it changed the outlook on Connecticut's general obligation debt from stable to negative.

Moody's said in the news release that the 26 municipalities, along with three regional school districts being reviewed for a possible downgrade, are "facing cuts in state funding equal to 100 percent or more of available fund balance or cash." These same entities, assigned negative credit outlooks, are "facing cuts in state funding equal to between 75 percent and 100 percent of available fund balance or cash," or are communities that would need to raise property taxes by at least 10 percent to account for state aid cuts.

Moody's has not changed anyone's rating at this time, and much depends on the legislature's actions. For the municipalities under review for a potential downgrade, Moody's will take a closer look within the next 90 days to determine whether their ratings will be downgraded, said spokesman David Jacobson. For municipalities assigned a negative outlook, this does not change their ratings, but means there is some downward pressure and a greater chance for a downgrade within the next year or two.

East Lyme First Selectman Mark Nickerson said his town is about to embark on a $37.5 million bond sale for the elementary schools' renovation project. If the town's rating is downgraded, the project would be bonded at a higher interest rate, costing taxpayers potentially thousands of dollars.

"This couldn't come at a worse time," Nickerson said. "This is coming not at the towns' mismanagement of funds, but the state's mismanagement of funds, and the burdens are going to be passed down to towns like East Lyme."

He said the town is now at a "fork in the road," as town officials are working to determine whether it would be better for residents if the town dips into its fund balance to account for cuts in state funding, or to raise taxes so the town's rating isn't affected.

Groton Superintendent of Schools Michael Graner said he is concerned about the state's financial health and how it could affect the state's ability to fund bonded projects. Last year, voters approved a $184.4 million project to build one middle school and renovate the two current middle schools and convert them into elementary schools. The town is expecting Groton taxpayers would pay about $84 million, with the remaining balance covered by the state.

Graner said as time goes by without a budget, more and more serious concerns are going to arise, with communities first being concerned about Education Cost Sharing funding, then about municipal grants, and now the latest issue: credit ratings.

"All of this is completely destabilizing to our state and our municipalities," Graner said. "Hopefully, this will be another note of caution to the legislature to come together and get a fair and reasonable budget."

"I'm in constant contact with our legislators and following the process and still hopeful that something will get done at some point for a state budget," added Groton Town Manager John Burt.

Salem and Montville officials said they didn't expect the negative outlooks to have a major impact on their towns.  

Salem First Selectman Kevin Lyden said he doesn't anticipate the small town will need to bond a project for at least the next five years. He said the town has a healthy fund balance and very little debt, but he urged the state to pass a budget and end the uncertainty the towns are facing.

"We're a stable town," he said. "We just need a state budget." 

Montville Mayor Ronald McDaniel said the town doesn't have any projects it needs to bond. He added that towns are doing their best at the local level to be fiscally responsible, but continue to be short-shrifted.

"We've been able to build up a healthy reserve, which once again we get penalized for," he said.

Local officials have expressed concerns that communities with healthy fund balances or tax bases saw larger cuts under Gov. Dannel P. Malloy's executive order, which went into effect Oct. 1 in the absence of a state budget.

Meanwhile, New London is one of nine state municipalities that S&P Global Ratings placed last month on a negative credit watch. New London's credit rating was changed from A+ stable to A+ with a negative credit watch, a rating that usually is a sign of a possible downgrade, which will increase the city's cost of borrowing.

New London Finance Director Don Gray said the concern is mostly driven by the lack of a state budget.

"They are concerned about municipalities using their fund balance," Gray said. "The good thing about New London is in the budget, as it stands right now, we are not anticipating using any of our fund balance.

"Just the opposite," he said. "We have budgeted to increase our fund balance by $250,000. And what we have actually done is make the cuts to reflect the reduction of state aid in our budget. I truly believe that the final budget that the state is going to come up with is going to give us more revenue than we have anticipated in the budget right now.

"We're in the best shape we can be not knowing what the state is doing," he added.

Joe DeLong, the executive director of the Connecticut Conference of Municipalities, said in a statement Monday that "the time for action on a state budget agreement is now."

"These actions by Moody's will have a devastating impact on nearly 60 communities across the state — subjecting each of them to a credit downgrade that will increase their borrowing costs, potentially explode their property tax rates, and limit their ability to fund necessary municipal projects both in the short-term and long-term," he added.

Day Staff Writer Greg Smith contributed to this report.

k.drelich@theday.com