Groton — Moody's, which in October said it would review 26 municipalities in the state, including Groton, for a potential downgrade of their credit ratings, notified Groton this week that it would begin a full review of the town’s credit rating on Dec. 7.

Finance Director Cindy Landry told the Town Council on Tuesday she’d hoped that once the state passed a budget, the bond rating agency would not proceed with a full review.

But she said “they’re concerned about the towns and cities’ reliance on state revenue and the fact that the state really doesn’t seem to be resolving its problems and that the future of state revenue could be at stake.”

Groton could be vulnerable to a downgrade due to the amount of funds in its undesignated fund balance. The town keeps 7.75 percent of its total budget in reserve, or about $9.2 million of the roughly $118.9 million total budget.

Town Manager John Burt said the bond rating agency wants closer to 15 percent held in the undesignated fund balance, “otherwise we very much face a downgrade in our credit rating.” Groton’s peers with comparable credit ratings have undesignated fund balances of about 11 percent, Landry said.

A downgrade could drive up the cost of borrowing just as Groton expects to sell bonds to help fund a major school construction plan. Voters approved a $184.4 million school construction plan one year ago to build a new middle school, renovate the town’s existing two middle schools and turn them into elementary schools.

Landry said she couldn’t estimate the potential financial impact of a credit downgrade and wouldn’t know until the town actually tried to sell bonds.

But the Town Council voted during its Committee of the Whole meeting Tuesday to increase the amount in its fund balance from 7.75 percent to 11 percent. That vote must be reaffirmed during the council’s regular meeting on Nov. 28. The newly elected Town Council members take office on Dec. 5.

Groton would have means to increase the balance because it expects to receive about $5.76 million from the state. The town initially faced a potential $18 million loss in state aid and built its budget around an assumed $5 million loss to protect itself. Then the cut it braced for didn't happen.

Mayor Bruce Flax said the town essentially overtaxed residents to deal with the state's threat and should now return that money to taxpayers. The incoming council could address the fund balance, he said.

“I totally disagree,” Councilor Bonnie Nault said. The increased costs to taxpayers that would result from a credit downgrade would be “way more” than any refund, she said.

Councilor Dean Antipas described action to raise the fund balance and protect the credit rating as imperative. During the budget crisis, the town was at risk of running out of cash and it can’t allow that to happen, he said.

Using the windfall from the state to refund taxpayers $50 to $100 when it’s facing a credit downgrade would be the equivalent of telling taxpayers, “Here’s 100 bucks. By the way, I’m going to rook you years down the road,” he said.

 d.straszheim@theday.com