The DeStefano administration’s fiscal chiefs came asking for permission to borrow more money to pay off lawsuits. Instead they received instruction in how to read aloud.
The lesson came Wednesday night inside City Hall’s aldermanic chambers at a two-hour meeting of the Board of Aldermen’s Finance Committee.
At issue: Whether to authorize the city to use tax-exempt bonds to pay off $900,000 in settlement costs from two lawsuits.
The DeStefano administration got such authorization already once last year to borrow $6 million in part to pay the bill for its loss in the Ricci firefighter-hiring case—without controversy. So this latest smaller request appeared to face smooth sailing.
Instead, aldermen Wednesday night hammered at the idea of opening the door to continued use of a frowned-upon government practice of borrowing money for reasons other than buying equipment or fixing roads. Some argued that 10 years of such short-term quick fixes have dug New Haven government into a deep fiscal hole that the administration itself has now begun warning about.
The committee ended the night tabling City Hall’s requested resolution—and planning a special hearing to look at how it fits into larger questions about how New Haven pays its bills.
As the questions mounted, city Chief Fiscal Officer Mike O’Neil repeatedly emphasized that the resolution at hand Wednesday night wouldn’t technically involve borrowing any money. It would not require the city to issue the $900,000 in tax-exempt bonds. It would simply preserve the option to do so later this year, rather than face more expensive borrowing options. Wednesday night’s resolution wouldn’t technically involve spending a dime, yet, he argued.
Finally Hill Alderman Jorge Perez asked O’Neil to read the resolution itself out loud. Word for bureacratese word.
The resolution had already been read aloud before the discussion began. Perez was making a point.
O’Neill complied. In part.
“Resolution of official intent to reimburse expenditures from the proceeds of tax-exempt obligations for settlement of litigation against the City of New Haven, Connecticut,” O’Neill read.
Then he stopped. With five words left.
He asked O’Neill to read to the end of the line.
“In the amount,” O’Neill continued, “of $900,000.”
The $900,000 would cover two out-of-court settlements with people who sued the city. The cases stem from two incidents: a fatal crash between two police cruisers in 2008, and a 15-year-old’s traumatic brain injury in a Coop High gym class in 2006. (Read more about the cases’ details here.)
New Haven doesn’t have insurance to cover legal settlements. It’s “self-insured,” which means it retains a fund to pay for legal losses.
O’Neil began Wednesday night’s pitch to the Finance Committee by putting the new request in the context of the city’s larger effort to close a $12 million deficit in its legal self-insurance fund. Aldermen OK’d that plan last year. It called for borrowing $6 million right away to start paying off the Ricci case; then $2 million a year over the next three years.
“Given that there is such a plan,” O’Neil said, the city wants to borrow the money as cheaply as possible. It does that by floating tax-exempt bonds. The IRS requires the city to have identified the specific use of those bonds in order to sell them. The city can’t just state it’s “paying off debt.” It has to get aldermen to approve requests like Wednesday night’s—to use for these two specific legal settlements.
The city anticipates having to shell out $900,000 for the two suits later this year, and would rather borrow the money cheaply than have to raise taxes or make painful budget cuts.
The problem will continue beyond that payment. Traditionally New Haven, and other city governments, don’t borrow for such costs. They raise taxes or cut other costs. They borrow for traditional “capital” costs like public works. But the current deficit is too large to cover with tax hikes or painful cuts, officials argue.
“This is the second time” such a request has come before the board, Alderman Perez noted, as O’Neill downplayed the $900,000 figure of the specific resolution before the committee.
“This is symptomatic of something larger,” added East Rock Alderwoman Jessica Holmes.
“I think it is perpetuating a problem,” agreed fellow East Rock Alderman Justin Elicker. He argued that his colleagues faced more than a one-time $900,000 decision, but rather a broader policy question.
“I don’t feel very comfortable talking about borrowing ....” Downtown Alderman Doug Hausladen began.
City Budget Director Joe Clerkin cut him off. You wouldn’t be voting tonight to borrow the money, he noted.
“I guarantee you, you will be back here asking to borrow the money,” Hausladen responded.
“We are making a precedent to continue ... borrowing,” noted Fair Haven Migdalia Castro.
If you don’t leave options open for later, when a decision needs to be made for paying the $900,000 bill, you risk having to pay higher interest rates, O’Neill emphasized.
“We have to find the money somewhere,” Perez argued. That became the thrust of the discussion among his colleagues—that they should wrestle with that question of where they will find money over time to meet these legal costs before continuing to approve piecemeal steps toward a reliance on borrowing.
“The prospect of borrowing money to deal with an operating problem—that’s not the right way to do things,” O’Neil acknowledged; but the city is faced with a set of “less desirable” options.
In the end, the committee agreed to talk about those options and the self-insurance/borrowing question at a special meeting next month. Then it will get back to whether it should OK City Hall’s $900,000—or pre-$900,000—request.
Which may be lucky for the administration. A vote Wednesday night might not have turned out in its favor.
“If it was going to be a vote tonight night, I was going to vote no,” Newhallville Alderwoman Delphine Clyburn (pictured) said after the meeting. She said she wants to see the city come up with alternatives to long-term borrowing to pay its bills, the way families must. She also said she would like answers to why the city keeps facing these expensive legal bills.
The elephant in the room was New Haven’s worsening fiscal condition. It ended the most recent fiscal year with an $8.4 million operating deficit, according to updated figures Clerkin presented to aldermen Wednesday night. Already this year police and fire overtime expenses are coming in over budget, and dragged-out union negotiations are putting expected labor cost-savings into question. This past July, two ratings services downgraded the city’s financial outlook from “stable” to “negative.” (Read about that here.) Among the reasons: the city’s continued reliance on short-term budget fixes that delay dealing with broader structural problems into future years.
Two analysts from Fitch Ratings, one of the two agencies that issued the downgrade, portrayed the latest $900,000 request as part of New Haven’s broader plan to tackle its litigation fund deficit. Fitch already knew about that plan when it met with city officials earlier in the year before the downgrade, said the analysts, Mike Rinaldi and Kevin Dolan.
In general, Rinaldi said, “The issuance of debt is typically associated with the financing of capital needs, not [general] operations. ... It is not the normal use.”
“In general the practice is viewed negatively,” said Dolan.
“The fact that they’re issuing this additional debt does not seem to be inconsistent with ... what we talked about with city earlier this year,” Rinaldi said. “I think that amount of debt is fairly modest and would not in and of itself have an impact on the city’s overall credit profile.”