City Hall Sales Pitch Hits A Brick Wall
by Paul Bass | Oct 25, 2012 12:52 pm
Posted to: City Hall
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.”
Tags: debt, litigation settlement
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This proposal should hit a brick wall and it should stay there. If the city can’t afford the self insurance fund, it should get a policy that will cover these endless management driven lawsuits and judgments. Moreover, this account is chronically underfunded on purpose so that the mayor doesn’t have to make the tough decisions on spending that monster judgements require. Borrowing for predictable, operational expenses is reckless and foolish. If you budget correctly, accurately and honestly, this conversation and proposal would never happen. The city should immediately implement a loss prevention strategy and quit making foolish decisions that cost big bucks.
$8 for every man, woman and child in the city, or $10 for every man and woman in the city. Just call it a special tax and tack it on to other city-levied taxes. Let’s pay up and move on.
If the Aldermen aren’t willing to pick up the tab for the Mayor’s lawsuits, they should act to keep the 360 State tax problem out of the courts. (http://www.360StateTaxProblem.com) $900,000 is pocket change compared to the attorney bills and liability the city faces for not standing behind the tax estimates it provided to the union pension fund to induce them to invest in New Haven.
Perhaps self-insured is not the way to go. What is the alternative to granting the request? Perhaps it comes with the string that self-insurance must end.
We are being driven into bankruptcy… the Mayor is driving and the spineless alders are in the back-seat—powerless to grab the wheel and as guilty as the mayor. Shame!
“The fact that they’re issuing this additional debt does not seem to be inconsistent with ... what we talked about with the city earlier this year,” Rinaldi said.
This simply truth remains hidden in this discussion, during the budget briefing to this very same finance committee in March 2012, the city advised the committee of a deficit existing in the self insurance fund, and as a result the city was requesting not only $6M for this fiscal year, but, another 2M for the next four fiscal years as well.
As stated above by NHI:
“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”.
Pecisely, Perez and Elicker are playing a shell game, acting as if this is something new. Perez is a voting member of the Litigating settlement committee, who has already approved the request for the 900K.
In addition, this finance committee approved appropriating ordinance #5 to the 12/13 budget which carries the 6M payment this year, and 2M for the next four years.
Here the city is asking for the money in advance of the 2014 allotment.
Perez needs to Come clean and stop the games, this request will be approved because it already has been.
Give us a break…!
The City is top heavy with non-profit properties, including the 4th wealthiest corporation on the planet - Yale University - and even modest homes carry high tax rates.
Perhaps it’s time to look at the tax exempt status of these properties.
More people would likely buy homes here if taxes were reasonable. We cannot continue to fund education - the largest part of most towns’ budgets - using real property for what should be a national expenditure, like the military.
People are at the breaking point, as are many local governments.
It’s time to re-think the system of taxation.
Check out Prof. Richard Wolff’s long ago study of how New Haven subsidizes Yale (and not vice versa) by Googling his website.
NOW YOU’VE DONE IT, Dwight Streeter. Didn’t anyone tell you you can’t ever say anything bad about Yale? Yale gets whatever it wants from a compliant, supine New Haven in exchange for the relative crumbs it offers. They get streets, land, stores, tax breaks, you name it. New Haven comes , hat in hand , to Yale when it should be the other way around. Soon, when no one can afford to live in NH anymore, lands will be granted to Yale students and faculty and their can consolidate their kingdom once and for all. See if I am wrong!