Thomas Breen photo
Daryl Jones (left) and Mohit Agrawal at Tuesday FRAC-down.
An independent review board blasted the financial assumptions in the Harp adminsitration’s proposed new city budget, saying it would need a 22 percent tax hike to balance — and provoking a heated response at a City Hall square-off.
From the city’s perspective, the city should be able to close a current $14.4 million deficit and keep next year’s proposed budget in balance with the help of a long-in-the-works medical savings initiative and an optimistic expected rate of return on pension fund earnings.
From the commission’s perspective, the city is currently looking at a deficit upwards of $50 million, not $14 million, and the only way to keep next year’s budget in balance while maintaining the proposed level of services is to raise taxes twice as much as the Harp administration has proposed.
That debate took place Tuesday afternoon during the latest meeting of the Financial Review & Audit Commission (FRAC) on the second floor of City Hall. The commission consists of five New Haven citizens with financial expertise who have been appointed by the mayor to provide regular, independent analyses of the city’s budget.
Four FRAC commissioners were joined at the public meeting by City Controller Daryl Jones, Acting Budget Director Michael Gormany, Downtown Alder Abby Roth, Prospect Hill/Newhallville Alder Steve Winter, Morris Cove Alder Sal DeCola, and Westville Alder Adam Marchand for an hour-long debate about an analysis that the commission released earlier this week about the the mayor’s proposed $547.1 million budget for the fiscal year that starts July 1.
Click here to read FRAC’s full report.
The commission’s analysis states that the mayor’s proposed budget could be out of balance by roughly $27-$50.2 million, and that the mayor would need to raise taxes by at least 22 percent, not 11 percent, to achieve a balanced budget.
The FRAC analysis also states that the current fiscal year’s budget is out of balance by roughly $34-54.6 million, which is tens of millions of dollars worse than city staff projections, which put the current deficit, as of January 31, at closer to $14.4 million.
“Based on our collective experience,” the analysis reads, “these budget imbalances are historically large for New Haven.”
During the meeting and in the report, FRAC Commissioners Mohit Agrawal and Jim Alexander argued that the city needs to be more realistic in its assumptions about the rapid inflation of medical costs and about modest rates of return on pension funds.
At the top of the document, the commissioners outline a series of best practice guiding principles for budgeting, including not using debt to pay for operating expenses and not balancing the general fund budget with such “gimmicks” as the refunding of bonds.
“Certain financial transactions -– such as the refunding of bonds –- can have legitimate purposes,” the report reads, “but the city has largely used these transactions to shift operating expenses onto debt. This is one reason why New Haven’s credit ratings are similar to cities’ like Bridgeport.”
City Controller Jones said these cautionary principles are all well and good in theory. But in reality, he said, New Haven already refunds its debt only when it can get a lower interest rate than what it is currently paying.
“If there is a bond refunding that results in the city paying a lower interest rate, that’s amazing,” Agrawal said. “Obviously, we should be doing that. But if there’s a bond refunding or restructuring which just changes the cash flow structure and doesn’t change interest rates or makes interest rates higher, then, from an accounting perspective, that’s not a true saving to the city budget.”
Jones said that the city has refunded its debt for each of the last four years, and that each time, the refundings have saved the city money and lowered the debt service.
“The definitions and statements you’re making here don’t necessarily apply to the city budget,” Jones said.
Jones also said that the commission should not compare New Haven to Bridgeport.
Bridgeport, he said, has internal service debts of $56 million, and is significantly less transparent than New Haven when it comes to disclosing its finances to the public.
The credit rating agency Moody’s currently rates both New Haven and Bridgeport as Baa1, which is just two notches above junk. Jones said he fired Moody’s from conducting New Haven credit ratings at the city’s expense two years ago when he disagreed with its rating downgrade and it refused to meet with him to discuss it. He said that the city pays only S&P and Fitch to conduct city credit ratings now.
Downtown Alder Roth pointed out that, even if New Haven no longer pays Moody’s to rate its finances, Moody’s is still going to do it, and outside investors will see what grade they give New Haven, whether the city likes it or not.
During the meeting and in the FRAC report, Agrawal noted that the single most concerning factor in the city budget is the rapidly rising medical costs associated with insuring municipal employees, retirees and their dependents.
He said that the city estimates that medical benefits for the current fiscal year will cost $125 million. He said that the city expects to pick up $90.4 million of those costs, which is $13.7 million over budget.
“Medical expenses increase roughly 5 to 8 percent for the kinds of population the city insures,” continued Agrawal, a health and labor economist who is a fourth-year PhD candidate at Yale. “So, we need to make sure that we can make those payments going forward.”
He said that the city should expect to pay closer to $93-98 million next year in medical costs, as opposed to the $76.7 million included in the mayor’s proposed budget. The latter number represents a 0 percent increase over the current year’s budgeted amount for medical expenses.
Jones said that he and Acting Budget Director Gormany have been working closely on a new medical savings initiative for the past nine months, and that this initiative should close the current year’s medical budget deficit and keep the proposed 0 percent increase in medical expenditures in balance for next year.
However, he said, he could not share any details about this initiative until the next Finance Committee meeting on April 19.
“The city’s administration very well recognizes that this is one of the big drivers of our budget, and we are paying attention to it,” he said. “But because things are evolving, we outright decline to discuss it until April 19, because a lot more detail-intensive stuff is happening behind the scenes.”
Agrawal said that, regardless of whatever the city’s medical saving initiative proves to be, the city should more realistically expect to save closer to 1 to 3 percent on medical costs, rather than the current deficit of nearly 12.5 to 16 percent.
“We applaud city leaders for taking proactive measures to control medical spending,” Agrawal told the Independent via email after the meeting, “but we must also realize that the estimated variance of $16-$21M in medical spending will be difficult to close through city-side reforms alone.”
FRAC Commisioner Jim Alexander.
Agrawal and Alexander told the city staffers that “robust budgeting” principles mean accounting for the unexpected.
Jones and Gormany said that the city received a number of million-dollar insurance claims last year, and have already received two this year. However, they said, the city may not receive that level of claim next year, and were therefore comfortable excluding those extreme scenarios from their budget projections.
“We’re not going to know if we’re going to have three million-dollar claims, or one or zero,” Agrawal said. “But we could, and that’s something we should be looking forward to and preparing for.”
The $250M Question
Prospect Hill/Newhallville Alder Steve Winter at Monday night’s East Rock management team meeting.
The group spoke at length about the city’s two pension funds, the Police and Fire (P&F) Fund and the City Employee Retirement Fund (CERF). They also spoke about the city’s proposal, included in next year’s proposed budget, to bond up to $250 million to help shore up those funds. P&F and CERF are both currently funded at around 30 to 40 percent.
The decision, Jones said, all comes down to whether or not the city can earn enough money in its pension fund investments to comfortably cover the interest rate that it will have to pay on the borrowed money.
He said that the city has earned around 7 to 7.5 percent annually on its funds in the past 20 years, if you exclude the outlier years of the Great Recession. If you include the financial crisis years, those return numbers are closer to 5.4 or 5.5 percent.
Agrawal said that, again, best budgeting practices take into account variance over time.
“We should not expect to get X,” he said. “We should expect to get X minus something [due to unexpected variations in the market]. The real returns that you expect to get realistically should be at least 1 percentage point higher than the interest rates you’re paying.”
Prospect Hill/Newhallville Alder Steve Winter said after the meeting that he is wary of any financial projects that neglect to incorporate potential unexpected downturns.
“I came of age during the financial crisis,” he said, “and I know that we will have a financial crisis again at some point over the course of a 30-year bond.”
Alexander said that the city budget should base its proposed tax rate off such “reasonable downside assumptions,” and then let the rating agencies applaud New Haven if and when it exceeds its financial expectations.
“What’s the downside to that,” Alexander said. “If we’re right, and you have a tax rate that we think reflects the right thing, and you beat it all to heck, you end up with a city that will be upgraded back to A when the rating agencies see what you do. They’ll see that you’re able to take the hard medicine of a tax increase, but then beat the pants off the assumptions and fill up the fund balances. I would expect us to go back to an A rating, which would be much better than almost any other city in Connecticut.”
Alexander said that, realistically, the city needs to increase its tax rate by 22 percent, to 47.2 mills, if it wants to achieve a balanced budget with the current allotment of services.
Additional Drivers
Acting Budget Director Michael Gormany, Westville Alder Adam Marchand, Morris Cove Alder Sal DeCola, and Downtown Alder Abby Roth listen in on the FRAC meeting.
In addition to medical cost inflation, rising debt service, and most pension fund returns, the FRAC commissioners identified in their analysis three other factors that are driving budget costs that were not discussed in detail during Tuesday’s meeting.
Those other factors include:
• out of control Board of Education (BOE) spending;
• significant police and fire department deficits;
• and ambiguously successful revenue initiatives.
The report identifies BOE spending as the city’s single largest area of expenditure, and one that consistently increases year over the year.
The report notes that the BOE was $2.6 million out of balance in Fiscal Year (FY) 2016 – 17, and that the city projects the BOE to be $7 million out of budget this fiscal year.
The commissioners write that the mayor’s proposed allocation of a $5 million increase to the BOE instead of its ask for an additional $10 million next year likely means that the BOE will end next year out of budget yet again.
“Any budget increase for the BOE that is less than their current deficit of $7M would likely mean that the BOE would run a deficit again next year,” the report reads. “We suggest, whatever the amount that is approved for the BOE, that Alders work closely with the BOE and the new superintendent to keep spending within the budgeted limit.”
The report also notes that “the city habitually underbudgets reasonable overtime for police and fire.”
It says that, as of the end of January, the projected combined deficit for the police and fire departments is over $4 million, and the final deficit may range from $3 – 5 million.
The report points out that the proposed budget requests $300,000 less for the police department and $500,000 less for the fire department in the next fiscal year than they are expected to spend this year.
“In all reality, Police and Fire are likely to spend more than they spent this year,” the report reads, “meaning that the Mayor’s budget is underestimating spending in these departments by a total of $1 – 2M.”
Finally, the report expresses skepticism that the city’s revenue initiatives, defined as “additional State aid or revenue from other sources such as an increase in voluntary payments,” will be as successful as the city projects for this fiscal year and for fiscal next year.
The report notes that last fiscal year’s revenue initiative of $18.6 million has been unrealized to date. The commission expects that $15 – 18.6 million will remain unrealized when the fiscal year ends in June.
“Of the $6.1M that is envisioned” for next year, the report reads, “we estimate that $1 – 5M will not occur.”
“In presenting this analysis of the Mayor’s budget proposal, FRAC has no agenda, partisan or otherwise,” the report reads. “Further, we do not remark on the choice of how dollars are being allocated across departments or city programs, because we believe that the choice of allocation lies with the political branches. What we do [in this report] is present a bottom-line analysis of the Mayor’s budget proposal within the context of the city’s budget performance in prior fiscal years.”
"not using debt to pay for operating expenses and not balancing the general fund budget with such "gimmicks" as the refunding of bonds."
I've been saying this for several years now. Taxpayers should have been given property tax cuts from declining school construction payments but the savings has been rolled into a shadow expansion of new havens government.