Thomas Breen photo
Controller Daryl Jones delivers the news Monday evening.
• Helps close $14M hole in this fiscal year’s city budget.
• Also, Yale University ups annual contribution by $2.5M.
• Jones: Pension switch aimed at avoiding bigger downgrade.
• Festa: “We have a spending problem.”
City Controller Daryl Jones shared that news with the alders on the Finance Committee on Monday night at a meeting in the Aldermanic Chambers on the second floor of City Hall.
Just two weeks ago the full Board of Alders voted to approve an amended version of Mayor Harp’s $547.1 million general operating budget, preserving the mayor’s 11 percent tax increase, for the fiscal year that starts on July 1. On Monday night, the Finance Committee refocused its attention on the projected deficit for the current fiscal year ending June 30, after months of meetings, hearings and deliberations largely dedicated to next year’s budget.
Revenue Or Expenditure Issue?
Finance Committee Alders Dolores Colon and Adam Marchand.
According to the city budget department’s latest monthly financial report, published on May 25 and covering city finances through the end of April, the city projects a budget deficit of $14.07 million by the end of the current fiscal year, which closes at the end of the June.
The biggest drivers of the deficit on the expenditure side include overages in Fire Department salary and overtime, which add up to a projected $4.9 million in deficit for the department; overages in Police Department overtime, which, when mitigated by salary savings, add up to a projected deficit of $1.02 million for the department; and the Board of Education (BOE)’s projected deficit of $6.9 million.
During the Finance Committee hearing, Jones stressed that the city has a revenue problem, not a spending problem. He said the city did not find out until October 2017, when the state legislature finally passed its biennium budget nearly four months after the beginning of the current fiscal year, that it would be around $5 million short in expected revenue from Hartford.
That revenue loss came primarily from cuts to Payment in Lieu of Taxes (PILOT) of around $4 million for college and hospital reimbursements and around another $1 million for state property reimbursements.
State law says that, depending on available funds, the state can reimburse up to 77 cents on the dollar for property tax revenue that Connecticut cities and towns lose out on due to the local presence of tax-exempt non-profits. The state has no legal obligation to fund PILOT, though city legislators tend to fight for as high a funding as possible in order to make up for lost property tax revenue.
PILOT currently pays out closer to 41 cents on the dollar. Around 54 percent of New Haven property is owned by tax-exempt non-profits.
“It’s very important to put that in context,” Jones said about the state budget cuts to the two PILOT programs. “It’s very challenging for a city to make that revenue up in the middle of a fiscal year.”
The majority of the city’s revenue shortfall, however, comes from the mayor’s Revenue Initiative line item, which was budgeted to bring in $18.6 million this year. Starting with the August 2017 monthly financial report, published on September 28 of last year, that line item’s projected income has been $0.
The current fiscal year’s budget describes that $18.6 million Revenue Initiative line item as “premised on receiving additional State aid or revenue from other sources such as an increase in voluntary payments.” The Revenue Initiative for next year’s budget has been reduced to $6.1 million.
“The issue is a revenue issue,” he said. “Not an expenditure issue.”
He pointed out that next year’s general fund budget is only slated to increase by $8.1 million, or 1.52 percent, over last year’s final approved budget.
East Rock Alder Anna Festa.
“I disagree,” said East Rock Alder Anna Festa. “We definitely have a spending problem in this city.”
She and Hill Alder Dave Reyes and West River Alder and Boards of Alders President Tyisha Walker-Myers zeroed in on the projected deficits in police and fire overtime as particular causes for concern.
“That’s crazy,” Reyes said about the Fire Department’s projected $2.7 million overtime deficit and projected $2.3 million salary deficit. He said he had never seen fire deficit numbers that high.
Walker-Myers and Festa stressed the importance of the police and fire chiefs coming before the Board of Alders to get approval on overtime costs that push the annual overtime line item above $1 million for each department. They said that stipulation had been included in a policy amendment in the current year’s budget, but, to date, neither the police chief nor the fire chief had come before the board to get overtime approval.
Jones said the chiefs had not appeared before the alders in previous months to discuss overtime due to scheduling snafus. He also said that all overtime allocation details are run by Quinnipiac Meadows Alder and Public Safety Committee Chair Gerald Antunes.
Balancing Bad Options
Jones.
Jones told the alders that the city’s primary plan for filling this year’s projected $14 million deficit is to pull funds from a pool of money initially budgeted to be put into the city’s two underfunded pensions, the Police and Fire Fund (P&F) and the City Employees Retirement Fund (CERF).
Jones said that towards the beginning of the fiscal year, back in July or August, the budget department put aside $16 million from the budgeted $61 million pension line item to keep on hand in case the city were to experience any cash flow issues due to the delayed passage of the state budget.
The city still has that $16 million on hand, Jones said, and plans to tap into it to cover whatever remains of the projected deficit come June 30. He said the city has also issued strict suppression control measures, limiting new hires and overtime approval to public safety departments only.
The current fiscal year’s budget allocated $34.6 million to P&F, $21.6 million to CERF, and $4.7 million to FICA and Medicare. According to the April monthly financial report, the city has thus far this year paid out 71 percent of its budgeted pension contributions: $24.8 million into P&F, $15.2 million into CERF, and $3.3 million into FICA and Medicare.
The budget that the alders approved two weeks ago flat-funds the pension line item at $61 million next fiscal year.
Jones said the annual budgeted contributions to P&F and CERF correspond to “annual recommended contributions” (ARCs), which are set by actuaries hired by the city to review its public pensions and which work towards fully funding the city’s pensions over the course of two decades.
P&F and CERF represent around $900 million in combined liabilities, according to the city’s independent Financial Review and Audit Commission (FRAC). As of 2016, P&F was funded at around 40 percent; CERF was funded at just above 30 percent.
Westville Alder and Finance Committee Co-Chair Adam Marchand asked about the potential negative consequences of taking up to $16 million out of the city’s budgeted pension contributions.
“They’re far less than if we don’t balance the general fund,” Jones replied. He said the most likely consequences are that the two city pensions’ funding ratios will get worse because of the corresponding increase to their unfunded liabilities. He said actuaries will likely recommend that the city increase its annual pension contributions above the current budgeted amount to make up for this year’s pension budget deficit. He said the city can spread out, or amortize, that increase over the course of 20 years, so that the pain of having to pay more into the pension fund will not be felt all at once.
“There’s more of a likelihood of being downgraded [by a credit ratings agency] if you don’t balance your general fund,” he said. A downgrading from a credit agency like Standard and Poor or Fitch would almost certainly result in New Haven paying higher interest rates whenever it goes out to borrow money.
Marchand asked if the alders should look into increasing its budgeted pension contributions for next year based on the likely pension deficit for this year. Jones said he would recommend keeping the current $61 million budgeted pension line item the same.
The budget that the alders passed two weeks ago also includes a policy amendment that calls for the creation of a pension task force to investigate the challenges and best routes forward for adequately funding the city’s two public pensions.
One of the most contentious proposals from the mayor’s original budget recommended borrowing $250 million to shore up the city’s pensions. The Finance Committee ultimately tabled that proposal, keeping it within committee for future consideration.
FRAC Chair Mohit Agrawal told the Independent that pulling $16 million from the pension budget would certainly result in higher ARC payments, and increases the overall riskiness of the city’s financial situation.
“But we need to close the books” on the current fiscal year, he said. “And money needs to be found. The city’s in a hard place.”
He said the city faces a conflict between short term and long term obligations. In the short term, it must find money to balance the general budget. In the long term, it must adequately fund its pensions, which represent nearly half of the city’s $2 billion in total liabilities.
He said FRAC still estimates that next year’s budget is at least $27 million out of balance, and that the city faces structural deficits that will not be remedied by finding pulling money from this year’s pension budget.
“We wouldn’t be surprised if the city finds itself in the same place next year,” he said.
Jones and Agrawal both said this is the first year in Mayor Harp’s five-year tenure that the administration will not be fully funding its ARC payments for the city’s pensions. Agrawal said that fact underscores the seriousness of this year’s budget troubles.
More Money From Yale
Gary Doyens.
Jones also told the alders that in early April Yale University committed to increase its annual voluntary contribution to the city by $2.5 million.
He said Yale currently gives the city around $8.6 million each year. That contribution will increase to just over $11 million in total, he said. That increase will be applied to the current fiscal year’s budget, he said, and will be put towards reducing the projected $14 million deficit.
Jones said that Yale, as it has done for the past decade, will submit the majority of its contribution to the city in August. Yale then pays another couple million dollars each year later in the fall to cover its use of city fire services.
The August money, however, is always backdated to help close deficits in the previous fiscal year’s budget.
“This is about as bad as it’s ever been,” said budget watchdog Gary Doyens during the public testimony section of the hearing. “That practice [of backdating Yale’s contributions] should stop if you’re going to get a real budget and understand a real deficit and adjudicate your expenses to your revenues. … Quit taking money and backdating it just because your auditor says you can.”
Jones said that process of backdating Yale money has been approved by the city’s auditors, RMS, and has been done for over a decade ever since the city first started receiving voluntary contributions from the university.
He said the city’s auditors ensure that all of the city’s financial practices follow Governmental Accounting Standards Board (GASB) standards. He said for the past four years the city has won the Government Finance Officers Association (GFOA) award for transparent financial reporting.
$10M In Debt Savings?
The Finance Committee also moved approval of the city’s request to transfer $10 million from the debt service line items and use that money towards reducing various departments’ deficits. Jones said that transfer was possible because of upwards of $20 million in savings that the city achieved in bond refinancing in August 2017.
FRAC’s Agrawal said the city should not identify that money as revenue, as the city should never expect to achieve savings from its debt.
“The city should not expect to get a free $10 million loan from Wall Street,” he said.
The Finance Committee recommended approval for Jones’ proposal to transfer $10 million from Debt Service to the following locations: $2.9 million for police overtime, $2.8 million for fire overtime, $2.9 million for fire salary, $450,000 for Youth Services, $250,000 for Public Safety Communications overtime, and $700,000 for other employee benefits and workers’ compensation.
Jones said this transfer will not reduce the projected $14 million for this fiscal year, as it has already been factored into the monthly financial report.
Click here for a complete list of city monthly financial reports. Click here to learn more about FRAC, which will hold its next meeting on Tuesday, June 12, at 5 p.m. in Meeting Room 3 on the second floor of City Hall.
Where will the City be financially next summer? Three years from now? Five years? Ten years?
Do we have the leadership in place to get us throw this fiscal mess? Is the plan simply to continue hiking property taxes up to and beyond 50 mills?
What is John DeStefano up to these days? Any chance we can bring him back?