Hamden Council Nixes Year-End Closeout Transfer

In a tenth-hour vote following an evening of frustration and confusion, the Hamden Legislative Council voted Monday to not make a $2.85 million transfer to close out its 2019 – 2020 fiscal year (FY20) budget.

The move will not affect the budget’s bottom line, but it might create some concerning figures in an upcoming audit because of how the budget was crafted in the first place.

The transfer that failed Monday in a 7 – 7 tie was a procedural account transfer. It was supposed to prepare the books so that accounts would look smooth as auditors prepare the fiscal year’s audit. It had no effect on how much the town spent or saved. It simply would have made the audit conform to the way the budget was crafted.

Hamden’s FY20 budget included two expense savings lines. Those were not revenues — they were lines that showed negative values included in the expenditures section of the budget. One was a $2.5 million union concessions and attrition savings line included in the fringes section of the budget. The other was a $350,000 ​“expense reductions/efficiency” line in the mayor’s office section.

Those two lines were supposed to catch the savings in other lines in the budget that the town achieved over the course of the fiscal year. They allowed the town to present a balanced budget at the beginning of the fiscal year by anticipating savings, and including them as negative expenses in the budget.

In the fringes section of the budget, for instance, budgeted expenses totaled $4,369,500. Those expenditures, though, were offset by the $2.5 million concessions savings line. That meant the bottom line of fringes expenditures was $1,869,500. Those savings lines obligate the town to achieve savings in order to avoid going over budget.

Monday’s transfer was supposed to take the savings from accounts all over town government and transfer the extra funds to those two savings lines. Though savings are shown in those two lines when the budget is passed, they simply manifest at the end of the fiscal year as extra money in various accounts throughout the town that has not been spent. In order for the books at the end of the year to reflect how the budget was crafted, those savings must be transferred to the savings lines.

Had the council passed the transfer Monday, the audit would have shown that the mayor’s office and fringes sections of the budget ended up as anticipated.

By not completing Monday’s transfer, however, the audit will show that the fringes section of the budget was overspent by about $2.5 million, and the mayor’s office budget by $350,000. The bottom line of expenses will be the same though; according to Finance Director Curtis Eatman, overall expenses seem to have ended up about on target.

To some, the transfer may have seemed a routine budget move to close out the town’s books at the end of the fiscal year. But to others, it highlighted concerns, and confusion, about the way the town has conducted its accounting.

Finance Chair Kristin Dolan, who is herself an accountant, said she voted against the transfer because she had understood that the $2.5 million concessions line was intended to catch savings from union concessions, attrition, and ​“incentive savings.”

The transfer that came before the council Monday included transfers of savings from about 300 different accounts. (Scroll to the bottom of this document to view the list of accounts.) While many of those savings could have come from concessions, attrition, and ​“incentive savings,” many of them could not have.

As Eatman told the council Monday, the town achieved about $220,000 in union concessions savings in the 2020 fiscal year. Those savings would have been reflected in salary lines and in other personnel-related lines.

Attrition and ​“incentive savings” would also have resulted in savings in those same personnel-related lines, which would include benefit lines along with regular salaries. The personnel-related lines in Monday’s transfer account for about $1.5 million of the savings — a significant portion, but short of the $2.5 million in the concessions and attrition line in the budget.

Council members, though, did not have time to scrutinize each line in Monday’s meeting to determine how much of the savings actually corresponded to the concessions and attrition savings the town had anticipated in its budget. That information was not presented to the council.

Dolan said that if that $2.5 million concessions and attrition savings line had been intended as a catchall for all savings throughout the town, then it would have made sense to make the transfer. But as she understood it, she said, it was supposed to catch the savings from concessions, attrition, and other savings that the town can actively pursue and that are not just the product of luck. By including other savings in that line, she said, she was worried the accounting would become muddled.

Compounding the problem was that the transfer came before the council at the end of a long meeting that had featured frustration from council members about financial transparency from the administration. The administration, whether for timing or other reason, did not provide a thorough explanation of the transfer Monday.

“I think the problem is it was a confusing issue that was not well explained by the administration,” said Dolan, who is an accountant. No council member who spoke with the Independent about Monday’s transfer said they fully understood it.

Mayor Curt Leng said he is considering resubmitting the transfer to the council.

Deficit, And Potential Ratings, Loom

Eatman said the transfer’s failure will look bad for the town because it will make it look like it was very far off the mark in the fringes and mayor’s office sections of the budget. He said that the town will have to include a management letter with its audit to explain why the mayor’s office and fringes year-end totals appear to be so far off budget projections.

That will matter when rating agencies pour over the books again to determine whether to drop Hamden’s bond rating any further. Last year, Moody’s dropped Hamden’s bond rating to one step above junk-bond status. In July, S & P and Fitch both dropped their bond ratings for the town as well.

The potentially alarming numbers in the mayor’s office and fringes accounts lines will not be the only thing to raise eyebrows in the audit, though.

Eatman said that this year, the audit is projected to show a $6 million deficit for the 2020 fiscal year because of a shortfall in revenues. The town currently has a fund balance of slightly less than $2 million. That means the audit will likely show about a $4 million negative fund balance, though those estimates are not official.

“The FY20 budget is still likely to end in a deficit,” Leng wrote to the Independent, ​“but thankfully the deficit should be much smaller than originally discussed.” In the spring, Leng told the council that he was anticipating a deficit between $8 and $12 million. Through ongoing work, he said, the town has managed to lower it. He gave a different figure than Eatman, saying it would fall in the range of $4 to $5 million.

Regardless of whether the deficit is $4 or $6 million, a negative fund balance could have repercussions for the town.

Connecticut has two bodies that oversee, or consult on, the finances of distressed municipalities. In the first two tiers of fiscal distress, towns can elect to consult with the Municipal Finance Advisory Commission (MFAC). Hamden already meets the criteria for tier I MFAC review, and Leng said the town has started working with the state commission.

Once municipalities get to a certain level of distress, though, the state can take over their finances, and that process is not voluntary. Instead of MFAC, the Municipal Accountability Review Board (MARB) oversees those municipalities. Hartford, West Haven, and Sprague are currently under MARB review.

MARB review often means strict financial controls and austerity. ​“Going into the MARB means one thing, higher taxes, and that’s unacceptable,” Leng wrote. As he pointed out, ​“the MARB doesn’t give towns financial tools or additional legal authority.”

If Hamden’s next audit does show a negative fund balance, though, that would make it eligible for Tier III MARB review because of the town’s low bond ratings. That means the state could decide to step in and take over Hamden’s finances.

Moreover, rating agencies would not look favorably on an audit with a negative fund balance.

Luckily, Hamden does have a plan to mitigate the last fiscal year’s deficit. In June, it passed a $25 million debt restructure, which will give the town two years’ worth of savings. The first year’s savings will mitigate the FY20 deficit, and make the fund balance positive again. The second year’s savings, if all goes according to plan, will help grow the town’s fund balance.

Those savings will not be reflected until the 2020 – 2021 audit, though, because the savings come in the current fiscal year, not in the last. That means the restructure will not prevent the town from having a negative fund balance on the books come December, when the audit is set to be published.

Town officials explained that plan to rating agencies when they rated the town’s restructuring bonds in July, meaning they are primed for the town to show a deficit this year. But they only explained it to S & P and Fitch. The town did not ask Moody’s to rate this last round of bonds because it could not afford a downgrade from Moody’s.

Hamden still has outstanding bonds that Moody’s did rate, though, and that means that Moody’s can still come to the town and downgrade its rating on those existing bonds. That’s what it did last year when it downgraded the town to one step above junk bond status.

When the audit comes out in December, Moody’s may well come back to the town to talk to officials and consider changing the bond rating again. Unlike S & P and Fitch, it was not apprised of the town’s restructuring plan in July, and may not look favorably on a negative fund balance.

The debt restructure deficit mitigation plan also hinges on a budget in the current fiscal year that does not end in a deficit. That could be difficult to achieve.

The current fiscal year’s budget includes a $6 million revenue line for federal aid for Covid-19, as well as another $2 million union concessions savings line. Eatman said he is not concerned about achieving the $2 million in expense savings, but that the Covid-aid line is worrying.

Though Connecticut’s federal delegation has lobbied for more federal aid for municipalities, a second stimulus package is still stalled in the U.S. Senate, and there is no indication yet that $6 million may be coming Hamden’s way.

If this year’s budget ends in a deficit, the savings from the debt restructure would close the FY21 deficit, but would not solve the FY20 deficit, and the town could simply carry over a negative fund balance. That would not put the town in good stead, and could look very bad to rating agencies.

The town recently set up a fiscal stability committee to find a way to cut about $8 million out of this year’s budget. If that proves impossible, the town might be forced to enact a supplemental mid-year tax increase.