Audit Framing Questioned

As he sat listening to a presentation on Hamden’s audit Monday night, a number struck Councilman Harry Gagliardi. The auditor said the pension had been underfunded by $2.9 million — not the $6.7 million Gagliardi remembered.

“Where did the other $4 million go?” he asked.

David Cappilletti, the auditor, pointed to the numbers on page 77 of the town’s 2018 – 2019 fiscal year audit he was presenting to Hamden’s Legislative Council. It showed the math behind the $2.9 million figure.

The answer seemed not to satisfy Gagliardi. A few minutes later, he asked again. As Cappilletti answered, residents Christian McNamara and Sam Julier called out from the back of the room: ​“It’s CMERS money!”

“There will be a financial literacy workshop next Saturday. All members must attend,” echoed Stocky Clark in a lower tone. A chuckle ran through the small crowd.

The exchange highlighted the reason McNamara, Julier, Clark, and ten other residents had shown up to speak in a public hearing after Cappilletti’s brief presentation of the town’s audit.

The audit appears to show that the town’s pension was underfunded by $2.9 million in the last fiscal year. A closer look, however, shows that the situation is much more complex.

McNamara, Julier, Clark, and their neighbors were there to ask for greater transparency and clarity on town finances.

In February, Mayor Curt Leng sent out a press release announcing that the town had ended the last fiscal year with a $500,000 surplus. The release announced that the town had increased its fund balance from $1.5 million to nearly $2 million.

“We are seeing the results of our multi-year efforts to stabilize Hamden’s finances,” Leng is quoted saying in the release. He highlighted the cost savings the town has achieved through negotiations with unions. Leng told the Independent that the town has saved $2 million in union concessions over the last two years, and that negotiations are ongoing.

By some metrics, the audit shows that Hamden’s finances are improving. The previous year’s audit showed that the town’s general fund had decreased by $1.5 million. This year, as the mayor’s press release stated, it increased. The previous audit showed that the town’s net position had decreased by $15 million in the 2017 – 2018 fiscal year (and by $26 million the year before that). The 2018 – 2019 fiscal year audit shows a stabilization in Hamden’s downward spiral of previous years, as the town’s net position decreased by only $489,000. The town remains in a total net position of negative $888.5 million. (See past audits here.)

Yet some residents, led by McNamara, have argued that focusing on the $500,000 surplus does not show the whole picture of where town finances stand. On Monday, he told the council that he does not blame the current administration for the town’s financial position, and acknowledged that the administration has taken steps to make a dent in the problem. He had not come to the council to blame anyone, he said, ​“but rather because we need a candid assessment of where things stand financially.”

Over the last few months, McNamara, Julier, Clark, and others have begun to show up to every council meeting, and have spoken about the town’s finances at most of them. McNamara has also prepared two presentations on town finances based on past audits and other financial documents.

As Monday’s exchange showed, financial information can be difficult to pin down with a quick look at the audit.

$2.9 M Or $6.7 M?

The pension confusion came from the fact that the line in the audit to which Cappilletti referred showed only gross totals. It did not show the breakdown of what the numbers represented.

Up until 2006, all town employees were placed in a town pension plan. After decades of underfunding, that plan now has nearly $300 million in net liabilities.

In 2007, the town pension plan closed to all new hires. New hires were placed in the Connecticut Municipal Employees Retirement System (CMERS), to which McNamara and Julier had referred in their back-row comment on the auditor’s presentation.

The town must now pay into both CMERS and its own plan each year. Contributions into both CMERS and the town plan have ramped up recently, and will continue to do so. At some point, if the town plan is fully funded, Hamden will no longer have to make contributions to it, though there is still a long way to go before then.

When the council originally budgeted $23.9 million for the total pension line in the 2018 – 2019 budget, that number included three components: $22.6 million of that was the town’s planned contribution into the town pension. The council budgeted $2.8 million for CMERS on top of that, bringing total pension costs to $25.4 million. To reach the final $23.9 million figure that the council passed, $1.5 million of concessions from unions were counted as savings in the pension section of the budget.

The audit shows that, though $23.9 million was originally budgeted for all pension expenses (brought lower artificially by counting union concessions in the line), the council ended up amending the total to $21.9 million.

The $2 million reduction came in a series of highly contentious financial transfers in the spring. The council transferred about $2 million allocated for the town pension plan to pay for utility bills, worker’s compensation, public works tipping fees, and police and fire overtime. At the time, some council members were vehemently opposed to the transfers, arguing that they had voted to pay the full $22.6 million into the pension, and that underfunding the pension again would just add to future debt. The transfers had to come before the council three times before they finally passed. The council also diverted $250,000 from the town pension for payment to CMERS, which is not reflected in the audit because it does not change the $21.9 million total pension figure.

The audit shows that in the end, the town paid $19.1 million in total pension expenses. That total came from two payments: The town paid $15.9 million into the town’s pension fund, and it made a $3.2 million contribution to CMERS. Subtracting $19.1 million from $21.9 million yields the $2.9 million underfunding figure that Cappilletti presented to the council.

That number does not show the specifics of the town’s own pension plan, however, because it includes the CMERS payment, incorporates the transfers that took place in the spring, and incorporates the $1.5 million of anticipated union concessions as a reduction to the initial total.

The town’s pension was underfunded by the $6.7 million figure that Gagliardi had asked about. The $6.7 million is the difference between the amount the council budgeted for the town’s pension fund ($22.6 million) and the amount it paid into it ($15.9 million). A little over $2 million of that was approved by the council. The rest did not need approval, because no money was ​“transferred.” It was simply accounted as an expense that came in under budget.

Not paying the full pension contribution that was budgeted is no longer an option. In the current fiscal year, the town is legally obligated to pay the full $19 million it budgeted into the town’s pension plan. In the next fiscal year, state law requires an estimated payment of $23.6 million. (Read more about the current pension situation here.)

Expenses And Revenues

In his presentations, McNamara has also pointed out the fact that while the town ended the year with a slight surplus, its revenues also came in $5.4 million lower than expected. Past audits show that revenues have come in short for the last six years.

McNamara made two specific demands of the council on Monday. He asked that the council request a written explanation of every proposed revenue that is significantly higher than what the line actually brought in in previous years. He also asked that the audited results of the previous three years be included in the budget, rather than just those from the previous one year, as is currently the case.

Throughout budget negotiations for the current fiscal year’s budget in the spring of 2019, revenues became a point of contention. Former Majority Leader Cory O’Brien in particular tried to scale back what he saw as ​“inflated” revenue projections in the mayor’s proposed budget. Scaling those projections back came at a cost, however. When the council passed its budget, it included a significant tax increase over the mayor’s budget. Leng ended up vetoing the budget because of the higher taxes.

The audit shows that overall, the revenues came in $5.4 million less than originally budgeted. To make up for the revenue shortfall, the town realized $5.7 million in savings in expense lines. The audit shows that every department had at least moderate savings. Some of those savings came from union concessions. Some came from department heads keeping the books tight. And a significant portion came from funding the town’s pension $6.7 million less than originally budgeted.

A large chunk of the revenue shortfalls was the result of lower-than-expected tax revenue. Nearly every tax that the town levied yielded less than expected, leading to a $1.9 million shortfall in taxes. Of that unrealized expected revenue, $750,000 was from a planned out-of-state motor-vehicle tax that was never enacted.

Shortfalls also happened in many other revenue lines throughout the budget, most relatively small, but a few large. Fees, permits, and licenses in the Building Department, for example, brought in almost $1 million less than budgeted. $740,000 of the $1.35 million the town expected in a gift from Quinnipiac University also did not materialize.

“Every budget year there will be some revenues that are higher or lower than our budget,” Leng wrote to the Independent. ​“It’s our job as good stewards of our town’s finances to then do our best to cut back on the expense side to make up for that.”

He said that financial professionals have told him the most important thing the town can do to improve its finances is to build up its rainy-day fund and fix its pension situation. Over the last five years, the town has contributed $75 million to the pension, which is more than at any other point in Hamden history.

“We have some work to do, but the point is that we are getting the job done,” Leng wrote. ​“Some folks seem to want to only talk about the negatives and the challenges, but don’t want to acknowledge the work that’s been done and has been positive or improved, all of which takes many years of planning and negotiating. I don’t find that to be very transparent and it misleads a lot of residents.”

He said the town would start publishing monthly updates on expenditures and revenues.