$5M Cut From Schools; Pension Idea Nixed

In a first pass at amending next year’s budget, alders recommended shifting $5 million from the schools to help cover public employee medical benefits, and they signed off on a proposed double-digit tax increase … for now.

They also ditched a plan to borrow heavily to shore up city pension funds.

Those were some of the key outcomes of the Board of Alders Finance Committee’s final deliberations on the mayor’s proposed $547.1 million operating budget and $79.6 million capital budget for the fiscal year that starts July 1. The deliberations took place on Thursday evening in the Aldermanic Chambers on the second floor of City Hall.

After two months of public hearings and departmental workshops, the committee ended its portion of the budget-making process by unanimously approving an amended version of the mayor’s proposed general fund budget. They also unanimously approved the original version of the mayor’s proposed capital fund budget.

Those budget documents now go to the full Board of Alders for a first reading this upcoming Monday and a second reading (and final debate and vote) during a special full board budget meeting on Tuesday, May 29. Any alder can submit further amendments to the proposed budget for discussion during the second hearing. The alders must vote on the budget and send it to the mayor for a final sign off by the first week of June.

The Finance Committee decided not to vote on a proposal to issue up to $250 million in Pension Obligation Bonds (POBs), choosing instead to leave that item in committee with the hope that a future pension task force will provide more information on the best path forward for dealing with the city’s two underfunded pensions.

“Over the last several weeks, we’ve listened to a lot of testimony,” said Westville Alder and Finance Committee Co-Chair Adam Marchand at the top of the meeting, ​“and we’ve come to understand and appreciate the significant structural issues that we as a city face.”

He listed the city’s underfunded pensions, rapidly rising healthcare costs, $66 million in annual debt service, and continued struggles with police and fire overtime as bigger-ticket items weighing down the city budget.

“Many are not new issues,” he said, ​“but they are very serious.” He noted that all of these issues were exacerbated this year by a reduction in funding from the state.

He then took the lead in laying out the details of the committee’s proposed changes to the mayor’s general fund budget, noting that the committee’s first priority was to address a few of the proposal’s underlying financial assumptions.

“Fiscal responsibility means we have to make realistic assumptions,” he said. ​“We cannot have a budget based on assumptions for savings that are not going to happen. We found some unrealistic assumptions in the mayor’s budget, and these are holes that we have to fill.”

First and foremost, he said, the committee could not agree to the mayor’s proposal to flat-fund the medical benefits line item at $76 million. ​“That’s just never going to happen,” he said. The city’s independent Financial Review and Audit Commission (FRAC) has estimated that medical costs for New Haven, and for the market more broadly, are likely to increase by 5 to 8 percent each year.

The committee voted to increase healthcare funding for next year’s budget by $5 million, or 6.5 percent above this year’s funding level.

“That doesn’t fix everything,” he said. ​“There’s still more work that needs to be done here.” But, he said, it’s a start.

The alders also voted to approve a policy amendment to create a healthcare task force to investigate the quality and costs of medical benefits for city employees, retirees and dependents. The committee voted to allocate $25,000 in next year’s budget towards hiring a consultant to help get the taskforce off the ground.

Tough News For Schools

That $5 million addition to the healthcare budget, Marchand said, would come out of the mayor’s proposed $5 million increase to the Board of Education (BOE) budget.

“It is imperative that we halt the slide in the medical benefits fund balance,” Marchand said. The most readily available funds with which to do that, he said, just happened to be in the proposed education increase.

“But we also want to send a clear signal to the Board of Education that they have to make some changes,” he added. ​“This is a time when we have to exercise an extreme amount of restraint in our spending.”

The BOE is already looking at a projected $6.5 million deficit this year and a projected $15 million deficit next year, schools Chief Operating Officer (COO) Will Clark said after the meeting. He said this $5 million cut pushed next year’s prospective deficit to upwards of $20 million.

“That’s a significant challenge,” he said, noting that the school system’s deficit has been compounded by a recent decline in state grants. He said the BOE has started addressing its looming deficits through its recent decision to close three city schools. ​“Our work has only just begun,” he said.

“It’s a tough decision,” Board of Alders President Tyisha Walker-Myers said about cutting funds from the school system to shore up healthcare costs. She said she grew up going to New Haven public schools and cared deeply about their funding, but that she was also confident that a failure to better fund medical costs now would only result in higher and higher payments in the near and long-term future. ​“We have to stand by the decision that we made.”

Marchand said the committee also proposed to decrease the mayor’s proposed savings from vacancies and employee concessions from $3.6 million to $1.8 million. ​“That’s too high a figure,” he said about the mayor’s original number, ​“and unlikely to come to pass.”

He did say, however, that the committee would leave intact the mayor’s proposed $6.1 million revenue initiative, by which her administration plans to solicit additional funds from partners like the state and Yale University. The city’s $18.6 million revenue initiative for the current fiscal year is currently projected to bring in nothing, according to the latest monthly financial report from the city’s finance department.

The increased costs associated with these more realistic financial assumptions, Marchand explained, would largely be balanced out by cuts to almost all of the mayor’s proposed new services and personnel.

21 Positions Cut

The committee cut 21 new or reorganized positions from the budget, including the mayor’s proposed public relations specialist, a body camera specialist for the police department, and a new code enforcement officer for public works.

The committee also nixed the proposed $468,000 expansion of the Health Department’s public health clinic, as well as the $150,000 for the new family justice center.

The committee did vote to restore $18,226 to the City Clerk’s office on top of a technical amendment from the city that gave back an additional $20,074 to the department in anticipation of a busy mid-term election year. 

The alders put aside $50,000 to help pay for operations for a not-yet-created Civilian Review Board, which they said they hoped to finally pass legislation on in the coming fiscal year.

Despite all of the cuts, Marchand said he did want to add a note of optimism to the budget proceedings.

“We’re doing tough things,” he said. ​“It’s not fun saying no. Oftentimes, more programs yield more services for city residents. But I am still bullish about New Haven. People are coming to our city. They’re investing in our city. … We haven’t fixed all the problems yet, but we have confidence that, if we work on it together, we will find a way forward.”

Marchand and his fellow committee members said now that they had laid a more responsible platform for the budget, they hoped to find additional savings to help achieve a reduction to the mayor’s proposed 11 percent tax increase.

“Our first priority now should be to reduce the mill rate increase,” he said.

“When we started this process,” Walker-Myers said, ​“we heard from residents about the tax increase. And when we approached this budget, we tried to find every bit of savings we could. That’s why we said no to things that might be otherwise be great.” She said she was committed to finding further savings in the budget to help cut the proposed tax increase before the full board holds its second hearing on May 29.

Acting City Budget Director Michael Gormany said that he needed some time to process the committee’s amendment to the budget, as Thursday night was the first time that he was seeing the proposed changes in detail.

Pension Bond Pause

The alders decided to take no action on Thursday night on one of the most discussed and debated proposals in the mayor’s budget: the proposal to issue $250 million in Pension Obligation Bonds (POBs) to help shore up the two city pensions, the Police & Fire Fund (P&F) and the City Employees Retirement Fund (CERF), both of which are currently funded at around 40 percent.

“The risk of bad outcomes is too great for the city,” Marchand said during the deliberations. “At this point the consensus opinion is that we are not in a position of confidence to approve the issuing of the pension obligation bonds.”

Edgewood Alder and Finance Committee Chair Evette Hamilton agreed.

“We need to make sure that these pensions are funded,” she said. “But for me, at this time, $250 million is a big, huge risk for us as a city. Everything is going by assumptions. Assumptions are not facts. You’re assuming this is going to happen, that is going to happen. But what happens if your assumptions are not proven? We cannot afford any more debt now.”

A recent FRAC report cautioned that the likely interest rate on the bonds will be 5.18 percent, and that the pension funds will likely return 6.5 percent on investment over the 30-year life of the POBs. City assumptions, on the other hand, predict a 4.85 percent interest rate and a 7.5 percent rate of return, which FRAC calls too optimistic.

The alders voted to take no action on the POB proposal, thereby leaving it in committee for future deliberation, and instead voted unanimously to approve a policy amendment to create a pension task force charged with studying and recommending strategies for funding the city pensions. They also voted to allocate $25,000 towards the new task force to help pay for any consulting fees.

After the meeting, FRAC Chair Mohit Agrawal said he was encouraged by the proposed creation of the new pension and healthcare taskforces, and said he was sure that FRAC would be involved with both.

“FRAC has made several suggestions regarding the pensions,” Agrawal said as suggested starting points for the pension task force, “including lowering the assumed rate of return, moving to passive investments, flat funding the contributions, and enacting a prohibition on trustees accepting gifts. We also encourage the city to discuss reforms of the pensions such as [City Controller] Daryl Jones’s suggestion of changing COLA [cost of living adjustment] calculations.”

As for some issues to consider for the healthcare taskforce, Agrawal pointed to such reforms as reference and bundle pricing, the use of capitation rather than fee for service, adopting an intensive primary care and continuity of care model a la Yale Health, and potentially joining the state health plan.

“Medical care has become increasingly expensive and increasingly fragmented over the years,” he said, “so the city has a real opportunity to both lower costs and improve quality.”