$9M Problem Solved? Or Pushed Back?

Budget deficits, pension obligations, capital sweeps, and the smell of coffee filled the air at Books & Co in Whitneyville as Hamden officials and citizens met to discuss the closing of the town’s 2017 – 2018 budget —and how the numbers added up.

The Hamden Progressive Action Network (HamPAN) hosted the event Saturday in order to discuss how the mayor solved a $9 million budget shortfall coming for the current fiscal year.

In the 2017 – 2018 fiscal year (FY 18), the town had a total annual operating budget of around $226 million. The town’s expenditures actually did not reach that $226 million; the town actually spent $7 million less than it had budgeted. But the revenue the town received ended up being much smaller than was anticipated in the budget, leaving a shortfall of around $9 million.

That left the mayor with the task of either balancing the budget somehow, or closing it out with a deficit, which could have potentially sent the town into state oversight. To close the budget shortfall, the mayor ended up using two main methods. First, $5 million that had been budgeted to go to the town’s pension fund went to the closing the deficit. The second, and more controversial move, involved capital sweeps — transfers of funds from bonds for capital projects to pay debt instead.

Some members of the Legislative Council argued the mayor chose the least bad of a few bad options. Others called the capital sweeps irresponsible, arguing that the budget had not been made with honest revenue projections in the first place.

In response to those concerns, HamPAN called the meeting so that politicians and citizens could get together to discuss what had happened in order to help citizens make sense of it all.

“‘17 – 18 Treat”

Hamden has been in a tight financial position for years, and the 2017 – 2018 fiscal year was particularly bad. As Mayor Curt Leng ironically put it, it was his “‘17-’18 treat.”

In all the time he has been involved in Hamden politics, he told the Independent, ​“there has never been a year like this past year.”

The biggest challenge: budget uncertainty at the state level, where projected deficits have run into the billions at times, and municipal cuts have been continually on the agenda. The town was required to provide a budget to the state in June. Usually the town would base its budget on how much revenue it will receive from the state. However, by the time the town had to submit its budget, the state was still not able to provide any accurate information on what revenues would look like; lawmakers at the Capitol missed their own deadline for passing a budget, running months late.

Some other towns, like Seymour and Branford, planned for extra cuts; others, like New Haven, didn’t.

Once the Hamden budget was passed and the 2017 – 2018 fiscal year had begun on July 1st, the town received mixed messages about what state funding would look like. Town officials said they kept hearing from state officials that they would get the amount they had budgeted for. It was not until November 2017 that the town learned it would receive much less from the state than it had anticipated — approximately $5 million less.

The town had also overestimated the revenue it would receive from its own revenue sources. In addition to regular annual taxes, other revenue sources include building permits and conveyance taxes (taxes on property transfers).

According to at-large Council Rep. Lauren Garrett, the reason the budget has had shortfalls for years is that the town keeps making budgets that have inflated revenue projections. She said the the town could have prevented the budget shortfall by not relying on inflated projections. (Garrett wasn’t yet on the Council for that budget year.)

Certain revenue sources, including conveyance taxes and building permits, had been budgeted ​“on the high side,” according to District 8 council Rep. Jim Pascarella. Nonetheless, he added, the town had usually managed. He would argue that those revenue projections were not irresponsible.

“I don’t think anyone turns around and says, ​‘I know what we’ll do, we’ll inflate the revenues and worry about it later.’ That’s not the plan.” He explained that the budget contained a multitude of projections that could turn out to be inflated revenues, and that the 2017 – 2018 fiscal year turned out to be a ​“worst-case scenario wherever you looked.”

After they found out that they would not be receiving what they had budgeted for in November, the mayor and the Legislative Council tried to figure out how they could save. Through hiring freezes, stopping promotions, and other spending freezes, the town was able to save some money, but not enough to prevent a budget shortfall at the end of the fiscal year.

The Pension Problem

Whether due to irresponsible decisions or routine budgeting practices sabotaged by particularly adverse circumstances, the combination of optimistic revenue estimations and lower-than-expected state funding left the mayor with around $9 million he had to come up with in order to prevent the town from closing out the fiscal year with a deficit.

He did that partly by diverting money that had been budgeted for the pension fund and using it to help close the deficit.

Hamden, meanwhile, has an underfunded pension already. The roots of the town’s pension woes go back decades, to when the town promised substantial pensions to its employees. The town used to put all town employees on its ​“legacy” plan; that is, the town funded its employees’ pensions itself. Though the town switched over to the state’s pension plan about 10 years ago, any town employees hired before the switch are still on the legacy plan. That means that as those employees retire, the town will have to pay pensions for a growing number of pensioners as more and more town employees retire. Though no new employees have been added to the legacy plan since the town switched to the state’s pension plan, it will be a long time until the last pensioners on the town’s plan pass away, leaving the town with no more pensions it has to pay directly.

In order to pay those pensions, the town has a pension fund. In an ideal scenario, the pension fund would have enough money to pay the pensions of all current pensioners in addition to those of all future pensioners until they die. That requires putting enough money into the fund. Hamden has underfunded it by hundreds of millions of dollars.

In the early 2000s, the town essentially stopped making payments to the pension fund. That meant that a few years ago, it dipped to 9 percent funded, according to Mayor Leng, forcing the town to pay pensions with budgetary allocations rather than with the fund, which is intended to prevent pensions from burdening the budget. The town currently pays around $2.2 million to pensioners each month. That number will only increase as more employees retire.

In order to deal with the underfunded pension, the town took out a $123 million pension obligation bond about four years ago, before Leng was elected. That allowed the town to pay pension obligations.

However, the pension obligation bond requires that Hamden make annually increasing payments to the fund in order to fully fund the pension in 30 years. By the 2017 – 2018 fiscal year, the town was supposed to pay 100 percent of the actuarially required contribution (ARC) to the fund. The ARC is the amount that the town has to pay every year in order to fully fund the pension by the end of a 30-year period.

When the state notified Hamden that it was shorting the town in revenues, in exchange, it extended the amount of time the town had to reach its ARC payments.

That provided Leng with an opportunity to shore up some of the deficit. The town had budgeted $17.7 million for the pension fund. The state’s concession allowed the town to only pay $12.65 million to the fund, leaving $5.05 million that the town could instead use to close the budget shortfall.

Some members of the Legislative Council said that step was necessary in order to prevent a budget deficit; others argued it simply prolonged the process of funding the pension. ​“We feel that continuing to drag it on is more of the same and it’s further prolonging our fiscal issues,” Democratic Majority Leader and District 6 Rep. Cory O’Brien told the Independent.

Mayor Leng told the Hamden PAN meeting on Saturday that the pension is currently around 37 percent funded, meaning it contains around 37 percent of the town’s total pension liabilities, present and future. The town’s total pension liabilities are around $450 million, so approximately $164 million is already funded.

Yet, as O’Brien pointed out, the town still has to pay both principal and interest on the pension obligation bond every year, in addition to making payments into the pension fund itself. O’Brien said that principal plus interest comes to around $8 million each year.

Then The Sweeps

The mayor patched the other part of the budget shortfall with capital sweeps. That involved taking money from bonds that the town took out for capital projects and using it to pay for the debt.

As Mick McGarry explained at the meeting on Saturday, when the town takes out bonds on capital projects, the bonds are slightly larger than it anticipates the project will actually cost, in order to cover unanticipated overruns. At the end of each fiscal year, the mayor looks at those capital projects and bonds and sweeps the leftover money that wasn’t used in the project in order to pay the deficit.

However, capital sweeps don’t always involve just taking the excess bond money that was not used in the project. In some cases, the projects don’t happen for various reasons, and the town sweeps most or even all of the original bond towards the deficit.

The mayor relied on around $3.7 million total in capital sweeps to balance the 2017 – 2018 budget. According to O’Brien, the town usually takes out around $8 – 10 million in bonds each year. Even if the town were able to complete every project using 10 percent less than had originally been bonded for, that would only leave $800,000 to $ 1 million extra for sweeps. The fact that the capital sweeps totaled around $3.7 million indicates that some of those sweeps were from projects that were never completed.

O’Brien acknowledged that some of those projects that did not happen may have been canceled because they were deemed unnecessary. Yet he said he worries that many of those projects need to be completed in the long term, and the capital sweeps simply push them off.

Lauren Garrett was particularly concerned about sweeps in the engineering department. A spreadsheet of the sweeps the town made shows a number of bridge and drainage projects that had large sums of money swept from them. One bridge repair project, for example, originally had $150,000 budgeted. As of November, $112,000 of those funds were still available, and all $112,000 were swept to take care of the deficit. It is unlikely that that project was completed with only $38,000 of the original $150,000 budgeted. Other projects listed on the spreadsheet show that no funds were spent on the original project and all was swept, meaning a number of projects simply never happened.

Capital sweeps are legal, and they have accounted for balanced budgets in Hamden for many years. Garrett and O’Brien said they are concerned about their use for balancing the budget for a number of reasons. First, they worry that projects that need to happen are being canceled, and those funds are going towards the deficit instead of funding the projects they were intended for. Second, using capital sweeps means using borrowed money, which has to be paid back with interest, to close the deficit. That’s essentially like taking out a loan in order to pay off the debt you owe on previous loans. It simply increases debt in the long term. (Click here to read a story about the dangers of long-term borrowing to pay operating costs, which led Hartford to the brink of bankruptcy and a state bailout, and which New Haven has embraced as a strategy.)

O’Brien argued that it makes more sense to use ​“swept” funds to pay for projects in the next fiscal year, rather than to close a deficit.

Though O’Brien and Garrett don’t have a problem with using some sweeps, they said, they do have a problem with the scale at which the mayor used them.

As Mayor Leng pointed out, the 2017 – 2018 budget included a line that anticipated $1.57 million in capital sweeps. In addition to those sweeps that had already been planned, the mayor did around another $2.1 million in sweeps to get to the total $3.7 million swept. The mayor argued that therefore he didn’t really sweep as much as he has been criticized for.

He added that the 2018 – 2019 budget included a similar line for around $1 million.

At Saturday’s meeting, Leng explained that when he realized he was going to have to try to solve a deficit, he had four bad options.

First, he could have enacted a mid-year tax to raise more revenue. That would have meant people would go out to their mailboxes in January and find an unexpected tax bill, which would have caused an uproar.

Second, he could have taken out tax anticipation notes (TANs) — loans that help cover short term costs which are to be paid back by taxes when they come in. Since there was no reason to believe that revenues in the next fiscal year would be any better, taking out TANs would just have meant raising taxes the next year. They are essentially a more extreme version of capital sweeps — borrowing money to pay for borrowed money.

Third, he could have allowed the town to go into a negative fund balance. That would have sent the town into state budgetary oversight and would have come with a whole host of other problems, like a downgraded credit rating (which increases the cost of borrowing). 

That left him with the capital sweeps, the fourth option. Though it was not ideal, it was the least bad of a few bad options, he argued. ​“Given a series of unpleasant choices, we took the one that was in the best interest of our taxpayers short and long term to make sure that our budget was balanced.”

What Is To Be Done?

O’Brien and Garrett have both said that the problems with the 2017 – 2018 budget go back to when it was passed,. They said they would not have supported it had they been on the council at the time.

Though no one could have anticipated that the state would end up so severely underfunding the town, O’Brien estimated that based on trends from previous years, the council at the time and the mayor could have predicted around a $4 million deficit at the end of the year because of inflated revenue projections.

Both he and Garrett said they would like to reverse the trend in recent years of inflating revenues and then using capital sweeps to make up the gaps. They called for making more realistic budgets using audits from previous years.

“We can’t put ourselves in a situation where we’re passing budgets that we know are going to deficits,” Garrett said.

O’Brien said the Legislative Council will have to find ways of making every part of its government more efficient. It will have to look at every part of the town’s government in order ​“to find small percentages everywhere. and those add up to a big percentage.”

Creating Transparency

HamPAN’s primary goal is to broaden awareness about town and state politics among Hamden residents. According to organizers Megan Goslin, she and other leaders were aware of the budget crisis the town was facing, but she was having trouble making sense of it. She had heard about different options, but she said she was ​“not really sure how to understand these options.”

If she was confused, she thought, other people probably were too.

She and the other leaders decided that everyone could benefit from talking to officials about the budgeting process, so they decided to host the meeting. At one point, Goslin asked the officials and residents assembled on the couches how what they had learned at the meeting should translate into activism. After a discussion, Goslin and others concluded that HamPAN needs to make a point of showing up to town government meetings in order to keep close tabs on what’s going on, and in order to show politicians that citizens are paying attention and are invested. Goslin also mentioned that the town needs more journalism.

District 5 Council Rep. Justin Farmer mentioned after the meeting that in his view, transparency would be key going forward. He said that it was nice to have the public and politicians talking openly at the meeting, and that people want to be in the loop when it comes to planning.

While HamPAN and other residents have tried to keep people aware of what happens in the local government, some officials have raised concerns about transparency within the town’s government as well.

Others have raised concerns about a memo that the mayor sent to department heads on Monday, Dec. 3, in advance of a meeting that evening in which the Legislative Council discussed fourth quarter transfers.

Certain budget items were in the red; the mayor needed to come to the council to approve transfers of funds so those negative line items would not show up in an audit.

Some council members had raised questions about whether these transfers were a good practice. Council members then went to department heads to ask questions about items on the budget that pertained to their departments; the department heads referred their questions to the deputy finance director.

A council member submitted a Freedom of Information Act request to figure out what was going on. The request came back with a memo the mayor had sent to department heads the morning of Dec. 3 instructing them to refer any questions from legislative council members about budget items to the deputy finance director.

The memo, which the mayor was willing to provide to the Independent, read as follows:

“If any legislative Council members send you individual inquiries related to the FY 18 budget, in any manner, please refer them to the deputy finance director. This is a directive. If the council president calls, that would be the exception to the above so that he can Take answers and share them with the rest of the members.”

The memo continued by instructing department heads to answer questions at the meeting that evening ​“where appropriate.”

The mayor told the Independent that he had sent the memo so council members would not get only part of the information and take it out of context. He was worried that council members had gone to department heads that he ​“was not 100% confident had all the information,” he said. Therefore, he had decided, with the exception of the council president, to ​“refer [council members] to the deputy finance director and allow him to give the whole picture.” That way, department heads were ​“not just answering one question that could be taken out of context.”

Some council members accused the mayor of being less than transparent with them about those money transfers, which related to how he had solved the budget deficit.

Regardless of the purpose of the memo, Saturday morning’s meeting showed that citizens are engaged in the town’s politics and see a need to start paying closer attention to the budgeting process.

“I think it’s good that elected people are also aware that regular residents have concerns too and are paying attention,” said Jennifer Pope, one of the leaders of HamPAN.

She added that Hamden has a long road ahead: ​“I think it became more clear [Saturday] we have a lot of work to do, and Hamden’s financial position is not the best, and there’s a lot we’re going to need to continue to do.”