If City’s Broke, Can MARB Fix It?

It sounded like a magic solution to New Haven’ long-term fiscal mess: Surrender control to the state in return for one of those big bailouts.

In real life, that option may not be on the table.

The suggestion has arisen since the city raised taxes 11 percent this year, engaged in a notorious buy-now-pay-later re-refinancing of its debt, and still ended up with a $30 million structural deficit. A budget oversight panel floated the idea; a Board of Alders committee debated it last week.

The state has agreed to bail out two other local governments, and insisted on structural changes like new labor contracts, the argument went. So why not have New Haven do the same?

For starters: The state’s existing $27.3 million annual bailout pot is bascially empty; Hartford and West Haven got there first.

With control of state government changing hands in January, future bailouts may be off the table.

And … it may not even make sense for New Haven anyway. Not if the people calling for a takeover learn it might mean even higher taxes.

Those risks and potential rewards of engaging with Connecticut’s Municipal Accountability Review Board (MARB) emerged from the debate last Monday at a hearing of the Board of Alders Finance Committee as well as from interviews with people knowledgeable about the program, including the state official in charge of it. Whether or not to seek a state bailout is one of many tough choices facing New Haven as it confronts a long-term structural deficit estimated at $30 million.

MARB is an 11-person board that was created by the state legislature in 2017. It’s charged with providing fiscal oversight, advice, requirements, and aid to eligible distressed municipalities.

In the current fiscal year’s state budget, MARB has $27.3 million in ​“Municipal Restructuring” funds to give out in state aid in exchange for municipalities submitting their budgets and their union contracts to a various degrees of state scrutiny, depending on the severity of the municipalities’ current fiscal distress.

New Haven’s fiscal situation came to the attention of state budget chief Ben Barnes, who summoned Harp administration officials for a chat about whether to join the program. The danger signs: a $30 million structural deficit, two credit rating agency downgrades, and a recent $160 million bond refunding that lightens current debt service payments but increases the city’s debt burden as much as $80 million down the road. The mayor and city legislators are now faced with the question of whether or not MARB holds the key to a sounder fiscal future at a cost that city taxpayers can and should bear. (If matters worsen enough, MARB will have the statutory authority to step in with or without city permission.)

“Not A Fan”

Members of the Finance Committee expressed caution, if not outright disapproval, of submitting the city’s budget authority to MARB.

“We are in tough economic times,” Board of Alders President and West River Alder Tyisha Walker-Myers said on Monday night.

“I’m not a fan of the MARB,” she continued. ​“I believe that this city can handle their business theirself. We all just have to take the responsibility and make hard decisions.”

The city’s financial staff agrees, arguing that the limited pot of money with which MARB has to work is not an adequate enticement for the city to sacrifice control over its own budget.

“I think the city’s done a good job in trying to keep the mill rate as low as possible while trying to maintain the city services,” city Acting Budget Director Michael Gormany said after Monday’s meeting.

If MARB requires the city to further increase its property tax rate and doesn’t provide significant municipal aid in return, he said, ​“I think that would put a strain on a lot of the residents of New Haven.”

Even representatives from the city’s independent Financial Review and Audit Commission (FRAC), which had called on the city to look into engaging with MARB, advised caution before the Finance Committee.

They did say, however, that MARB’s budget strictures could lead to more realistic city budgeting going forward.

“Do you want to raise taxes in the middle of the year and embarrass oneself?” FRAC’s Jim Alexander asked the alders. ​“Or do you want to erode the [city’s] credibility with the rating agencies?”

Barnes, secretary of the state Office of Policy and Management (OPM) and the current chair of MARB, said predicting what will happen if New Haven decides to engage with MARB is difficult right now, since a new governor and a new legislature are poised to take office in January. They will decide the funding of the program from next fiscal year onward, he noted. The state’s $534 million bailout of Hartford incited outrage among some legislators, including Republicans who might take over control of the legislature and/or the governor’s office.

Furthermore, Barnes said, the current fiscal year’s nearly $27.3 million in MARB funds are already accounted for: $20 million is scheduled to be sent to Hartford as part of the capital city’s bailout package, and the remaining nearly $7.3 million will almost certainly go to West Haven, which has already engaged MARB and just needs to submit the final requisite financial planning documents before receiving the state-promised aid.

“We want the alders to pass their own budget,” Barnes told the Independent, ​“not [for MARB] to do it for them.”

But he said if the city fails to start working towards righting its fiscal ship, then MARB may be compelled to intervene, regardless of how the program is funded in the future.

A Crash Course On MARB

The state legislature created MARB as part of Public Act 17 – 2, passed during the legislature’s June 2017 special session. MARB is charged with providing ​“technical, financial and other assistance and related accountability for municipalities experiencing various levels of fiscal distress,” according to OPM’s website.

The board consists of 11 members: the secretary of OPM, the state treasurer, five members appointed by the governor (including one member representing organized labor and one member representing state teachers), and four members appointed by the leaders in the General Assembly. The board currently includes former city firefighter union president and former New Haven assistant Fire Chief Pat Egan.

The state law assigns municipalities into one of four different tiers. The higher the tier, the more fiscally distressed the municipality. Placement in higher tiers results in greater levels of subsequent local budget oversight by MARB, as well as increased opportunities for distressed municipalities to receive additional state aid.

The criteria that the state uses to determine which tier a municipality falls into include recent bond ratings, reliance on municipal aid, equalized mill rate (that is, a municipality’s property tax rate with certain variables taken into account so that it can be accurately compared to that of other Connecticut towns and cities), and the size of its rainy day fund.

Click here to read about the different criteria for each tier.

According to Barnes, New Haven already meets the criteria for a Tier II designation, but the city can apply to be a Tier III if it wants to incur the increased oversight and potential increased aid that comes with it.

Each tier requires the relevant municipality to submit a three-year financial plan to the state. (Tier I cities are assigned to a slightly different fiscal oversight body, the Municipal Finance Advisory Commission [MFAC], whiles Tier II, III and IV cities are directed to MARB.)

Tier II cities must also submit monthly financial reports and can ​“only include assumptions as to state revenues and property tax collections as approved by the Board,” according to a Dec. 12, 2017 MARB summary put together by OPM.

Eligible Tier II municipalities may, with MARB approval, issue general obligation bonds to help close a general fund deficit, as supported by the state Special Capital Reserve Fund (SCRF). They can also apply for assistance from the municipal restructuring funds pot of money, which is funded at $27.3 million in Fiscal Year 2018 – 2019 (FY19) and was funded at $28 million in FY18.

For Tier III municipalities, MARB has the authority to review and comment on a municipality’s annual budget. MARB must sign off on the budget’s state revenue, property tax revenue, and mill rate assumptions before the budget can be adopted.

MARB must also approve the proposed issuances of any new debt service obligations.

And it has the right to approve or reject any new collective bargaining agreements and arbitration awards between the municipality and local unions.

In addition to being able to issue general obligation bonds to close general fund deficits and to apply for a portion of the $27.3 million in municipal restructuring funds, Tier III municipalities are eligible to enter into a contract with the OPM secretary and the state treasurer for ​“contract assistance” to receive additional state support.

That is the route that Hartford took. As a Tier III city, it succeeded in not only tapping into MARB’s $27.3 million annual pot of municipal restructuring funds, but also in working with Barnes, state Treasurer Denise Nappier, and Gov. Dannel P. Malloy to get the state to pay off the city’s $534 million in general obligation debt over the next two to three decades.

Barnes said the contract assistance route is technically separate from MARB, and does not require a Tier III community to first engage with MARB in order to be eligible to work with the OPM secretary, the state treasurer, and the governor to negotiate a larger bailout than what MARB can provide.

But even with that legal distinction, Barnes said that MARB is working closely with the city of Hartford to ensure that it follows the various budgetary strictures required by the contract assistance.

“In the case of Hartford,” Barnes said,” which is not only a Tier III but subject to a whole lot of restrictions under contract assistance, the role of MARB has been really collegial. I think MARB is inclined to defer to the city as long as the city is actively engaged and is able to demonstrated that they are actively making decisions inclined towards their long-term turnaround plan.”

Finally, Tier IV communities are subject to all of the same requirements as Tier II and III communities, but in addition to approving or rejecting all new union contracts, MARB can also impose binding arbitration with respect to collective bargaining agreements of the municipality and its board of education that are subject to or in binding arbitration.

Barnes said that MARB technically has the power to compel distressed municipalities that meet Tier III and Tier IV designations to engage with MARB, even if the mayor and local legislative body don’t reach out first.

But, he said, as MARB is still working through its first year of activity, Barnes has thus far prioritized developing policies and procedures for the state board, as well as working out the complicated aid provisions for Hartford and West Haven.

Going forward, he said, he would like MARB to be more proactive in evaluating the fiscal health of Connecticut’s distressed municipalities and, if need be, compelling them to engage with MARB.

But five months before a change in administrationis not the right time to compel New Haven or any other municipalities to work with MARB, he said.

“I would probably decline to take action on that now unless if the city wanted to come in,” he said. ​“But in the long run, the city of New Haven faces some severe challenges. If things don’t go their way or if they make some improvident decisions, it could definitely be a possible in the future. No question. My approach is to give communities ample opportunity to find their own way to fiscal sustainability. Yes, there’s some danger for them, but we should give them every opportunity to find their way through.”

Higher Taxes And/Or Increased State Aid?

During Monday night’s Finance Committee meeting, the alders and FRAC members discussed the risks and benefits of engaging with MARB during a public hearing on FRAC’s proposals for how the city might incorporate more realistic assumptions into its annual budgets.

Mohit Agrawal, FRAC’s chair, reviewed for the alders his commission’s assessment that the city bears a roughly $2 billion debt load: around $550 million in general obligation debt principal, around $900 million in unfunded pension liabilities, and around $400 million in Other Post-Employment Benefits (OPEB). That adds up to the highest per capita debt burden in the state, he said, coming in at over $10,000 per person.

“We can see where the increases are coming in from,” he said, noting that the city’s medical expenditures jumped 10 percent last fiscal year.

Acting Budget Director Gormany told the committee earlier in the evening that the city’s medical self-insurance fund for last fiscal year is slated to come in within budget when last year’s books are finally closed later this summer. But Agrawal said the only reason that that will be true is that the alders agreed to infuse the self-insurance fund with over $9 million earlier in the year with the portion of a premium that the city earned through a bond refunding back in August 2017. So, Agrawal said, the medical self-insurance fund is really going to end the fiscal year $9 million over budget.

FRAC recommended that the city adopt a check register whereby all city expenses are made available to anyone interested in taking a look. It recommended that the city conduct an independent fire and police cost study to determine the structural deficits built into those public safety budgets. FRAC also recommended that the city consider engaging MARB with the hope of tapping into its annual municipal restructuring funds budget, or even with the hope of getting a Hartford-style bailout.

“I’m very skeptical that any other city in the state could receive the type of assistance that Hartford got,” said Westville Alder and Finance Committee Vice-Chair Adam Marchand.

OPM Public Information Officer Chris McClure cautioned against speculating on exactly how much money New Haven or any other interested municipality could get from MARB prior to that municipality’s application.

“Grant amounts are limited to appropriations,” which in FY19 are $27.3 million, he wrote in an email response to subsequent questions from the Independent.

“The contract assistance agreement with Hartford,” he continued, ​“was signed by OPM Secretary and Treasurer under statutory authority that remains in effect.” He said that ​“contract assistance” statutory authority which facilitated Hartford $534 million bailout is ​“separate from MARB and state budget process.”

However, the next governor and next legislature could amend the statute if they do not want the governor, treasurer, and OPM secretary to be able to negotiate a ​“contract assistance” agreement with a distressed municipality independent of state legislative approval.

Higher Taxes?

At the hearing, FRAC member Jim Alexander then raised his concern that engaging with MARB would give the state board effective control over the city’s property tax rate, insofar as MARB gets to sign off on all key budget revenue assumptions for Tier II, III, and IV communities.

“What are you getting and what are you giving up?” Alexander asked. ​“If you’re getting $40 million a year and property taxpayers like me have to pay a lot more, that makes sense. But if you’re not getting extra resources and tax rates go up overnight 20 or 30 percent, that would be a very different situation.”

Agrawal noted that New Haven, even after this year’s 11 percent increase, has the lowest mill rate among big cities in Connecticut.

New Haven’s mill rate is 42.98, which means that city taxpayers must pay $42.98 for every $1,000 of a property’s assessed value. Waterbury’s mill rate is 60.21. Bridgeport’s is 54.37. Hartford’s is 74.29. Even after those mill rates are ​“equalized” to take into account each municipality’s different assessment practices, Agrawal said, New Haven’s mill rate still comes in at the bottom of the pack.

“I would not be surprised if MARB says you can increase your tax rate by 10 mill points, and that would roughly solve your problem,” Agrawal said.

Alexander then said that the city is indeed in a fiscal bind. Should it engage with MARB and risk a dramatic increase to its property taxes? Or should it keep its tax rate relatively low and risk eroding its credibility with rating agencies like S&P and Moody’s?

Alexander suggested that New Haven ​“budget conservatively so that we retain credibility with the state, credibility with the rating agencies, because you’ll need every bit of it if Washington starts going down.”

Secretary Barnes said the fear that MARB would come in and immediately jack up a city’s taxes is ​“an oversimplified concern.”

He said Tier IV municipalities are the only ones for which MARB can actually draft a budget, and therefore set the tax rate (and the other revenue assumptions) at what it thinks is reasonable.

For Tier II and Tier III communities, he said, MARB is simply charged with ensuring that the revenue assumptions in a municipality’s proposed budget are reasonable.

“If at the end of the day they’re holding taxes artificially low or if they’re kicking a can down the road for the next generation, we’re gonna call them on that,” Barnes said. But in general, he said, MARB would much rather approve a municipality’s revenue assumptions then rewrite them.

He called it unfair to blame MARB if a city is not generating an adequate amount of revenue to pay for city services after taking into account reasonable expectations for state aid.

Home Rule Wins Out For Now

“We are in tough economic times,” Board of Alders President Tyisha Walker-Myers said towards the end of FRAC’s presentation. ​“We’re not getting any more money from the state. Because the state has their own troubles right now.”

She said the city’s recent refunding of $160 million in existing debt has opened her eyes as to how the city needs to fundamentally rethink how it crafts its budgets.

“We do need to budget more conservatively,” she said.

She said the premium saved through the recent refunding has given the city and the alders space to come up with a five-year financial plan, which should be done later this year.

She said the city and the alders have also used that premium to boost the city’s rainy day fund, so that it is now $1 million, and make an extra payment into the city’s two pension funds.

“All of those things to me, even though they’re small. they make a difference when we go to rating agencies,” she said. She said the moves show that ​“we are actually trying to handle our structural problems that we have in the city and are trying to reforecast the different things that might come down the pike over the next couple years.”

She said the alders and city officials need to be transparent with city residents about the cost of municipal services.

“If it’s the worst-case scenario,” she said, ​“we need to just say it.”

Click on the links below to read other stories about the city’s structural deficit and ideas for closing it.

• Hey, Buddy, Can You Spare $30 Million?
• Fixing the Budget: Fire Choices
• Old Debt Plugs Old $10M Shortfall
• Police, Fire Chiefs: Overtime Budgets ​“Unrealistic”
• Record Bond Sale OK’d; Discipline Vowed
• Like Hartford, New Haven ​“Scoops & Tosses”
• S&P Downgrades City Credit Rating
• City Will Refinance Debt To Avoid Takeover
• Mayor Open To Idea Of Fewer Top Cops
• City Ends Policy As It Begins To Pay Off