Now It’s A $66M Gap

As of Thursday, next fiscal year’s projected city deficit looks $25 million bleaker than it did on Wednesday, thanks to a slate of new estimates and recommendations regarding how the city funds its pensions.

Mayor Justin Elicker, Budget Director and Acting Controller Michael Gormany offered those even-more-dire-than-yesterday financial projections Thursday afternoon during a virtual press conference livestreamed on Zoom and YouTube Live.

On Wednesday the mayor told the Independent that the projected city deficit for Fiscal Year 2021 – 2022 (FY22) would be at least $41 million due to a mix of falling revenues and increasing fixed expenditures. On Thursday, Elicker and Gormany said that the worst-case budget scenario for next fiscal year is actually closer to $66 million.

They said the source of that $25 million fiscal leap is a host of recommendations and assumptions that city-hired actuaries have provided over the past week to the city’s two public employee pension fund boards, the City Employees Retirement Fund (CERF) board and the Police and Fire Fund (P&F) board.

Neither pension fund has taken an official vote on those recommendations. Elicker said that if the city were to follow those suggestions in full, it would have to contribute up to $25 million more each year from the general operating fund into those two public employee retirement accounts.

That would plunge the city even further into the projected red for the fiscal year that runs from July 1 to June 30, 2022.

Gormany said that the city is currently projecting a $13 million to $16 million deficit for the fiscal year that ends June 30. If city operations and financial estimates stay the same as they are today, and if the city adopts the pension-related recommendations in full, that projected deficit would jump to $66 million for the end of FY22.

This large of a projected deficit is ​“nearly impossible to fix,” Elicker said Thursday. ​“The issue is, we can’t cut most of the things in our budget.”

He noted that the city cut over 100 vacant positions, raised taxes, and eliminated several city programs in the current fiscal year budget. ​“We’ve already made significant sacrifices.”

The best, and perhaps only, way for the city to emerge from such a large projected deficit, Elicker said, is by Yale University and the state dramatically increasing their financial contributions to city coffers each year.

“Both the state and Yale University need to understand that, if they do not play a very significant role in assisting us with the budget situation,” Elicker said, ​“it will be a disaster for the city and a disaster for them.”

The mayor must submit a proposed FY22 budget to the Board of Alders by March 1. The alders then take roughly two months holding public hearings on the budget before making changes and taking a final vote in late May or early June.

Biggest Driver: Pension Estimates

Elicker and Gormany identified the same sources in falling revenue and rising fixed and contractual costs that the mayor outlined in his budget-related interview with the Independent on Wednesday.

Gormany said that next fiscal year the city is projecting a roughly $8 million drop in building permit revenue, a roughly $3.7 million drop in parking meter and tag revenue, the removal of the $2.5 million open-ended ​“Revenue Initiative” line from city revenue expectations, and a $1.9 million drop in construction-related reimbursements from the state.

He also pointed to an estimated $3.5 million increase in debt service payments, a $3 million increase in employee healthcare and workers compensation payments, a $6.5 million increase in police and fire salaries and overtime payments thanks to relatively recent new union contracts, $3 million in increased Board of Education payments, and a $3 million decrease in expected vacancy and operational savings.

“These numbers do fluctuate from time to time,” Gormany cautioned. ​“The estimated shortfalls are due to revenue growth not keeping up and in pace with the city’s current fixed costs.”

By far the largest chunk of the projected $66 million next-fiscal year deficit is an estimated $25 million annual bump to how much the city contributes to its two pension funds.

Elicker said that, as of two weeks ago, the city thought that the FY22 projected deficit would be around $41 million. That ​“we would need to find an additional $41 million to keep things going as they are today.”

“In the last week, our actuaries for the Police and Fire pension fund and the CERF pension fund have made additional changes and [recommendations] that we increase our payments to the pension fund.”

The mayor said that, every two years, city pension fund actuaries conduct an ​“experience study” to look at changes in employee habits (such as when they might buy back sick time, when they might retire), at how long pension beneficiaries might live, and about how new union contracts might impact the retirement funds.

They also look at how the fund’s investments have fared in recent years, and how they might do going forward giving current broader economic assumptions.

One of the most consequential recommended changes that actuaries for both pension funds have called for, is dropping each fund’s estimated annual rate of return from 7.75 percent to 7 percent.

“That’s a smart thing to do,” Elicker said. Close watchers and critics of the city budget have long criticized the 7.75 percent estimate as too rosy of an expectation.

Reducing that rate would directly result in the city having to step up its own annual contributions to the pension funds by millions, or even tens of millions.

That’s because, in order to keep the two currently underfunded pension accounts solvent, the city would have to make up with its own money for what is no longer assumed to be coming in through investment revenue.

That proposed ​“discount rate” reduction combined with changes to the fund’s mortality tables (i.e. when they expect members to die) and other recent estimates add up to the $25 million bump, Elicker and Gormany said.

Elicker and Gormany were asked if the city is legally required to make its full Actuarially Determined Employer Contribution (ADEC) into the city pension funds each year, even if that ADEC rises by $25 million above the currently roughly $60 million the city pays each year into the pensions. They said they are still looking into that question.

“My sense is that both boards understand the impact on the city and are willing to work with the city to make sure that we’re addressing this together,” Elicker said. ​“We all have the same goal in mind in ensuring the long-term viability” of the two pension funds.

He said that the trustees for the two pension funds have not yet taken a final vote on whether or not to adopt the new actuarial recommendations.

Elicker said that the funds will most likely adopt some kind of ​“stepdown” plan in regards to the discount rate, meaning that they wouldn’t jump down from 7.75 percent to 7 percent all at once.

“Unless if we get significant revenue, we’re not going to land at a point where we reduce our rate of return from 7.75 to 7” right away, he said.

He was also asked if the city would consider issuing Pension Obligation Bonds (POBs)—that is, to borrow money in a bid to infuse the two underfunded retirement accounts with cash. ​“My sense is that it’s still not a responsible thing to do,” he responded. At the moment, he said, the city’s answer to POBs is, ​“No.”

To Cut Or Not To Cut?

Elicker and Gormany then detailed just how ​“impossible” a situation this puts the city in, considering how little wiggle room the current city budget allows for.

The current city general operating budget is roughly $568 million.

The mayor and city budget director said that only roughly $196 million of that amount cover areas that are not fixed legal or contractual obligations. The bulk of the budget consists of debt service, self insurance, pensions, other employee benefits, and state-supported education spending.

Cutting into the remaining $196 million, Elicker said, would spell disaster for the city’s current, limited public services. That remainder covers everything from plowing city streets to police and firefighter work to building inspections to youth services to public education.

Getting rid of the entire public library budget would save the city only $4 million, he said. Scrapping the entire police salary and overtime budget would save only $43 million. And the knock-on effects of such cuts would be unthinkable, he said.

“The amount that we would have to cut our city services is beyond what our city can handle,” he said. It’s ​“completely unrealistic. Our city would not function if we were to cut this money.”

Raise Taxes? Or Raise Hell?

One option for closing the gap, Elicker said, would be to raise local property taxes. A lot.

Erasing the entire $66 million projected deficit would require a 23 percent local tax increase, he said. Even if the city managed to cut $30 million from its budget, city residents would still see a 12 percent tax increase.

“That is not a sustainable option,” he said.

The second, the mayor said, is for Yale and the state to contribute a lot more.

Elicker repeated his 2019 mayoral campaign call for Yale to increase its voluntary contribution to the city to $50 million a year. Currently, the university’s annual voluntary local payment is $13 million. Yale University and Yale New Haven Hospital are not legally required to pay local property taxes on much of their local holdings because of their largely tax-exempt nonprofit status. (See below for a detailed response from the university’s spokesperson as to Yale’s manifold positive impacts on New Haven’s economy more broadly and the city budget directly.)

“We are having active conversations with the university” right now, Elicker said.

He said that he and a committee he has put together for such work are still asking the university to up its voluntary contribution to the city to $50 million a year.

The mayor said he is ​“cautiously optimistic” about those ongoing negotiations with Yale. ​“I feel like we’re making progress.”

In response to a request for comment about the city’s latest fiscal projections and calls on Yale to contribute more, university spokesperson Karen Peart told the Independent by email, ​“We are continuously in discussions with the city about ways to support New Haven. We play an active role in supporting our community and are regularly engaging in discussions with the city to address ongoing challenges, most recently COVID-19.” See below for Peart’s full written response, which includes many of the same points made in a statement sent over last week in response to a similar call by local unions for the university to contribute more.

Elicker also on Thursday endorsed State Sen. Martin Looney’s proposed tiered Payment in Lieu of Taxes (PILOT) legislation as one ​“thoughtful, progressive, bipartisan way to dramatically address the financial challenges we’re facing, not just in New Haven, but in many struggling cities and towns across the state.” The mayor recently signed a letter with 27 other mayors and first selectpeople from across the state calling on the governor to support such a reform.

He said he’s also open to other proposals floated by the state’s top legislator that would raise taxes, especially on people who have ​“amassed incredible wealth throughout the pandemic.”

He noted that Gov. Ned Lamont has signaled his opposition to any statewide tax increases.

“I think it’s intellectually inconsistent if the governor decided not to” raise taxes statewide, Elicker said. If that were the case, ​“I would have to raise taxes significantly on New Haven residents who, frankly, can least afford it.”

Elicker said he has briefed municipal union leaders, aldermanic leadership, and the city’s state delegation on New Haven’s projected fiscal woes.

Walker-Myers: Can’t Cut Or Tax Our Way Out Of This

On Wednesday afternoon, Board of Alders President Tyisha Walker-Myers called the then-$41 million projected deficit a sobering reminder for the city to ​“continue to be fiscally responsible.”

Like the mayor, she warned that the city ​“won’t be able to cut our way or tax our way out of a deficit that large. I think we need to work with our state partners to bring in more revenue, and we also need to work with our large institutions [like Yale and Yale New Haven Hospital], because we need a better deal with them.

“The taxpayers shouldn’t have to take on all of the responsibility” of closing this structural deficit. ​“We have come together to collectively” solve this problem.

She said that the very fact that state legislators are talking about reforming PILOT and increasing statewide taxes on the wealthy indicates to her that ​“the state is paying attention. We’ve been crying out.” And New Haveners’ voices are now being heard.

When asked why city residents should care at all about the city budget and such a large projected deficit, Walker-Myers said that, if the city isn’t able to find new sources of revenue or get increased contributions from the state or local partners, ​“then that means a larger tax increase for taxpayers.”

That would affect everyone, she said, including renters who would likely see a higher property tax bill passed down by their landlords in the form of higher monthly rent.

Yale’s Response

See below for Yale University spokesperson Karen Peart’s full written response to a request for comment for this article.

We are continuously in discussions with the city about ways to support New Haven. We play an active role in supporting our community and are regularly engaging in discussions with the city to address ongoing challenges, most recently COVID-19. 

At the start of the pandemic, Yale moved swiftly on several fronts to support the New Haven community and continues to do so through a number of initiatives and programs. Our Yale Community for New Haven Fund was established to address the local impacts of the COVID-19 pandemic and has, since March 2020, distributed over $2.7 million to local nonprofits to support New Haven residents negatively impacted by the pandemic. This includes $250,000 to New Haven Public Schools to purchase Chromebooks for New Haven students as well as contributions to provide support for child care, food, housing/shelter, PPE, and other basic needs.

During the spring and summer, the university provided 1,800 free room nights, including free food and laundry services to New Haven first responders. We continue to work with local merchants to support them during this difficult time as well.

Our recent partnership with Yale New Haven Health System will help even more New Haven residents gain access to the COVID-19 vaccine. The university will make the Lanman Center available to YNHHS so that it can operate clinics for residents in the New Haven area and beyond. YNHHS will use the space on the days it is not being operated by the university. The university is also providing YNHHS with additional clinic space on Yale’s West Campus, located in nearby Orange, Connecticut. Vaccinations will take place in Building 410, located at 100 West Campus Drive.

The $700 million we spend annually on New Haven includes compensation to New Haven residents who work at the university and many programs and initiatives that we support throughout the city. Yale University’s $13 million voluntary payment in FY21 to the City of New Haven was the highest from a university to a host city anywhere in the United States and Yale continues to be among the top three real estate taxpayers in New Haven due to its Community Investment Program. On average, Yale annually also pays about $5 million in permitting fees.

When the university develops property, we do so primarily on land we already own, so the city benefits immediately, not just through these permitting fees, but through increased demand for construction as well as opportunities for jobs. You may find more information about how Yale supports New Haven at the University’s Office of New Haven Affairs.