Budget Watchdogs: No To Borrowing $250M For Pensions

Fifty New Haveners seized on their last public chance to influence next year’s budget by offering a litany of concerns with a proposed double-digit tax increase and the riskiness of borrowing a quarter of a billion dollars to fund city pensions.

That was the result of the Finance Committee’s third and final public hearing about the mayor’s proposed $547.1 million operating budget for the fiscal year that starts July 1. The three-hour hearing, which was held on Wednesday night in the Aldermanic Chambers on the second floor of City Hall, saw 31 residents testify in person about their wariness with the proposed budget. An additional 19 residents submitted written testimony.

The first two hours of testimony saw a range of constituents testify about the difficulties they’ll have bearing a proposed 11 percent property tax increase.

A number of high-profile budget watchdogs also spoke out at hearing in opposition to the city’s proposed issuance of up to $250 million in Pension Obligation Bonds (POBs) to help shore up New Haven’s two underfunded public pensions: the Police & Fire Pension Fund (P&F) and the City Employee Retirement Fund (CERF).

“Pension Obligation Bonds would probably be the worst fiscal decision ever made by the city of New Haven,” said Patrick Egan, the former president of the firefighters union and former assistant fire chief. ​“They are tremendously risky.”

He said the interest rate for the bonds would likely be above 5 percent, as opposed to the high 4 percent range described by advocates in the city’s financial department. He also said that POBs would not only require the city to make its actuarily determined Annual Required Contributions (ARC) payments to the pension funds every year, but would also necessitate that the city keep the funding level for the two funds at minimum at the level achieved by the initial infusion of dollars.

As the city projects that the POBs would bring P&F to 54 percent funded and CERF to 70 percent funded, that means that the city would have to keep the pensions funded at or above those levels for the duration of the bonds.

Mohit Agrawal, the chair of the city’s independent Financial Review and Audit Commission (FRAC), also questioned city assumptions during his criticism of the proposed POBs.

“FRAC believes that the likely interest rate for the taxable POBs will be 5.18 percent,” he said, ​“and over the 30 year life of the POBs we expect the pension funds to return 6.5 percent. These assumptions contrast with the city’s assumptions of 4.85 percent and 7.5 percent respectively, which we believe are simply too optimistic.”

He said FRAC calculates that the POBs could save the city about $27 million over 30 years if the interest rate on the bonds is 5.18 percent and returns are 6.5 percent. He also said that there was a 20 to 25 percent chance that the city would lose money instead, based on these assumptions.

“As is usual in the world of finance,” he said, ​“there is no free lunch. In choosing to use POBs, the city will be making a risky financial bet. My role as chair of FRAC is to make sure that you are informed about these risks so that you can make an informed judgment.”

Elicker: Irresponsible Pattern

Justin Elicker, the current director of the New Haven Land Trust who is also a former East Rock alder and 2013 mayoral candidate, told the alders that the POB proposal falls into a pattern of irresponsible fiscal behavior that spans mayoral administrations.

“Over the years that I’ve been paying attention,” he told the Independent, ​“there’s been a consistent theme of making short term decisions that impact the long term fiscal health of the city.” He cited the DeStefano administration’s sale of portions of Wall Street and High Street to Yale and its attempt to monetize parking meters as examples of such irresponsible short-sightedness.

“It’s gambling with our financial future,” he said about the POB proposal. ​“It’s just too risky.”

Elicker said he would support borrowing money to shore up the pensions if he were confident the move would reduce unfunded liabilities and ensure a greater level of predictability for the pensions. ​“But the likely risk is too large for me to feel comfortable with,” he said.

“I’m planning on staying in New Haven for 10, 20, 30 years,” he said. ​“I’m planning on staying here for a long time. I want all throughout my time in New Haven for the city to be run in a fiscally responsible way.”

After the hearing the Finance Committee held a brief deliberation in which it voted to recommend approval of the budgets for the Alling Memorial Golf Course, the East Rock Park Communications Tower, the Lighthouse Park Carousel, and the Walker Skating Rink. (Those institutions have their own budgets, which taxpayers do not fund. The Board of Alders still must approve those budgets.) The alders also voted to recommend approval of the municipal tax levies for the Grand Avenue Special Services District, the Town Green Special Services District, the Whalley Avenue Special Services District, and the Chapel West Special Services District.

Westville Alder Adam Marchand said that deliberations on the rest of the proposed budget, including the weightier items of the pension obligation bonds and the entirety of the proposed general fund budget and capital fund budget, will take place during next Thursday’s Finance Committee meeting at 6 p.m. in the Aldermanic Chambers.

After the committee finishes voting on the budget, it goes to the full Board of Alders for final review and approval.