The city is projecting it will bank a $14.6 million surplus as it closes last fiscal year’s books, thanks to lower-than-expected medical costs, higher-than-expected tax collection revenue, increased contributions from Yale, and — most significantly — a delay in paying off its debts after last year’s massive refinancing.
That anticipated operating budget surplus is detailed in the city’s latest monthly financial report, published on July 26 and covering the entire Fiscal Year 2018 – 2019 (FY19), which began on July 1, 2018 and ended last month.
While FY19 numbers won’t be officially finalized by city budget staffers until later this summer, the June monthly report, as well as a “stable” fiscal outlook that the city earned from the rating’s agency Moody’s on July 11, point towards a rosier end-of-year financial picture than last year’s $10.6 million deficit.
The double-digit projected surplus, which includes a projected $5.4 million deficit at the Board of Education, is also significantly higher than the $9.1 million positive balance projected just a month earlier in the May 2019 financial report.
The most significant savings came from last year’s decision to delay paying off debts. That gave the city a $26 million break on its bills this year, even though it will eventually cost $83 million in additional interest by 2034.
Essentially, the city balanced its budget — with millions left over — by avoiding payments on what it owes. City financial staffers have defended the bond refunding as flattening out debt service payments over the coming decade-and-a-half, creating a predictable payment schedule unencumbered by spikes that lets the city invest up front in higher pension payments and medical payments. Critics have lambasted the decision as a way of delaying present costs for future generations to bear.
“The surplus stems from a combination of revenues received higher than budget, expenditure savings within various City Departments, and the refunding that the City performed in August 2018, which produced significant savings in the debt service payment for FY 2018 – 19,” the city’s June report reads.
Click here to read the full June financial report.
“The stable outlook reflects the expectation that the city’s financial position will improve slightly in fiscal 2019,” the Moody’s report reads, “and stabilize due to management’s continued efforts to increase revenues and minimize expenditure growth. The outlook also reflects the ongoing growth in the city’s tax base.”
Click here, and see below, for more on the July 11 Moody’s report.
Medical Down, Yale Up
A deep dive into the June financial report reveals a host of cost-saving measures, unexpected revenue bumps, savvy investing, plain good luck, and planned savings from last year’s record refunding of $160 million in existing debt.
Buried at the bottom of the report is a surprising source of fiscal optimism: $113.6 million spent on city employee and dependent medical benefits. That’s over $3 million less than what the city spent on medical benefits last fiscal year for its roughly 12,000 covered employees and dependents.
Earlier this year, City Controller Daryl Jones and Acting Budget Director Michael Gormany touted the now required Health Incentive Program (HIP), newly available high-deductible, Health Savings Account (HSA) plans, better communication around existing preventative healthcare services, and new partnerships with Yale New Haven Hospital, as all working together to “bend the curve” on ever-rising healthcare costs. Many healthcare economists expect healthcare costs to rise between 5 and 8 percent each year.
The June report also identifies a $2.5 million increase to Yale’s voluntary annual contribution to the city, bumping the university’s annual payment in lieu of taxes from around $8.5 million to around $11 million. The report also notes a $3 million contribution from Yale New Haven Hospital, which brings the city’s overall “Revenue Initiative” line to $3.07 million received out of $6.1 million originally budgeted.
Continued vacancies in the police department, meanwhile, allowed that department to end the fiscal year with a projected balanced budget.
“A transfer was approved by the Board of Alders in March 2019 moving funds from Debt Service to Police and Fire,” the report reads. “Since Police is projected to be in balance, the transfer of funds were not needed. The Debt Service budget was reduced by $1.1M to accommodate the approved transfer by the Board of Alders.”
The department’s end-of-year salary expenditures are projected to be $30.3 million, nearly $3.5 million less than budgeted, while its expected end-of-year overtime expenditures are projected to top $7.8 million, nearly $3.5 million more than budgeted.
The Fire Department, meanwhile, is projected to have spent a total of nearly $3.8 million on overtime last year, which is over $500,000 more than budgeted.
And the city’s tax collections, the report reads, are projected to exceed budget by around $4.3 million, with an overall projected tax collection rate of 98.36 percent.
“The anticipated surplus for FY19 will allow the City to eliminate accumulated negative ‘rainy day’ savings balance for all of its’ operating and internal service funds,” the report reads. “In addition, a positive ‘rainy day’ savings balance of $3.9M is anticipated, which will serve to establish a ‘rainy day’ savings reserve for future operations.”
Moody’s: City Stabilizing At Moderate Risk Level
On July 11, Moody’s, one of the three major credit ratings agencies along with Standard & Poor and Fitch, kept its credit rating for the city flat at Baa1 and upgraded its outlook from “negative” to “stable,” putting off immediate worries about another downgrade. Last year, both S&P and Fitch downgraded their respective credit ratings for the city.
New Haven “continues to be challenged by a very narrow reserve position, limited revenue raising flexibility due to high tax rates and a significant amount of tax-exempt property, and elevated long-term liabilities,” Moody’s report reads.
“However, due to a tax rate increase in fiscal 2019, strengthened financial monitoring and expenditure controls, the city is projecting an operating surplus in fiscal 2019 and balanced operations in fiscal 2020. Fixed costs are currently manageable, but long-term liabilities are high and increased pension funding is required to prevent depletion of assets.”
In addition to singling out the institutional presence of Yale University and Yale New Haven Hospital, the recent construction boom, and planned road improvement projects as positive forces in the city’s economy, Moody’s also points to the federal appeals court’s recent decision in favor of Tweed New Haven Airport’s expansion as reason for economic optimism.
“The city will remain challenged to improve its reserve position to be in line with state peers given the potential for future state revenue cuts,” the report reads, “which will compound relative stagnant revenue growth given limited tax base expansion, and high fixed costs.” Of particular concern, the report reads, is the city’s “unusually low” debt service expenditures of just over $30 million in FY19, in comparison to a budgeted $58 million, thanks to last year’s historic bond refunding.
“However,” the report continues, “management’s proactive approach to identification and implementation of cost saving measures, development of long-term financial plans and recent tax rate increase demonstrate an ongoing commitment to achieve structural balance.”
“It’s gratifying to see that my administration’s strict financial policies balanced the FY19 budget,” Mayor Toni Harp is quoted as saying in a July 11 press release about the Moody’s rating, “eliminated the FY18 negative fund balance, and inspired Moody’s to favorably reconsider New Haven’s financial outlook and credit worthiness. City residents, property owners, and business operators will likely embrace Moody’s willingness to formally underscore New Haven’s ‘stable’ fiscal prospects.”