Campaign Truth-O-Meter: Taxes & Pensions

Ship shape? Or the Titanic?

At a recent mayoral candidate forum, Mayor Toni Harp painted a picture of the city budget as responsibly managed, built on reasonable assumptions, and bolstered by a tax rate that has increased only marginally in her five years in office.

At that same forum, mayoral challenge Justin Elicker accused the mayor of muddling her facts. He compared the city’s fiscal health to the iceberg-struck Titanic.

The prompt for the mayor’s statements about the budget came from Democratic Town Committee Co-Chair Sarah Locke, who served as the forum’s co-moderator along with Newhallville Alder Kim Edwards.

“The city needs to retain and attract homeowners for stability in our neighborhoods,” Locke said. ​“What steps will you take to address the city’s looming deficit and the unfunded city pensions while providing property tax relief?”

Following is an NHI ​“Truth-o-meter” check of several specific budget-related claims the mayor made in her response to Locke’s question.

Claim: Taxes Have Gone Up Only 3% In 5 Years

Harp began her response by saying that the city’s mill rate, which corresponds to one dollar in taxes for every $1,000 in a property’s taxable assessed worth, has risen by only 3 percent since she took office in 2014.

While this statement is on its face accurate, it’s also incomplete.

“I don’t know where people are getting the 11 percent,” she said at the forum, referencing a year-over-year tax increase by that percentage that was included in the current fiscal year’s budget. ​“But that’s absolutely not the case. You can do the math yourself.”

Harp’s review of mill rate changes during her administration is correct.

Since the mayor’s first budget in Fiscal Year 2014 – 2015 (FY15) to the current proposed budget for Fiscal Year 2019 – 2020 (FY20), the mill rate has increased by 3.4 percent, from 41.55 to a mill rate of 42.98.

But looking at just the mill rate only tells half the story of taxes in the city. The other half lies in changes in the value of the properties being taxed.

In 2016, the last time the city undertook its every-five-year comprehensive property revaluation, the net taxable grand list (i.e. the sum of all taxable property value in town) grew by 8.42 percent. from around $6.08 billion to around $6.58 billion. Some of that is due to new construction, some due to increases in the taxable assessments of existing properties.

According to state data, the grand list inched up to $6.59 billion in 2017, reflecting a total growth of 8.6 percent since 2014, before the reval. Residential property values, meanwhile, increased by 7.3 percent, from $2.73 billion to $2.93 billion, during that time period.

The city’s general fund budget has also increased by 9.5 percent since the mayor’s first budget, from $508.3 million in FY15 to $556.6 million in FY20.

And, even more pertinent to the changing property tax burden, budgeted property tax revenue during that same time period increased by around 10 percent, from $251.8 million in FY15 to $278.5 million in FY20.

“This 10.6 percent increase in total property taxes resulted even though mill rates only increased by 3.4 percent,” said Mohit Agrawal, the chair of the city’s independent Financial Review and Audit Commission, ​“which means that the remainder (7.2%) was due to increases in property values.”

So, while the mill rate has increased by only 3.4 percent during Harp’s time in office, the amount of money that city taxpayers actually kick in to the city budget each year through property taxes has grown by nearly triple that percentage.

Agrawal also pointed to changes in average income among city residents to see how much of a bite taxes are taking out of the average resident’s pockets.

The state Office of Policy and Management (OPM)‘s annual Municipal Fiscal Indicators reports show that, from 2014 to 2017, the last year on record, the city’s per capita income (or average annual income per person) grew by 3.75 percent, from $23,796 to $24,688.

In that same time period, the city’s median income grew by 4.49 percent, from $37,508 to $39,191.

“So the 10.6 percent increase in total property taxes relative to the 3.75 percent increase in income (note that the 3.75 percent number is sensitive to population growth, but population growth has been close to 0),” Agrawal said, ​“means that people faced a net 6.85 percent increase in taxes (or, taxes increased by more than incomes, so people are paying more in taxes and have less income left over).”

“All in all,” Agrawal concluded, ​“there was an increase in property values, personal incomes, and mill rates. Between 2014 and 2017, the increase in taxes outpaced the increase in personal incomes, so individuals are bearing a greater tax burden.”

Claim: The Previous Administration ​“Refinanced The Pension Fund” Every Year. Harp Has Stopped That Practice

Harp went on to say her administration has put a stop to a fiscally irresponsible pension-funding practice that her predecessor’s administration engaged in on a regular basis.

“In terms of pensions,” she said, “when I first became mayor, I discovered that the previous administration had been refinancing our pensions every single year. Basically that would be like,if you had a house, if you refinanced your house every single year. The value of the pensions went down. Since I’ve become mayor, we have stopped refinancing. We will be what is near fully funded in about 25 years.”

Agrawal said that this statement is indeed correct.

When Harp took office, her administration closed the “amortization window” for the city’s two public employee pension funds, the City Employees Retirement Fund (CERF) and the Policemen & Firemen’s Retirement Fund (P&F).

That means that the pension fund’s actuaries are no longer instructed to calculate how much the city should contribute to the pension funds every year based on an assumption that the funds should be fully funded in 30 years. Because the 30-year window was reset every single year, the city could keep its annual contributions to the pensions artificially low.

When the mayor came into office, her fiscal team stopped resetting the date by which the pensions are expected to be fully funded, meaning that the city’s contributions have had to increase each year in line with the assumption that the pensions will be 100 percent filled now in 25 years, rather than 30 years.

Indeed, the city’s aggregate annual pension fund contributions have increased by 47 percent, from $44.7 million to $66 million, between former Mayor John DeStefano’s last budget in FY13 to Harp’s current proposed budget for FY20.

“It’s a more realistic and responsible approach to budgeting,” city spokesperson Laurence Grotheer said about closing the amortization window.

At the end of FY18, according to according to documentation in this year’s budget, CERF was 37.9 percent funded and P&F was 41.4 percent funded. While the CERF funding level has bounced between the low 30s and low 40s throughout Harp’s tenure as mayor, the P&F funding level has actually dropped by over 10 percentage points from a high of 53.1 percent in June 2014.

What Harp did not mention at last week’s forum, and what Elicker sharply criticized her administration for, was that her financial team oversaw the largest debt refinancing in the city’s history in August 2018, when they refunded $160 million at interest rates as high as 4.83 interest rate in order to free up cash for short-term investments in the pensions and other city services. That refinancing cost the city around $89 million in increased debt service payments over the next 15 years as according to the official statement from the restructuring.

“We took out a payday loan,” Elicker said at the forum about the debt refinancing. “We need to right this shop. We’re on the Titanic, folks, and people are acting like there’s nothing going on.”

The Harp administration’s financial team has defended the refinancing as smoothing out anticipated debt payments at around $55 million each year over the next decade-and-a-half so that the city budget doesn’t experience the short-term shock of having to make nearly $70 million annual debt service payments, as it would have otherwise had to do. City Controller Daryl Jones also pointed to the city’s new two-year capital borrowing strategy as one that will save hundreds of thousands of dollars in administrative fees every other year as well as reduce the city’s overall capital borrowing by millions going forward.

Claim: Harp Lowered The Pension Funds Expected Rates Of Return To 7.5%. The Funds Actually Achieve An Annual Return Closer To 10%

The mayor also said that, under her administration, the pensions funds have consistently overperformed more conservative expected rates of return.

“We are making sure that we’re earning what we say that we’re going to earn” in terms of assumed rates of return for the pension funds, she said at the forum. “We’ve said that we’re going to earn 7.5 percent, and for the past two years, we’ve made over 10 percent.”

The key misstatement here is that both pension funds currently have assumed rates of return of 7.75 percent, not 7.5 percent, as Harp stated.

While a quarter of a percent may not seem like the biggest of differences, for pensions that are hundreds of millions of dollars large, a 7.5 percent return rate assumption would require city pension contributions that are millions of dollars higher per year than those required by a 7.75 percent assumption.

The Harp administration has, however, reduced the assumed rates of return for the pensions from 8.25 percent to 7.75 percent during her time in office, thereby requiring larger annual city contributions to the funds.

As for the funds’ actual returns, they were close to 10 percent in the last reported year of FY18.

According to reports prepared by the city’s pension fund asset manager, Morgan Stanley, P&F grew by 9.09 percent from April 2017 to April 2018. Jones said the police and fire pension’s actual returns were even higher the year before, coming in at 14.7 percent for FY17.

And from June 2017 to June 2018, CERF achieved an actual rate of return of 9.96 percent.

Grotheer added that, since Harp took office, CERF has invested $160 million of its funds into New Haven real estate. “That particular fund is invested in committed to the future of New Haven,” he said.

Furthermore, he said, Harp pushed for the adoption of the first ever sets of bylaws for the two pension funds. Those bylaws outline the administrative structure of each board and the each board’s obligation “to discharge all of its duties solely in the interest of the members and beneficiaries of the Fund.”

Jones added that the city has started making its annual pension contributions all at once at the beginning of the fiscal year, as opposed to its past practice of making quarterly installments. That has saved the city over $1 million a year in legal fees, he said. Plus, the city now sets aside six months of pension payout money in a separate, lower-risk fund at the beginning of every fiscal year, so as to ensure it has enough cash on hand to pay out its monthly pension requirements even when the market dips.

“Those are concrete steps that we’ve taken to put the pension funds on more solid footing,” Grotheer said.

Taking a slightly longer look, however, reveals lower pension returns than achieved in FY18.

From June 2013 to June 2018, according to Morgan Stanley, CERF grew by 7.05 percent. And from December 2014 to April 2018, P&F grew by 6.42 percent.

Agrawal pointed out that, in that same May 2018 report, Morgan Stanley identified P&F’s three-year average returns at 4.94 percent.

He said that the National Association of State Retirement Administrators’ (NASRA) list of assumed rates of return from a selection of state and local pension plans reveals an average assumed rate closer to 7.25 percent.

“This average has been falling over time and will likely come down to 7% soon,” he said.

NASRA’s numbers on actual pension plan returns achieved, he said, vary from negative 4 percent to 8 percent, depending on how long a time frame one looks at.

“Major investment banks are using the 6 to 7 percent range as the new normal,” he said, “and Connecticut is moving its assumed rates of return on state pension plans to 6.9 percent. A rate over 7 percent will be seen by credit rating agencies and investors as overly risky.”