Tag Archives: Budget

Reporting

The MERF and the General Fund

Investment returns on the assets in the City’s pension fund have been well below average for the past five years. Poor investment performance impacts the General Fund in two ways.

First, the General Fund will need to make extra contributions to the MERF because of the poor investment performance. The General Fund is a main source of cash inflows for the program. Since Hartford’s pension investments didn’t grow as much as those of other pension funds, the taxpayers have to provide additional support.

Second, poor investment performance diverts scarce resources from the other General Fund priorities. Pension contributions are a top priority. The extra contributions that result from the MERF’s poor investment performance mean that other programs and services need to be cut even further to bring the budget into balance.

Pension contributions are one of the larger line items in the General Fund budget. The table below comes from page 28-1 of the Mayor’s Recommended Budget.

2016-04-18_Recommended-Pension-Funding

The recommended budget calls for just under $42 million in pension contributions this year, and over $47 million in contributions next year. It also calls for $16.5 million in employee concessions.

The table is full of large numbers. It might look a little different if the assets of the pension fund produced investment returns that matched, or exceeded, its peers.

$50 million in estimated MERF underperformance matters.

Reporting

The Fiscal 2016 Budget

Hartford’s leaders passed a balanced budget for fiscal 2016.

Reports varied about the precise size of the budget gap leaders overcame. The Committee on the Restructuring of City Government reported the gap to be $40.4 million at their first meeting in January. The Mayor’s Message that accompanied the adopted budget noted that leadership mitigated a $48.7 million budget gap. The official press release on May 28th characterized the gap as “more than $40 million.”

Regardless of the exact figure, three primary strategies were used to bridge the majority of the $40+ million gap.

First, “sustainable department cuts” were made that saved $12.8 million. The description that accompanied the dollar figure noted that there would be no cuts in “essential” services. The savings came via increased efficiency and, by implication, cuts to unnamed non-essential services.

Next, the debt was restructured to reduce payments in fiscal 2016 by $12 million. The action was described as the “second phase” of debt restructurings, and it was noted that leadership planned to “gradually increase our existing debt service over the next five years.”

Finally, the City negotiated a deal with the Schools to spend $13 million that had been set aside by the Board of Education. The details of the agreement are not posted on the City’s website with the adopted budget. However, media reports have stated that in exchange for spending the $13 million, the City took on $11 million of school expenses in the capital improvement budget.

This year’s strategies did not include any efforts to address the structural nature of the budget gap.

Instead, the three primary strategies responsible for balancing the 2016 budget are likely to make the structural budget deficit worse in future years.

A recent police staffing report stated that the department is significantly understaffed. The police department is one of the “essential” public safety functions, raising immediate questions about whether department cuts are “sustainable.” The City has begun adding staff to backfill cuts made in this, and previous, budget cycles.

Restructuring the debt to reduce payments in fiscal 2016 and fiscal 2017 increased the payments in the future. Over the next two years Hartford is scheduled to pay off $2.24 million of the $424.9 million the City currently owes. The total owed will increase in coming years. The 2016 – 2020 Capital Improvement Plan that was approved in conjunction with the 2016 budget calls for over $378 million in net borrowing over the plan’s five year life (see page 17).

If media reports about the deal with the Schools to spend money earmarked for post employment benefits are accurate, then effect is two-fold. Taking the $13 million reduced the funding status of the Schools’ benefits program. The $11 million in future debt/payments the City accepted from the Schools repays some value, but doesn’t make the Schools whole. The Schools still have to rebuild the account balance, and they lose out on all the potential investment income that the $13 million would have generated.

On the City side, the $11 million the City added to the Capital Improvement Plan in exchange for access to the $13 million represents additional future costs too. The practical result was that the City borrowed $13 million to spend on this year’s operating expenses, and will repay it over time. One could argue that getting $13 million and repaying $11 million over time is a good deal. For some people, companies, or municipalities, a negative interest rate loan like that would be a good deal (it’s an arbitrage opportunity). For others, those that repeatedly restructure their debt to postpone repayment, borrowing to meet current operating expenses has a negative overall impact. It increased Hartford’s debt burden and decreased Hartford’s financial flexibility.

All three of the primary budget “balancing” strategies involved manipulating expenses to make the 2016 income, expenses, and cash flow work. None of the three strategies will help put Hartford on a more sustainable financial path, and each one is much more likely to make the structural budget gap worse.

Reporting

Overlapping Budgets

It’s budget season in Hartford, and both the Schools and the City have released their proposed budgets.

Dr. Schiavino-Narvaez, Superintendent of the Hartford Public Schools, released her proposed budget on April 7, 2015 showing $429 million in revenue.

Pedro Segarra, Mayor of the City of Hartford, released his proposed budget on April 20, 2015 showing $534 million in revenue.

Although the two proposed budgets are separate, they overlap. The chart below shows the revenue sources that are included in each proposal.

2015-04-20 Overlapping Budgets

The total combined revenue is $679 million once the double counting is eliminated. $429 million is to be spent on the school system, while $250 million is to be spent on non-education programs.

Also of note is that over 76% of the proposed funding for the school system comes from State and Federal grants.

Commentary

Three Phases: A Restructuring Framework

1 Comment

Hartford’s financial condition has gotten to the point where it cannot be fixed in a single budget cycle. Breaking the process into phases will give the City a better chance at success.

Restructuring will require collaboration between all stakeholders; the Administration, the City Treasurer, the City Council, City employees, the State, the business community, the non-profit community, and the residents. Presumably there are others that have been left off this list; they should be included too.

It is not a process than can, or should, be handled quietly in back rooms and then presented in final form.

Phase 1: Develop Goals and Strategy

Once the community commits to making difficult changes, the first step will be to develop goals and a strategy. All stakeholders need to be involved in the conversation. There must be an extensive public discussion.

Practical concerns seem most pressing. Can Hartford find a balance between revenue, operating expenses, and long-term liabilities?

Philosophical concerns are also important, given the City’s limited resources. How much should the municipal government try to accomplish? How should municipal objectives be prioritized?

Phase 2: Implement Expense Reductions

Reducing expenses first is more conservative than trying to do everything at once. Even the most well thought out plans involve estimates. The City needs to know how effective the expense reduction initiatives will actually be before adjusting the revenues.

It could take years to fully implement the expense reduction ideas, as agreements will likely need to be negotiated with the employee unions.

Reducing expenses first will also allow the City to operate at a surplus for one or more years. The extra funds will not be needed for operations, so they can be used to pay down the bonded debt, improve the pension plan’s funding level, or fund an account for Other Post Retirement Benefits.

Phase 3: Adjust the Revenue

Once City operations have been reorganized, the revenue can safely be adjusted. In practical terms this means dealing with the split tax rate so that the mill rate can come down.

Conclusions

Hartford’s current strategy of hoping that the financial stress resolves itself has failed. A new strategy is required, and it will take years to identify and implement the necessary changes.

The first step is starting the conversation.

Stakeholders need to identify their goals and priorities for the municipal government. Ultimately, Hartford needs as much input as possible, from everyone who has a stake in the community.

Commentary

Aspiring Mayors and the 2016 Hartford Budget

Let’s get excited everyone, it’s budget time in Hartford!

Like most recent years, the stage has been set with a large budget gap to overcome. Unlike previous years, however, the landscape is different this spring.

The effort to redevelop Downtown North generated considerable public debate about City finances. Hartford has continued to increase its general obligation debt, with rounds issued in October, November, and February (via the Stadium Authority) so far this fiscal year. Finally, phase one of the SC2 Challenge provided preliminary economic development ideas.

The Hartford Commission on the Restructuring of City Government met for the first time on January 5, 2015, after a six month delay. Meaningful recommendations are unlikely to be made in time for the current budget cycle, but could be available in future years.

This is also an election year; the residents will select the next Mayor in November. The race has already drawn a considerable amount of attention, and numerous potential candidates.

The Mayoral race could serve to elevate the budget debate. Serious candidates know that the City has an unsustainable financial model. They know that the City needs a new forward-looking vision.

This is an opportunity for candidates with legitimate ideas to lead the conversation. Residents are poised for debate after months of discussing the Downtown North project, and the media has an apparently insatiable appetite for Hartford politics.

Hopefully the aspiring Mayoral candidates will engage in the budget discussion to bring new ideas to the table about how to move the City forward.

Commentary

Hartford Can’t Borrow its Way to a Balanced Budget

Hartford’s elected leaders restructured the City’s debt in March 2013 in an attempt to address a structural budget gap. It was an effective way to address short-term concerns, but will ultimately be an expensive temporary measure as the bill comes due.

The chart below attempts to show graphically how scheduled debt payments were manipulated. It compares scheduled payments as of June 30, 2012 (green bars in the background) to scheduled payments after the November 2014 issue (purple bars in the foreground).

The color at the top of the bar indicates the direction of the change. A green top means the scheduled payment was higher as of June 2012, while a purple top means the scheduled payment was higher as of November 2014.

2015-02-17 Evolution of the Hartford Debt Profile

The Hartford Citizen’s model estimated that Hartford owed about $29 million in the current fiscal year (fiscal 2015). This total is over $8 million less than the City was scheduled to owe as of June 2012. The decrease illustrates the impact of the restructuring.

While arguably an effective short-term strategy for balancing the budget, postponing debt into the future is a poor long-term strategy. The debt will ultimately need to be repaid, with interest.

If a balanced budget depends on annual debt service costs of about $29 million, then what will that mean for the future? Debt service payments are projected to remain above this year’s $29 million level until 2028. They are projected to peak at $44 million in 2019.

Since fiscal 2004, the City has averaged $39.4 million in new debt issued per year. It is highly unlikely that Hartford will stop issuing debt altogether in order to pay down the current balance.

The chart below shows the year-by-year totals, and excludes debt used to restructure or refinance. So far this year (fiscal 2015), Hartford has issued $82 million in debt, more than double the average of the 2004 to 2015 time period.

2015-02-17 Recent History of Bond Issues

When a person, or a company, or a municipality borrows money, they need to have a plan pay it back. Money is not free.

Borrowing money can delay expenses, but it cannot reduce them. Loans are not a long-term solution to a structural budget gap. Additional debt will make a persistent budget deficit worse.

How do the City’s elected officials plan to pay back the money Hartford already owes?

Commentary

Actually, That’s a Budget Conversation

The City’s financial position is rarely discussed directly. It’s not a sexy topic, and can be discouraging.

However, the restrictions it imposes influence all other decisions and priorities. Most discussions about Hartford’s goals are really conversations about the budget.

Want to improve the educational environment for the City’s children? Great, figure out how to fund the changes.

Hope to improve public safety? Super, let’s look at what that might cost.

Plan to encourage job creation within the City? Excellent idea, though don’t overlook the impact of the mill rate on commercial property owners.

Hartford cannot make meaningful and sustained progress on any issues without first addressing the budget.

Reporting

First Restructuring Committee Meeting

4 Comments

City of Hartford COO Darrell Hill convened the first meeting of the Hartford Committee on the Restructuring of City Government on the afternoon of Monday, January 5, 2015.

Nine of the twelve committee members attended at least a portion of the meeting. There appeared to be some membership changes since the initial appointments. The gathering focused on background information and the committee’s overall mission.

Mr. Hill noted that the Committee was originally expected to start in July of 2014 and deliver final recommendations in December 2014. He said that he still envisioned a six month effort, though recognized that major recommendations were unlikely to be approved in time for the City budget cycle that is about to begin.

Preliminary documents distributed to committee members estimated a $40.4 million budget gap for the coming fiscal year. Committee member Albert Ilg stated that he recalled a $25 million goal when the resolution establishing the committee was passed in the spring of 2014. Mr. Hill confirmed that the $25 million number was discussed, and said that his understanding was that the committee should try to reduce the budget gap by $25 million as soon as possible. He said that the larger goal was to make the budget sustainable for the next five years without raising taxes.

The conversation touched on the scope of the challenge; it was observed that the City is a complex organization. The background material distributed filled a four inch binder. Committee members will consider forming sub-committees at the next meeting.

Mr. Hill said that the committee must decide if there are services that the City should stop providing. The administration has asked department heads to list and prioritize the services their organizations currently oversee. Councilman Kennedy raised the possibility of identifying additional services that can be shared between the City and the School Board to achieve cost savings.

One budget item that Mr. Hill indicated was not up for debate was the General Fund allocation to education. He stated that the $284 million allocation that the City has made in recent years is a State mandated figure. He directed the committee to focus on the other $268 million in the $552 million General Fund budget.

The committee’s next meeting is expected to be on either 1/15 or 1/16, depending on committee member schedules.

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2015-01-09, 8:30am, Correction: An earlier version of this article identified Albert Ilg as the Acting Finance Director. Mr. Ilg is no longer in that role, which is currently held by Leigh Ann Ralls.

Commentary

Opposed to Downtown North

2 Comments

The Hartford City Council has held numerous public hearings and committee meetings in an effort to better understand the Downtown North proposal. They have dramatically increased the amount of information available to the public.

I’ve followed the discussion, and see many positives to the proposal. Yet, I still find myself opposed to the project. I see building out the site as a luxury, and as a distraction.

Hartford has a more important priority right now; restructuring municipal finances and operations to put the City on a sustainable path. My primary concern is that if Downtown North is approved that it will be much more difficult to make the hard choices that a restructuring will require.

There are positives to the proposal, and the first phase of Downtown North seems likely to achieve meaningful goals. There is a good chance that the main benefits would be realized. Baseball would expand and diversify the City’s entertainment options. A grocery store would address the food desert in the northern neighborhoods and provide a new option for the increasing number of Downtown residents. Main Street would be transformed north of the highway. Clay Arsenal would be reconnected with Downtown. There would be more construction jobs. Hopefully phase one would also create momentum that would ensure the entire project is completed.

The Downtown North business case for the City is approximately revenue neutral. The business case has been portrayed as a positive, though I see it as a negative. The Administration is projecting that the City can achieve the benefits listed above without increasing the property tax. The ancillary development can create new revenue that will more-or-less offset the expected costs of the land preparation, stadium construction, and public infrastructure improvements.

Unfortunately, Hartford is in a position where it has to do better than financially treading water. Increasing expenses at the same pace as revenues doesn’t improve the City’s financial position.

Other criticisms of the proposal also resonate.

Stadiums, in general, are regional assets. They provide entertainment to all of the surrounding towns while generally losing money. Asking the City of Hartford, a financially stressed municipality with very low median income residents and a highly taxed business community, to take on the facility alone doesn’t seem appropriate.

The financial model of professional baseball, specifically, has regions paying for the privilege of hosting a team. Again, it does not seem appropriate for the City of Hartford to subsidize this entertainment option on behalf of the entire region.

There has been virtually no discussion about how the XL Center is impacted by the proposed baseball stadium. Hartford needs to ensure that the XL Center, which is the more important of the two sports venues and is already funded at the state/regional level, continues to be successful and remains a top priority.

When looking at the big picture, Downtown North seems like an acceptable project, but not a great one. Choosing to move forward will not expose the City to an unreasonable amount of risk, and would bring some positives.

However, committing time and money to Downtown North will distract from a higher priority effort that the current political leaders have already agreed is necessary.

Approving Downtown North will send conflicting messages to stakeholders that will need to make concessions in the form of higher taxes, fewer services, or fewer benefits as the City works to find a sustainable path.

The best course of action is to put Downtown North on the back burner until the City has an opportunity to reorganize.

It could take years to get Hartford’s proverbial house in order, and at that point the environment may be different. The numerous early-stage Downtown construction projects will be much further along, if not complete. The influx of new residents may even change the priorities for the Downtown North site.

Hartford needs to set sustainable municipal goals. Hartford needs to agree on primary strategies for working towards those goals. Hartford needs to organize and focus its operations around the goals and strategies.

Once those steps are complete, the City will be in a much better position to consider proposals like the one currently on the table for Downtown North.

Commentary

Implications of the Moody’s Credit Rating Downgrade

1 Comment

Moody’s Investors Service downgraded of the City’s credit rating in the midst of an active debate about a significant construction project on the Downtown North site.

The Mayor interpreted the downgrade as highlighting the importance of economic development. He also implied that the financing structure currently proposed for the Downtown North project is the best available option.

Downtown North supporters using the rating downgrade as evidence the project should move forward need to be absolutely sure that the proposal grows the taxable Grand List without earmarking those new tax receipts to pay for the development. Otherwise the project doesn’t address the City’s financial situation.

Others saw the downgrade as a warning that the City is stretched too thin, and a reason to reject the current Downtown North proposal as an imprudent financial commitment by the City.

Opponents need to realize that the downgrade is independent of the ballpark-centered proposal. Stopping the Downtown North project doesn’t speak to Moody’s concerns either.

There are a limited number of ways that the City’s financial position can be improved – increasing revenue, reducing spending, or improving operations are the most common. Concern about the credit downgrade needs to translate into constructive action to address the problem.

Does this mean that it’s time to get serious about reviewing Hartford’s goals, strategies, and overall business plan?

Fortunately, the Hartford Committee on the Restructuring of City Government was created to start this exact conversation.