Under the shadow of a potential $11 million budget shortfall and facing uncertainty over massive federal cuts, the New Haven Board of Aldermen Finance Committee met Thursday evening to discuss the city’s financial troubles.

In the hearing, aldermen discussed two reports on the current state of the city’s finances — the city’s September monthly financial report and a report by New Haven’s Financial Review and Audit Commission (FRAC) — and was the beginning of what will likely be a long process of attempting to balance the budget that will last through June, when the city’s fiscal year ends. Currently, the city faces a budget deficit that could range anywhere from $1.8 million to $11 million due to projected shortfalls in revenue and overruns in expenditures.

“We’re hoping it’s closer to $1.8 million, but we’re worried and think it will be closer to $11 million,” FRAC chair David Cameron said. “We have a big structural problem. It’s very hard to keep this budget in balance.”

A chronic shortfall

Cameron pointed to several causes of the shortfall, emphasizing inaccurate predictions made during the budgeting process. The intention of his committee’s report, he said, was to draw the attention of the mayor and Board of Aldermen to assumptions in the budget which may be inaccurate.

Shortfalls in the city’s revenue include receiving $2.446 million less than expected in PILOT payments, voluntary payments made by colleges, hospitals and other tax-exempt organizations in lieu of property taxes. The city may also receive as much as $4 million less than expected in building permits due to the delay of construction of Yale’s new residential colleges and a development at 100 College St. Other revenue shortfalls include low voluntary payments by nonprofits and the State Property Tax Relief Fund.

FRAC’s report detailed overruns in expenditures on behalf of the city, much of which came from overtime expenditures — police overtime alone nearly doubled the original prediction, adding almost $2.8 million to the city’s costs. Expenditure overruns also included a possible failure to save as much as $2.5 million in negotiations with city unions, in addition to several smaller issues.

Despite the FRAC report, a solution for the city’s financial woes remains elusive. Neither City Budget Director Joe Clerkin nor City Finance Director Mike O’Neil presented a set of strategies for reducing the shortfall to the committee.

Last year, when the city ran a $8.7 million budget deficit, it was able to draw from a $10.6 million “rainy day” fund to cover the difference. That fund, however, now only has $1.86 million left, meaning the city will either have to cut expenses or raise revenues.

“We’re just going to manage down expenditures this year. So what that practically means is that across the board we’ll slow down hiring and only fill essential positions,” Mayor John DeStefano Jr. told the News Thursday. “I feel relatively comfortable with our approach.”

But Ward 7 Alderman Doug Hausladen ’04 was not as confident, suggesting that the city needs to revamp how it develops its annual budgets. He added that the city needs to reconsider its pension and health care obligations in addition to how it predicts revenue.

“We’ve had years of declining sales revenue,” Hausladen said. “If you don’t take your medicine early, you’re going to be dealing with this problem over and over.”

Peering over the cliff

Absent from the Finance Committee meeting Thursday night, though, was mention of the national “fiscal cliff” that threatens to derail New Haven’s budget efforts.

While budget shortfalls are a norm for cities following the 2008 economic downturn, municipalities must now grapple with the looming specter of the fiscal cliff, a series of automatic tax increases and cuts in the federal budget totaling $2.4 trillion over the next decade set to go into effect in 2013 unless the White House and Congress agree upon a solution. According to the Congressional Budget Office, the nation’s gross domestic product (GDP), would shrink by approximately 0.5 percent in 2013 were the fiscal cliff’s sequestration and tax hikes to occur.

“It’s safe to say that if [we go off the fiscal cliff] it would put the state in a forced position to make cuts in the state budget, a big part of which is aid to municipalities,” State Comptroller Kevin Lembo told the News Thursday.

DeStefano said that, despite dire predictions about the consequences of sequestration, he was not overly concerned about the fiscal cliff’s impact on New Haven, telling the News that the city does not “receive meaningful amounts of federal dollars in our operating budget.”

DeStefano added, however, that economic stimulus funds beneficial to the city may be lost.

“I would suspect that there could be some public stimulus dollars, particularly around infrastructure that could represent good investments for us, particularly rail, that would be lost” due to the sequestration, he said.

Clerkin agreed with DeStefano, saying that the city was more worried about budget issues at the state level due to the size of the aid the Elm City receives from state coffers. Connecticut is currently facing a $415 million budget shortfall.

Others, however, are more concerned about the fiscal cliff. Gregory Minchak, a spokesman for the National League of Cities, told the News that sequestration could have a trickle-down effect, with cuts at the federal level reflected in state budgets, which would then impact the balance sheets of municipalities.

“It’s a huge problem,” Ward 10 Alderman Justin Elicker FES ’10 SOM ’10 said. “The city receives a lot of federal and state aid, particularly for funding our schools, but also for a lot of our programs, whether it’s maternal health funding or environmental programs or Community Development Block Grants, and it’s clear that we’re not going to be receiving as much aid in the future.”

Federal CDBGs fund community improvements like nonprofits, affordable housing and infrastructure developments.

While New Haven has not released information detailing the potential impact of sequestration on city programs, Hartford, Conn. has. The cuts, totaling between $4.2 million and $4.5 million, would reduce 14 federal programs by about 8 percent, which Hartford Mayor Pedro Segarra said would slash benefits for 5,300 to 7,600 Hartford residents.

Minchak noted that beyond cuts in federal programs and state aid, sequestration could also mean reduced revenue for cities due to a double-dip economic recession, which economists have predicted if an agreement on the fiscal cliff is not reached. The further reduced revenue, Minchak said, would only exacerbate what cities already face.

“They would be forced to do what they’ve already done, which means further cuts to services. They’re already at very deep cuts right now, so they would have to go that much further,” Minchak said. “We’re at the bone right now and they’d be chopping into it.”

New Haven’s fiscal year concludes on June 30, 2013.