New Haven officials are struggling to find the best way to finance out-of-court settlements resulting from recent lawsuits.

Last Wednesday, New Haven Budget Director Joe Clerkin and City Controller Mike O’Neil asked the Board of Aldermen’s finance committee to grant tax-exempt status on potential bonds to pay for two cases, Aponte v. Gonzalez and Martone v. City of New Haven, which together cost the city $900,000. While the city may ultimately decide not to use tax-exempt bonds to finance payments for the cases, aldermen questioned whether this was an appropriate use of tax-exempt bonding and decided to table the item, postponing the vote to a later date.

“We have accumulated a fund deficit in our self-insurance fund over the past few years,” Clerkin said. “There is no easy way of making the deficit go away, but there has to be an alternative one way or the other: You can’t just say we’re not going to bond for it. The deficit still exists, and [the Board] needs to replace it with another solution if they reject it.”

City Hall spokesperson Elizabeth Benton ’04 said Wednesday’s meeting aimed to decide whether to “preserve the option” of giving these bonds tax-exempt status, enabling the city to realize lower borrowing costs. New Haven is self-insured — when the city owes money as a result of a lawsuit, it pays out of its own budget and is not insured by an outside company, she added.

However, tax-exempt bonding is usually only used for capital expenses, such as building roads, schools, construction projects and other expenses that are seen as having long-term value, Benton said. Wednesday’s meeting asked the Board’s finance committee to approve this type of bonding for an expense that is usually not paid for in this manner.

The city used this method of tax-exempt bonding to help pay for the Ricci v. DeStefano case, in which the city borrowed about $6 million after the Supreme Court ruled that the city’s decision to discard the results of a job test for firefighters was discriminatory, Benton said. Clerkin said the meeting was supposed to be about the tax-exempt status of the bonds — the IRS requires that the city obtain approval from the Board of Aldermen in order to make these bonds tax-exempt — but that it “devolved to the larger question about whether [court settlements are] something we should be bonding for in the first place.”

Clerkin added that potential alternatives include raising taxes and cutting services, though he said he was unsure about the existence of other alternatives.

Ward 5 Alderman and Board President Jorge Perez explained that the Finance Committee chose to postpone the vote to a later date because its members felt they needed more information, such as how the city can prevent cases where it pays for settlements using bonds in the future, how the city gets into these economic situations in the first place, whether voting to grant tax-exempt status to these bonds will set a precedent for tax-exempt bonding, and what the exact alternatives are. The circumstances around Wednesday’s request were different from those surrounding the Ricci case, he added.

“[During Ricci v. DeStefano], we didn’t have a lot of choice. They were asking for $6 million and we were dealing with an $8 million deficit,” Perez said.

Ward 7 Alderman Doug Hausladen, who serves on the finance committee, said that the city is already facing a sizeable amount of debt and that the Board needs to keep in mind that while bonding might be easy now, the city may struggle in the future when it has to pay back the bonds.

He echoed Perez’s sentiments, saying that the committee needed more information before it could make a decision about whether it wanted to preserve the ability of the city to take out tax-exempt bonds to pay for these settlements in the same way it paid in the Ricci case.

“If this really is the second time we’re doing something along these lines, setting a precedent isn’t something you want to do lightly: We tabled it to give more time to do a little research on everything so we’re not rushing into a precedent,” Hausladen said. “$500,000 here, $500,000 there adds up, and in theory, if we had a healthy city budget with a healthy reserve fund, we’d be able to swallow these losses without bonding.”

The Ricci v. DeStefano case was decided in June 2009.