Courtesy of New Haven City Government

Surpluses are usually seen as cause for celebration, but the Elm City’s dire financial state has forced officials and experts to question the significance of a City Hall–projected excess in the city’s budget.

At the end of September, the embattled administration of Mayor Toni Harp released its monthly financial report and projected an optimistic statistic in the face of financial frustrations. It estimated that, at the close of the fiscal year in June 2019, the Elm City’s budget will have a surplus of $11.6 million. The projected surplus, however, does not reflect the state of New Haven’s fiscal health, or lack thereof — that projection accounts for cash only and does not account for long-standing challenges to the city’s poor financial well-being, including increasingly looming debts and an unorganized overtime-pay system.

“The projected surplus is in no way going to be a real surplus,” Ward 1 Alder Hacibey Catalbasoglu ’19 said. “When you look at the city’s budget, there are a billion different numbers that you can extrapolate things out of. But at the end of the day, the city is facing a financial crisis.”

In preparing the budget for this fiscal year, which began on July 1, Harp and her administration were forced to grapple with its large operating deficits. An unpopular 11 percent tax hike raised limited revenue, and the mayor chose to double down with a more drastic option to avoid bankruptcy. New Haven refinanced its existing debt -— extending some payments by two decades — in exchange for more freedom with spending in the interim. The deal, which restructured $160 million in existing debt and took on an additional $58 million in new borrowing, is the largest restructuring in city history.

The restructuring will decrease payments to debt services over the next seven years by a total of $108 million while leaving future generations of Elm City residents responsible for the payoffs of the short-term relief.

City Hall’s September financial report estimates the eight-figure surplus at the end of this fiscal year largely due to the decrease in expected spending on debt service payments as a result of the August refinancing.

According to Mohit Agrawal GRD ’20, chair of the city’s independent Financial Review and Audit Commission, the surplus calculation is based in cash-basis accounting. The number predicts what the city believes will be available in cash in the general account at the end of the fiscal year. The general fund operates on roughly $550 million and does not include several other city funds, including a separate general fund for education.

The debt-backed nature of the funds used in calculating the surplus — which would be considered under alternative forms of accounting, such as the accrual basis — are not considered under cash-basis accounting. Under an accrual basis, the Harp administration would have to account for the fact that approximately $30 million of the city’s cash flow this year came from bond and debt initiatives, which will increase costs in the future.

But even under cash-basis accounting, experts and local officials are skeptical of the surplus. The Elm City has underestimated its costs before, and Agrawal estimated that the actual surplus at the end of the year will fall somewhere around $1 million — a full order of magnitude short of City Hall’s projection — if it does not “get wiped out” completely.

Agrawal cites fire overtime and medical self-insurance as two costs that could push the City’s total operating costs well past projections. The Board of Alders acknowledged similar concerns about departments traditionally overspending their budgetary allotment at a hearing on Wednesday.

While such spending frustrates those hoping to redefine the city’s fiscal course, Agrawal noted that the extent of the city’s borrowing plan would also seem more logical without a surplus.

“It doesn’t really make sense to do a major $160 million refunding to generate $30 million in free cash flow if you only needed [$20 million],” Agrawal said.

Mayoral spokesperson Laurence Grotheer, however, said that a surplus, even one resulting from a refinancing effort, is a fiscal advantage. Beyond serving as a safeguard against unexpected deficits, any surplus also increases financial stability and improves the city’s bond rating, according to Grotheer. Higher bond ratings generally translate to lower borrowing rates.

Harp was first elected mayor of New Haven in 2014.

Angela Xiao | angela.xiao@yale.edu .