It's About Restoring Trust

Strategies for Financial Recovery:
The City of New Haven's Experience.

By John DeStefano, Jr.

[Originally published in Government Finance Review, June 1, 1999]

As usual, this year's annual meeting of the U.S. Conference of Mayors hosted no shortage of proud leaders ready to boast about what their cities were accomplishing. Typical of U.S. cities, New Haven, Connecticut, has known both good times and tough times. Over the last five years, New Haven has made itself much, much better - and its mayor and citizens seek to make it better still.

“City officials have returned the jurisdiction back to a sound fiscal footing and are recreating a place where children learn in good schools, residents live in safe neighborhoods, and everyone has the opportunity to make the most of his or her talents.”

New Haven is a pre-Revolutionary American city with a rich history. By 1950, more than 164,000 people lived in the city, with an economy largely defined by manufacturing, railways, and Yale University. Largely due to the presence of Yale University, New Haven has been blessed with cultural, scientific, and recreational resources well beyond those offered by most cities of its size. Despite launching one of the country's first major urban renewal efforts during the 1950s, the city struggled to adapt to economic change and compete with neighboring communities. Free to vote with cars that could speed down new, federally funded highways, more residents and businesses chose to leave than to stay.

In 1994, the current administration came into office to manage and rebuild the city. At that time, the city had little money in the bank and its credit was so shaky that it could hardly borrow. The city's population had fallen to about 125,000, while it lost 18 percent of its manufacturing jobs in only three years. To make matters worse, the city's public buildings and infrastructure were crumbling, while its fiscal health continued to deteriorate and its shrinking tax base smothered plans for capital investment. Looming just behind the budget deficit was a cash shortfall that delayed vendor payments. Meanwhile, city officials were wasting precious general fund dollars to subsidize the operation of assets once intended to be self-supporting.

Five years later, New Haven is a reborn American city. City officials have returned the jurisdiction back to a sound fiscal footing and are recreating a place where children learn in good schools, residents live in safe neighborhoods, and everyone has the opportunity to make the most of his or her talents. The city has accomplished this by following a path that avoids temporary, quick fixes in favor of creating a climate for sustainable economic growth and social well-being. New Haven has regenerated itself through competition and compassion:

• competition, by retaining existing residents and businesses and attracting new ones through cutting taxes, lightening the regulatory burden, offering quality services, and making investments to strengthen New Haven's great comparative advantages - arts, entertainment, transportation, technology, neighborhoods - while preparing to make the most of the new federal Empowerment Zone designation;
• compassion, by targeting employment, health, welfare, safety, and redevelopment efforts to individuals and areas of the city most in need.

Exercising Financial Leadership

New Haven could not have regenerated itself without financial leadership - leadership characterized by planning, innovation, problem-solving, and establishment of systems to tell its officials where they are financially, were they are going, and what they are getting for what they spend. The term leadership is used because of the importance that New Haven's executive administration places in having city financial managers do more than just track debits and credits; they sit at the policy table and implement initiatives that improve service delivery and reduce operating costs.

Soon after taking office in 1994, the current administration concluded that the city needed a multi-year strategic and financial plan to map its vision for the city, its fiscal direction, and the savings and revenue-raising opportunities that the administration would use to achieve its vision. The plan would serve two purposes:

1. to serve as management and communication tool to inform city residents, businesses, elected officials, staff, and credit rating agencies what the mayor's office was going to do and how it was going to implement its strategic plan; and
2. to guide the city through contract negotiations with its 15 collective bargaining units.

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To begin addressing the city's poor financial health, the mayor's office developed a snap shot of the following:

1. debt and cash management;
2. historical, current, and projected revenue and spending patterns for the city;
3. major operating departments;
4. procurement processes and practices;
5. the utilization of city assets; and,
6. workforce management.

This process identified areas where costs were out of line with other governments and with revenue growth rates.

Instead of being proposed in a scattershot fashion, one of the benefits of putting these initiatives into a single strategic and financial plan was that they could be organized into coherent strategies, making clear their impact on the city's bottom line. For example, by identifying where personnel costs were out of line and why, the mayor's office developed a workforce strategy to take into its collective bargaining discussions, emphasizing elimination of burdensome work rules and lowering health care costs without sacrificing compensation, benefit coverage, or worker safety.

The mayor's review of the city's debt management policy and practices translated into a strategy for achieving an upgrade by rating agencies and savings through refinancing debt. By analyzing the use of city assets, the mayor 's office developed a privatization strategy for the following services and functions:

1. delinquent tax collections;
2. operation of solid waste transfer station;
3. the municipal airport;
4. the public golf course; and,
5. water and wastewater services.

The mayor's office believed this privatization strategy would generate savings in the tens of millions.

Policy Implementation

To implement the city's management of competitive service contracting, the mayor's office started by defining mission statements, goals for key operations, and, finally, establishing performance measures. In doing this, it became clear that as long as the city's mission remained focused and outcomes were achieved to serve the public's purpose, private providers would be allowed the opportunity to propose how they could perform city functions at less cost, less risk, and with equal or better performance.

The mayor's office also reached out to employee unions to explain that the city was in no position to continue funding operations and maintaining assets that were under-used or overly costly. The mayor's office also indicated that the best way to ensure job security was to work with city officials and department directors. To ensure the cooperation of collective bargaining units, the mayor's office gave its assurance that, as a result of a competitive contracting process, city employees would either join the winning vendor at equal or better terms and conditions or would be transferred to comparable, vacant positions within the city.

Finally, the mayor's office wanted to take advantage of the creativity of the marketplace. While much time was invested in defining monetary goals of its requests for proposals (RFPs), the mayor's office structured many of them to encourage proposing firms to apply creative solutions to meet the current administration's fiscal, revenue enhancement, and privatization goals.

Results

New Haven's budget director, controller, and treasurer have served as the financial management leaders, directing or playing an important role in the success of the city's initiatives, including:

• applying the workforce strategy through collective bargaining to reduce the rate of salary increases to 1.6 percent from the average rate of 4.5 percent;
• contracting out the management of the Water Pollution Control Authority, resulting in estimated savings to ratepayers of $53 million over 15 years, as well as facility maintenance for a $135 million school operations budget;
• establishing a $350 million School Construction Fund to rejuvenate city schools, generating seed money from the securitized sale of $26 million in delinquent tax liens, which in turn was used to leverage an additional $100 million from the state;
• installing new financial management systems to further improve financial management and comply with Year 2000 requirements;
• issuing bonds to pay a health insurance company to assume full responsibility for meeting payments to police officers and firefighters for heart and hypertension-related disabilities, saving the city up to $7 million;
• leasing the city's airport to a newly created regional entity responsible for its operations and management;
• moving employees from traditional indemnity health benefit programs whose costs outstripped city revenues to a preferred provider organization resulting in an estimated 20 percent savings;
• moving toward outsourcing the operation, maintenance, and management of the solid waste transfer station to a private firm;
• outsourcing the management of the city's golf course, dramatically improving playing conditions, while eliminating operating subsidies; and
• shifting from in-house workers' compensation claims administration to a third-party administrator, cutting costs by about $6 million a year.

These successes have been important to the current administration's ability to balance its $300 million budget. The general fund balance went from a deficit of about $4.4 million in FY1992 to a surplus of almost $14 million in FY1999. The current administration also has held the rate on property taxes steady from FY1994 through FY1996 and has cut rates since 1994, including the proposed FY2000 budget. Finally, the city has been warmly welcomed back to the credit market, with demand for recent debt issuance of $72 million in insured long-term bonds strong enough to result in interest costs ranging from 4.3 percent to less than 3.9 percent.

The City of New Haven: A Path to Results

November 1993

• City has BBB-Baa credit ratings
• City unable to access capital markets
• City unable to meet vendor accounts or payroll

March 1994

• City completes five-year financial plan
• Plan identifies $45 million of management initiatives

February 1995

• $25 million BAN conversion and new money issue

August 1995

• $43.9 million general obligation refunding

September 1995

• $19.1 million tax lien sale (proceeds used to leverage $60 million state guarantee)

November 1995

• $23 million BAN for capital projects

June 1996

• $5.9 million bulk tax lien sale

August 1996

• $29 million BAN for capital projects

December 1996

• $28.8 million general obligation refunding

May 1997

• $40 million BAN conversion and new money issue

June1997

• City institutes contract for golf course
• $6.4 million bulk tax lien sale

August 1997

• City institutes contract for water/wastewater system
• City upgraded to BBB/Baa1

Autumn 1997

• Capital market access fully restored
• Debt service reduced $1 million annually

December1997

• $13.1 million general obligation refunding
• $25 million issued for capital projects

August 1998

• $40 million BAN for capitalized projects

Summer/Autumn 1998

• City institutes contract for school facilities maintenance

January 1999

• $55 million BAN conversion and new money issue for capital projects

February 1999

• $17 million general obligation issue to eliminate heart and hypertension liability

April 1999

• City upgraded to AB/BBB+

The mayor's office has directed savings into expanding critical services, investing in more police officers, firefighters, school nurses, and recreation, while launching a capital improvement program of $55 million in the first year alone. No doubt, New Haven is benefiting from Connecticut's general economic growth but New Haven's initiatives to make the city a more attractive place to live and work is an important reason why the value of building and facility permits climbed 43 percent from 1992 to 1998, while unemployment has fallen sharply.

Next Steps

With firm financial footing, New Haven is in excellent position to keep climbing, particularly in areas where it enjoys great comparative advantages, such as the following.

• Transportation and Waterfront Development. By 2001, the mayor's office expects the $431 million Marketplace at Long Wharf to provide over one million square feet of high-end retail space on the city's historic harbor - already the second busiest in New England. By next year, Amtrak's investment in high-speed rail will cut travel time between New Haven and New York City by half, increasing ridership along the Connecticut shoreline by an estimated 90 percent.
• Arts, Entertainment, and Leisure. The city has opened large hotels downtown and on the waterfront and hosts annual festivals as well as professional hockey, baseball, and tennis facilities. Moreover, Yale University has planned $85 million worth of investments in arts facilities over the next 10 years, including a $22 million School of Art.
• Science, Research, and Technology Transfer. New Haven was identified by The Wall Street Journal as having the country's most diverse group of high-tech companies in the country, as well as the second highest concentration of high-tech jobs, at 21.6 percent of the workforce. The administration's efforts to spur investment in research, science, and technology transfer already have created or attracted 85 firms. The Yale-New Haven Hospital - an internationally recognized research and medical institution which employs about 5,000 people and serves as one of only 20 comprehensive cancer care facilities in the nation - has close ties to Yale Medical School and will benefit from an expected $27 million in improvements by the University.
• Neighborhood Development. New Haven is a city of richly diverse neighborhoods. The city's nationally acknowledged Community based Policing Program has helped cut crime rates by 40 percent. City schools, under the direction of a school board appointed by the mayor, have witnessed significant increases in standardized test scores, the end of social promotions, dramatic expansion of pre-kindergarten programs, and a major curriculum initiative with a particular focus on early literacy skills. New Haven's Livable City Initiative will continue to strengthen neighborhoods by continuing to remove blighted buildings and rehabilitate thousands of properties for sale or rent.

Providing families and businesses with so many reasons to visit and stay in New Haven will only make the city stronger and more competitive.

© Copyright 1999 Government Finance Officers Association of the U.S. & Canada.