Why Providence faces a multimillion-dollar budget shortfall

PROVIDENCE, R.I. (WPRI) – Welcome to Providence, where even bean-counting comes with bravado.

The city’s internal auditor and former Mayor Angel Taveras are at odds over the state of Providence’s finances, with the auditor claiming the city is facing a $23-million budget gap for the fiscal year that begins July 1 and Taveras saying that prediction is exaggerated.

The feud between internal auditor Matt Clarkin and Taveras has been simmering for several months, but it came to a head last week when new Mayor Jorge Elorza released a memo from his predecessor that said the auditor is “often wrong.”

“The internal auditor is appointed by the council and works for them,” Taveras wrote in his transition memo to Elorza. “It is in the internal auditor’s interest to be ultra conservative because it is better for him to be too conservative with his estimates.”

Taveras explained that he expected Elorza to face a $7 million shortfall for the 2015-16 fiscal year, thanks to the City Council’s decision to approve an ordinance that gives a tax break to rental property owners beginning July 1. (Taveras vetoed the ordinance, but the council overrode the veto.) In December, Taveras’s finance director upped the predicted shortfall to $10.5 million.

So why, in a roughly $680-million budget, are the numbers guys offering conflicting outlooks?

Because municipal budgeting isn’t as simple as adding up all of your expenses and crossing your fingers that they don’t exceed your revenues.

In a letter to the City Council Tuesday, Clarkin offered a blow-by-blow account of the differences between his prediction and the former mayor’s outlook.

On property taxes, he said Taveras offered an “optimistic” assumption that revenues would grow by about 2.4% next year, or $8 million. Clarkin said he assumed no significant increase in the tax levy because “there are not clear factors that point to robust growth.” The city collected about $255,000 less in tax revenues during the 2013-14 fiscal year, according to the annual city audit.

Taveras projected the city would bring in about $4 million from the state’s general revenue sharing program, about $1 million more than Clarkin’s prediction. Clarkin noted that the state hasn’t funded the program since the 2009-10 fiscal year and “this revenue was not approved by the state for the current fiscal year.” He said that program should be considered a “potential solution” to the city’s shortfall rather than a revenue in the budget.

When it comes to revenue from permitting fees, Taveras projected the city would bring in about $7.4 million next year, up 75% from this year’s budget. That is thanks in large part to an “expected increase in real estate development,” stemming largely from projects on the vacant I-195 land and the downtown nursing center at the old South Street Power Station. Clarkin acknowledged he took a more “cautious approach,” predicting a 15% increase.

Taveras said the city’s medical expenditures will rise by 4% to $77.8 million next year and Clarkin believes they will grow to about $81 million. Clarkin said Taveras was factoring in possible savings that must be achieved through negotiations with the city’s public employee unions; Clarkin did not incorporate those hypothetical savings into his projection.

Add it all up and you arrive at a $10.5 million predicted shortfall from Taveras and a $23.1 million gap from Clarkin. Either way, city officials will have to find ways to balance the budget over the next several months. (Elorza has promised to not raise taxes in his first year in office, meaning the city will likely have to cut expenses to avoid finishing the year in the red.)

“I would like to assure you and the entire City Council that it has been and will continue to be my goal to provide the council with the most accurate information and reporting possible – not an ’ultra conservative’ or worst case view of the city’s financial condition, as the former mayor surmised in his memorandum,” Clarkin wrote to the council.

Now for another question. Why, on his way out the door, would Taveras tell the new mayor that Clarkin is “often wrong”?

Because the internal auditor’s projected shortfalls have rarely come to fruition, in part because the predictions were made many months – in some cases, years – before an actual budget deficit would be realized. In other words, the city budget is a moving target.

In his letter to Elorza, Taveras said the auditor’s “incorrect predictions” included projected deficits of between $21.4 million and $32.4 million for the 2012-13 fiscal year, which the city ended with a $1.6 million surplus. Taveras said the auditor predicted budget gaps of between $37.5 million and $50.1 million for the 2013-14 fiscal year, but the city ended with a $1.1 million surplus.

For his part, Clarkin maintains that he never gave a “real time” prediction that said the city would end any year with a deficit. But he said that if the city didn’t take steps to address his projections, the city would have run deficits. He also noted that the city’s finance director regularly predicted massive budget gaps himself, including $31.2 million for the 2012-14 fiscal year and $50.5 million for the 2013-14 fiscal year.

“A projected budget gap is the amount that the city will have to address or remedy in order to submit a balanced budget at the beginning of fiscal year, not the actual result at the end of a fiscal year,” Clarkin wrote.

Dan McGowan ( dmcgowan@wpri.com ) covers politics, education and the city of Providence for WPRI.com. Follow him on Facebook and Twitter: @danmcgowan

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