New London - For more than two months, the city's finance director has been meeting with financial and legal advisers on a plan to straighten out New London's balance sheet and put some cash back in the bank.

The plan would involve bonding roughly $10 million to free up cash the city needs to pay its bills and meet payroll.

Finance Director Jeff Smith told a City Council committee Monday night that he and the council will have to act quickly to get the city's financial house in order.

"We have basically no cash in the bank and we are trying to do just-in-time financing, and it is not going to continue working," Smith told the City Council's Finance Committee. "We will, at some point, not be able to pay our bills and not be able to make payroll. And when that happens it will be a serious problem, and we probably won't be in charge of our own destiny after that."

If the city does not act, Smith said, New London could run out of cash in mid-May or early June.

"We really need, now, to fix this once and for all," he said.

The problem is a complex one that deals with different disciplines of municipal finance, Smith said. But at its heart is the city's withering fund balance, or savings account, chronic deficits in the city's capital projects fund and millions of dollars in state reimbursements that the city has never received.

The city has failed to collect $6.9 million in grant funding, including $5.3 million in state grant funding for school construction projects dating back to 2000. Between 2007 and 2011, the city overspent capital projects by about $1 million.

The city's fund balance has plummeted from $6.3 million at the beginning of fiscal year 2011 to $1.4 million at the end of fiscal year 2013.

The city has had cash flow problems for "a number of years," Smith said, but in December, while out of the office on medical leave, he got an alarming phone call.

"I got a call from my treasurer saying, 'We're out of money' and 'How are we going to pay our bills?'" he said. "What we did is we didn't pay any bills for a couple of weeks so we could make payroll payments."

Over the last two years, the city has borrowed about $3 million on a short-term basis to "provide necessary operating funds" with the assumption that it would receive the outstanding grant money by now.

"That initial optimism has not proved correct and the city must now move with deliberate speed to fix our balance sheet so that we can continue to pay our bills and meet our payrolls," Smith wrote in his memo to the mayor and City Council.

In addition to the $5.3 million in state grant funding the city has never collected for school construction projects, it has never received about $1 million for the Parade Plaza reconstruction project and about $600,000 for the remediation of Veterans Field.

The problem, Smith said, does not lie at the origin of those projects, but rather with the follow-through. A large part of the problem, he said, is that the city did not properly file the paperwork needed to receive grant funds and then did not pursue the outstanding money properly.

"This isn't money that was spent willy-nilly. This is money that was spent on good, solid capital projects," Smith said. There's "nothing wrong with what people did. We just didn't handle getting our grants back in a timely manner."

Smith likened the process of collecting outstanding grant money to running through mud.

"We are working on that," he said, "but I have been surprised by how difficult it is."

There are also about half a dozen projects for which the city raised more money than the project cost. The net balance from those projects, more than $500,000, should be transferred to the capital projects reserve fund to have on hand as a contingency, Smith said.

He also recommended that a portion of that reserve be deposited into the Board of Education's yet-to-be-established nonlapsing fund so it could be used for maintenance and upkeep of the city's schools. Formation of that account is awaiting approval of the full council.

The approximately $10 million Smith has recommended that the city bond would be split into four ordinances the City Council will be asked to approve before April 25 to give Smith time to prepare the bond packages. The Finance Committee was not asked to take any action Monday, and Smith said he expects to present his proposed ordinances to the full council as early as at its next meeting.

City Council President Wade A. Hyslop Jr., who is also chairman of the Finance Committee, was traveling Wednesday and said councilors will need some time to review Smith's proposal.

Roughly $6.9 million would be bonded to account for the outstanding state grants, $1 million to cover overspending on a handful of city projects such as improvements to City Pier, $1 million for smaller projects that drew from the general operating fund, and $1 million for vehicle purchases made last year that were originally going to be paid from the general fund.

The bond packages would have the near-immediate impact of almost doubling the city's fund balance to about $2.4 million, Smith said.

If or when the city is able to collect the outstanding grant money, it will be placed in an escrow account that will be used solely for debt service, he said.

Smith said he doesn't "see a lot of options."

"This is what you have to do when you're behind the eight ball. If this had been done correctly over the years, we wouldn't be in this position," Smith said. "We're here now because it wasn't done correctly."

c.young@theday.com