June 4, 2013
State audit raises concerns over Niagara Falls' budget practices
Niagara Gazette — An audit released Tuesday by the New York State Comptroller's Office raises serious concerns about the city's finances, including a "pattern of structural deficits" due to a lack of incoming casino revenue and budgetary decisions made by city officials in recent years.
The audit suggests matters were "worsened significantly" as a result of the continued inclusion of unrealized casino revenues in annual budgets and a reliance on what auditors described as revenue "one-shots" drawn from fund balance and surplus capital project funds.
“Niagara Falls has nearly exhausted its resources to avoid a fiscal crisis," state Comptroller Thomas DiNapoli said in a statement accompanying the audit. "City officials cannot continue to walk a financial tightrope for much longer."
The audit describes the lack of incoming casino revenue since 2008 as one of the reasons recurring revenues have not been sufficient to fund recurring expenditures. The situation, according to auditors, resulted in a general fund annual budget gap averaging $12.4 million during the audit period from Jan. 1, 2009 through Jan. 9. The audit indicates that city officials balanced budgets using fund balance and an estimate for casino revenue averaging $5.3 million annually.
"While the dispute over gaming revenue is significant, the city’s budget challenges also stem from a number of socio-economic factors including population loss and a high unemployment rate," DiNapoli said. "The mayor and the city council are actively trying to manage their considerable hurdles, but getting on firmer financial footing will require a resolution of casino gaming issues and likely even greater assistance from the state."
The audit suggests Dyster's administration should have removed casino revenues from annual budgets during the casino cash dispute to better protect the city's overall financial position. Auditors also said the city should have developed more formalized multi-year plans for eliminating accumulated deficits.
"The city has funded these structural deficits by relying on "one-shots" such as fund balance and surplus moneys remaining in the capital project fund," the audit reads. "This approach has negatively affected the general fund's financial condition. The controller indicated that the general fund ended the 2012 fiscal year with an unassigned fund balance deficit of approximately $5.2 million.
Therefore, over this four-year period, fund balance decreased by about $21.6 million."
Auditors concluded that while it "might have been prudent" for the city to account for incoming casino revenues when the gaming revenue squabble started in 2009, as the dispute "dragged on without resolution," it should have removed those revenues from its financial plans. Instead, as of Dec. 31, 2012, the audit notes that the city incurred, in the aggregate, $23.4 million in expenditures intended to have been funded with casino money, that it has not received.
Dyster declined comment when reached by telephone Tuesday morning prior to the audit's formal release, saying he could not discuss what was at the time considered a "draft" report.
In a letter of response attached to the final audit, Dyster's administration indicated that it budgeted casino revenues to "support" the state's long-held position on the dispute itself.
"This situation is virtually unprecedented in the history of New York state, and almost beyond the control of the city of Niagara Falls," Dyster wrote. "The city has been forced to choose among largely bad options with little guidance as to what constitutes best practice under often unique circumstances. Given the state's degree of involvement and responsibility in this matter, we find it somewhat ironic that an agency of the state of New York would now find itself in a position to critique our attempts to deal with a crisis in which the state itself has been a central actor."
In their report, auditors noted that although the city's fund balance had been depleted, it continued to budget for what they described as "one-shot revenues," including in the 2013 budget which relied upon $2 million in unavailable appropriated fund balance, $2.9 million in transfers from the capital projects fund, $850,000 in debt service fund transfers and $1 million in property sale revenues. As a result, auditors concluded that the city's 2013 adopted general fund budget has a structural deficit of $12 million.
"Therefore, if the city does not receive any or an insufficient amount of casino revenue in 2013, it will have a revenue shortfall of approximately $7.2 million, representing the budgeted casino revenues and the unavailable appropriated fund balance," the audit reads. "Moreover, even with a resolution of the casino revenue impasse that would positively impact the city, the council and mayor will still need to take action to address the structural budget deficits affecting the city."
In its letter of response, the Dyster administration takes exception to auditors' reference to "one-shot" revenues.
"The report goes on to take issue with the city funding certain structural deficits by relaying on 'one-shots,'" Dyster wrote. "The city's strategy should not be characterized in this way. Large fund balance surpluses remaining on capital projects, as well as from the general fund, have been used time and again (year after year) in order to close deficits. Had the city not used those surpluses, they would have sat on the books and accomplished no purpose."
DiNapoli's office also suggested the city should have been more diligent in closing out completed capital projects and ensuring that all unexpended funds are transfered to the debt service fund and used only for "payments on all related debt." While the report notes that a "substantial amount" of unassigned fund balance in the capital projects fund was accounted for by Controller Maria Brown's office, it estimates that additional funds - ranging from $1 million to $1.4 million - may remain in other projects that could be returned to the general fund.
Reached by telephone on Tuesday, Brown said her office is not in a position to closely monitor all capital projects, including such things as road repair or construction jobs. She suggested the work was more in keeping with the duties of the city engineer, a position that has been in flux at various points under the Dyster administration.
"I repeatedly asked for a list of closed projects from engineering to no avail," she said. "I send reports on a continuous basis to the mayor and the city administrator informing them on the status and funds for projects and encouraging them to find out when, and if, projects closed," she said.
Brown said the city has maintained multi-year plans for various accounts in recent years and that, although not required to, the city was asked by state auditors to maintain those plans in a different form recommended by the state.
Brown noted that auditors took a look at "thousands and thousands" of transactions as part of a six-month review and did not identify anything improper.
"Everything was in order," she said. "Everything required of my office was in place."
The draft audit predicts "significant cash flow shortfalls" for the city in 2013 and a need for the city to issue short-term debt to address cash flow problems late in 2013. It also notes that the city's credit rating has been downgraded several times in recent months and may be reduced further in the future, possibly preventing the city from being able to issue debt or to do so at a reasonable cost.
"The biggest thing is the lack of casino funds and I don't want people to lose sight of that," Brown said. "It all boils down to the lack of casino funds that put us in the situation we are in."
FALLS AUDIT DiNapoli's office recommended that the city take the following corrective actions in the release; • Establish policies and procedures for access controls to restrict financial software permissions to only those functions that are necessary for employees' job duties • Designate someone independent of the city controller's office as the city's financial system administrator • Ensure that logs for the financial system are maintained and periodically reviewed • Establish policies and procedures for data backup and storage, and comprehensive guidelines for disaster recovery
http://niagara-gazette.com/local/x1465637714/Audit-takes-Falls-to-task-State-audit-raises-concerns-over-Niagara-Falls-budget-practices
The audit suggests matters were "worsened significantly" as a result of the continued inclusion of unrealized casino revenues in annual budgets and a reliance on what auditors described as revenue "one-shots" drawn from fund balance and surplus capital project funds.
“Niagara Falls has nearly exhausted its resources to avoid a fiscal crisis," state Comptroller Thomas DiNapoli said in a statement accompanying the audit. "City officials cannot continue to walk a financial tightrope for much longer."
The audit describes the lack of incoming casino revenue since 2008 as one of the reasons recurring revenues have not been sufficient to fund recurring expenditures. The situation, according to auditors, resulted in a general fund annual budget gap averaging $12.4 million during the audit period from Jan. 1, 2009 through Jan. 9. The audit indicates that city officials balanced budgets using fund balance and an estimate for casino revenue averaging $5.3 million annually.
"While the dispute over gaming revenue is significant, the city’s budget challenges also stem from a number of socio-economic factors including population loss and a high unemployment rate," DiNapoli said. "The mayor and the city council are actively trying to manage their considerable hurdles, but getting on firmer financial footing will require a resolution of casino gaming issues and likely even greater assistance from the state."
The audit suggests Dyster's administration should have removed casino revenues from annual budgets during the casino cash dispute to better protect the city's overall financial position. Auditors also said the city should have developed more formalized multi-year plans for eliminating accumulated deficits.
"The city has funded these structural deficits by relying on "one-shots" such as fund balance and surplus moneys remaining in the capital project fund," the audit reads. "This approach has negatively affected the general fund's financial condition. The controller indicated that the general fund ended the 2012 fiscal year with an unassigned fund balance deficit of approximately $5.2 million.
Therefore, over this four-year period, fund balance decreased by about $21.6 million."
Auditors concluded that while it "might have been prudent" for the city to account for incoming casino revenues when the gaming revenue squabble started in 2009, as the dispute "dragged on without resolution," it should have removed those revenues from its financial plans. Instead, as of Dec. 31, 2012, the audit notes that the city incurred, in the aggregate, $23.4 million in expenditures intended to have been funded with casino money, that it has not received.
Dyster declined comment when reached by telephone Tuesday morning prior to the audit's formal release, saying he could not discuss what was at the time considered a "draft" report.
In a letter of response attached to the final audit, Dyster's administration indicated that it budgeted casino revenues to "support" the state's long-held position on the dispute itself.
"This situation is virtually unprecedented in the history of New York state, and almost beyond the control of the city of Niagara Falls," Dyster wrote. "The city has been forced to choose among largely bad options with little guidance as to what constitutes best practice under often unique circumstances. Given the state's degree of involvement and responsibility in this matter, we find it somewhat ironic that an agency of the state of New York would now find itself in a position to critique our attempts to deal with a crisis in which the state itself has been a central actor."
In their report, auditors noted that although the city's fund balance had been depleted, it continued to budget for what they described as "one-shot revenues," including in the 2013 budget which relied upon $2 million in unavailable appropriated fund balance, $2.9 million in transfers from the capital projects fund, $850,000 in debt service fund transfers and $1 million in property sale revenues. As a result, auditors concluded that the city's 2013 adopted general fund budget has a structural deficit of $12 million.
"Therefore, if the city does not receive any or an insufficient amount of casino revenue in 2013, it will have a revenue shortfall of approximately $7.2 million, representing the budgeted casino revenues and the unavailable appropriated fund balance," the audit reads. "Moreover, even with a resolution of the casino revenue impasse that would positively impact the city, the council and mayor will still need to take action to address the structural budget deficits affecting the city."
In its letter of response, the Dyster administration takes exception to auditors' reference to "one-shot" revenues.
"The report goes on to take issue with the city funding certain structural deficits by relaying on 'one-shots,'" Dyster wrote. "The city's strategy should not be characterized in this way. Large fund balance surpluses remaining on capital projects, as well as from the general fund, have been used time and again (year after year) in order to close deficits. Had the city not used those surpluses, they would have sat on the books and accomplished no purpose."
DiNapoli's office also suggested the city should have been more diligent in closing out completed capital projects and ensuring that all unexpended funds are transfered to the debt service fund and used only for "payments on all related debt." While the report notes that a "substantial amount" of unassigned fund balance in the capital projects fund was accounted for by Controller Maria Brown's office, it estimates that additional funds - ranging from $1 million to $1.4 million - may remain in other projects that could be returned to the general fund.
Reached by telephone on Tuesday, Brown said her office is not in a position to closely monitor all capital projects, including such things as road repair or construction jobs. She suggested the work was more in keeping with the duties of the city engineer, a position that has been in flux at various points under the Dyster administration.
"I repeatedly asked for a list of closed projects from engineering to no avail," she said. "I send reports on a continuous basis to the mayor and the city administrator informing them on the status and funds for projects and encouraging them to find out when, and if, projects closed," she said.
Brown said the city has maintained multi-year plans for various accounts in recent years and that, although not required to, the city was asked by state auditors to maintain those plans in a different form recommended by the state.
Brown noted that auditors took a look at "thousands and thousands" of transactions as part of a six-month review and did not identify anything improper.
"Everything was in order," she said. "Everything required of my office was in place."
The draft audit predicts "significant cash flow shortfalls" for the city in 2013 and a need for the city to issue short-term debt to address cash flow problems late in 2013. It also notes that the city's credit rating has been downgraded several times in recent months and may be reduced further in the future, possibly preventing the city from being able to issue debt or to do so at a reasonable cost.
"The biggest thing is the lack of casino funds and I don't want people to lose sight of that," Brown said. "It all boils down to the lack of casino funds that put us in the situation we are in."
FALLS AUDIT DiNapoli's office recommended that the city take the following corrective actions in the release; • Establish policies and procedures for access controls to restrict financial software permissions to only those functions that are necessary for employees' job duties • Designate someone independent of the city controller's office as the city's financial system administrator • Ensure that logs for the financial system are maintained and periodically reviewed • Establish policies and procedures for data backup and storage, and comprehensive guidelines for disaster recovery
http://niagara-gazette.com/local/x1465637714/Audit-takes-Falls-to-task-State-audit-raises-concerns-over-Niagara-Falls-budget-practices
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