dinapoli troy audit

Division of LocaL Government & schooL accountabiLity

o f f i c e o f t h e n e w y o r k s t a t e c o m p t r o L L e r

report of ExaminationPeriod Covered:

January 1, 2012 — May 31, 2015

2015M-185

City of TroyFinancial Condition

thomas p. Dinapoli

Page

AUTHORITY LETTER 1

EXECUTIVE SUMMARY 2

INTRODUCTION 5Background 6Objective 6Scope and Methodology 7 CommentsofLocalOfficialsandCorrectiveAction 7

FINANCIAL CONDITION 8Operating Funds 9Capital Projects 18Financial Reports 22Long-Term Planning 24Recommendations 25

APPENDIX A ResponseFromLocalOfficials 27APPENDIX B AuditMethodologyandStandards 30APPENDIX C HowtoObtainAdditionalCopiesoftheReport 32APPENDIX D LocalRegionalOfficeListing 33

Table of Contents

11Division of LocaL Government anD schooL accountabiLity

State of New YorkOffice of the State Comptroller

Division of Local Governmentand School Accountability February2016

DearCityOfficials:

A toppriorityof theOfficeof theStateComptroller is tohelp localgovernmentofficialsmanagegovernment resources efficiently and effectively and, by so doing, provide accountability for taxdollarsspenttosupportgovernmentoperations.TheComptrolleroverseesthefiscalaffairsoflocalgovernmentsstatewide,aswellascompliancewithrelevantstatutesandobservanceofgoodbusinesspractices.Thisfiscaloversightisaccomplished,inpart,throughouraudits,whichidentifyopportunitiesforimprovingoperationsandCityCouncilgovernance.Auditsalsocanidentifystrategiestoreducecosts and to strengthen controls intended to safeguard local government assets.

Followingisareportofourauditof theCityofTroy,entitledFinancialCondition.Thisauditwasconducted pursuant toArticleV, Section 1 of the State Constitution and the State Comptroller’sauthorityassetforthinArticle3oftheNewYorkStateGeneralMunicipalLaw.

This audit’s results and recommendations are resources for local government officials to use ineffectivelymanagingoperationsand inmeeting theexpectationsof their constituents. Ifyouhavequestionsaboutthisreport,pleasefeelfreetocontactthelocalregionalofficeforyourcounty,aslistedat the end of this report.

Respectfullysubmitted,

Office of the State ComptrollerDivision of Local Governmentand School Accountability

State of New YorkOffice of the State Comptroller

2 Office Of the New YOrk State cOmptrOller2

Office of the State ComptrollerState of New York

EXECUTIVE SUMMARY

Thenine-memberCityCouncil(Council)istheCityofTroy’s(City)legislativebranch,whichconsistsof thePresident andeightother electedmembers.TheMayor is thechief executiveofficer and isresponsible for the administration of all City affairs. The City Comptroller (Comptroller) is the chief fiscal officer and is responsible for the oversight and accountability of all of the City’s financialactivity. The City Charter (Charter) governs City operations and outlines the powers and duties of the Council,MayorandComptroller.TheCity’sbudgetedappropriationsforthe2015fiscalyearwereapproximately$83.1million,whichwerefundedprimarilywithrevenuesfromrealpropertytaxes,salestaxandwaterandsewercharges.

Scope and Objective

TheobjectiveofourauditwastoreviewtheCity’sfinancialconditionfortheperiodJanuary1,2012throughMay31,2015.Ourauditaddressedthefollowingrelatedquestion:

• Does the Council adopt realistic budgets that are structurally balanced, routinely monitorfinancialoperationsandtakeappropriateactionstomaintaintheCity’sfiscalstability?

Audit Results

ThefinancialconditionoftheCity’sgeneralandwaterfundshavedeclinedoverthelastthreefiscalyears.TheCounciladoptedbudgetsforthegeneralfundthatwerenotstructurallybalanced,butinsteadtheCouncilroutinelyreliedonappropriatingsignificantamountsofreservestofinanceoperations.Asaresult,thegeneralfundrealizedplannedoperatingdeficits,adecliningfundbalanceandadecliningcashbalancefrom2012through2014.Thegeneralfund’sunassignedfundbalancewas$1.1millionattheendof2014,oronly1.6percentofthe2015generalfundadoptedappropriations.Thegeneralfund’sfinancialconditionwilllikelydeclinefurtherduring2015becausetheadoptedbudgetforthefund was again not structurally balanced.

In addition, the Council-adopted budgets for the water fund were not realistic because revenueestimatesformeteredwatersalescouldnotberealizedbasedonthewaterratesineffect.Inaddition,thebudgetscontainedincreasingamountsofinterfundtransferstothegeneralfundtosubsidizethegeneralfund’soperationsanddidnotincludeinterfundtransfersthatweremadetothecapitalprojectsfundtotalingnearly$4.4millionandmorethan$1.6millionduring2013and2014,respectively.Asaresult,thewaterfundrealizedoperatingdeficitsof$4.8millionand$1.3millionduring2013and2014,respectively,anddecliningfundbalanceandcashfrom2013to2014.ThetotalfundbalanceintheCity’swaterfundhasdecreasedbymorethan$6.1millionor67percentoverthelastthreefiscal


years,fromnearly$9.2millionatthestartofthe2012fiscalyearto$3millionattheendofthe2014fiscalyear.Theadoptedbudgetforthewaterfundfor2015againdidnotincludefundingtofinancewaterimprovementstotaling$1.2millionthatwereincludedintheCity’scapitalplan.IftheCouncildecidestomakeinterfundtransferstothecapitalprojectsfundtofinancethesewaterimprovements,thiscouldsignificantlyimpactthefinancialconditionofthewaterfundduring2015.

The Council also adopted budgets for the sewer fund that were not realistic because revenue estimates forsewerrentscouldnotberealizedbasedonthesewerratesineffect.However,theCityrealizedoperatingsurplusesduring2013and2014becausetherevenueshortfallswereoffsetbytheCitynotexpendingtheamountofbudgetedappropriationsin2013and2014andbecausetheCityreceivedanunbudgetedrevenueof$352,147in2014foranemergencydisasterassistancereimbursement.Asaresult,thesewerfund’sfundbalanceandcashbalanceincreasedfrom2012through2014.However,thesewerfund’scashbalancesat theendof the last threefiscalyearswerenotsufficient torepaytheamountsowedtothegeneralandwaterfunds.Asaresult,althoughthefinancialconditionofthesewerfundimproved,thesewerfundisstillnotfiscallyhealthy.Theadoptedbudgetforthesewerfundfor2015againdoesnotcontainrealisticestimatesforsewerrentsbutwilllikelybeoffsetagainby overestimated appropriations.

TheCityischangingitsmethodofaccountingforretirementexpendituresduring2015,whichwillresult intheCityrecognizingonlythreequartersofits traditionalretirementexpendituresin2015.Asaresult,the2015budgetincludesonlythreequarters,orapproximately$5.7million,oftheCity’sestimated retirement costs and excludes the approximate$1.9million in costs associatedwith theperiodJanuarythroughMarch,2016.However,in2016andinfutureyears,theCitywillberequiredtorecognize100percentoftheirretirementcostseachyear.Asaresult,ifretirementcostsremainat2015levels, the2016budgetmust includeanincreaseofapproximately$1.9millioninretirementappropriations,anamountwhichrepresentsapproximately10percentofthe2015taxlevy.

We also found that the Comptroller failed to maintain individual accounting records for each capital project(project)andtheCouncildidnotmonitorthefinancialactivityofprojects.Asaresult,oneprojectthatwereviewedwasoverspentby$425,261,projectexpenditureswerefundedthroughtheuseofotherprojects’funds,debtproceedshavebeenimproperlycommingledwithotherCityfundsand$85,334indebtproceedswereusedforanunauthorizedpurpose.Consequently,asofMay31,2015,thegeneralfundowed$688,929tothecapitalprojectsfundand$85,334tothespecialrevenuefund,andthewaterfundowed$466,753tothecapitalprojectsfund,whichwillnegativelyimpactthefinancialconditionofthesefunds.Inaddition,theCouncildidnotauthorizetheclosingoutofanycompletedprojectsduringourauditperiod,resultinginatleast13completedprojectsnotbeingclosedoutinatimelymanner.WhentheCityclosesoutallofitscompletedprojects,itistheresponsibilityoftheoperatingfundstofundanydeficits,whichcouldsignificantlyimpactthefinancialconditionofthe operating funds.

The Council also did not receive quarterly financial reports of the City’s operating funds during2012through2014anddidnotreceivebudgetstatusreportsfortheCity’sprojectsduringourauditperiod.Inaddition,theCity’sannualfinancialreportsforthe2012through2014fiscalyearswerenotfiledwiththeOfficeoftheStateComptrollerwithintheestablishedtimeframeandtheindependentauditsoftheCity’sfinancialstatementsforthe2012through2014fiscalyearswerenotcompletedtimely.Furthermore,theCouncilandCityofficialshadnotdevelopedamultiyearfinancialplanandacomprehensivecapitalplanthatwasinaccordancewiththeCharter.Asaresult,theCouncil’sability


toeffectivelymonitorthefinancialoperationsandfinancialconditionoftheCityandtomakeinformedfinancialdecisionshasbeenhindered.

Comments of Local Officials

The results of our audit and recommendations have been discussedwith City officials, and theircomments,whichappearinAppendixA,havebeenconsideredinpreparingthisreport.Cityofficialsgenerally agreed with our recommendations and indicated they planned to initiate corrective action.


Background

Introduction

The City of Troy (City) is located in Rensselaer County (County) and has approximately 50,130 residents. The nine-member City Council (Council) is the City’s legislative branch, which consists of the President and eight other elected members. The Mayor is the chief executive officer and is responsible for the administration of all City affairs. The City Comptroller (Comptroller) is the chief fiscal officer and is responsible for the oversight and accountability of all of the City’s financial activity. The City Charter (Charter) governs City operations and outlines the powers and duties of the Council, Mayor and Comptroller.

The City’s budgeted appropriations for the 2015 fiscal year were approximately $83.1 million, which were funded primarily with revenues from real property taxes, sales tax and water and sewer charges. The City employs approximately 600 full- and part-time employees, who are assigned to various departments that provide services including general government support, road maintenance, snow removal, water and sewer services, law enforcement and fire protection.

During the 1990s, the New York State Legislature authorized the City to issue debt to liquidate cumulative deficits in the City’s general fund for the years ending December 31, 1993, 1994 and 1995. At this time, the City of Troy Supervisory Board Act was enacted,1 creating the Troy Supervisory Board (Supervisory Board).2 The Supervisory Board has certain oversight powers and duties in connection with the finances of the City. In addition, the State Comptroller, pursuant to New York State Local Finance Law, conducts an annual review of the revenue and expenditure estimates in the City’s proposed budget and may make recommendations to the City concerning those estimates.

In recent years, budget review letters to the City from the Office of the State Comptroller (OSC) have disclosed inadequately funded contingency appropriations, a lack of adequate funding for capital costs and declining financial trends in the general, water and sewer funds. These negative financial trends have increased concerns relating to the City’s financial position. For example, the City’s capital reserve balance has decreased from approximately $6.5 million

1 Laws of 1994, Chapter 721 as amended by, among other laws, Laws of 1995, Chapter 187

2 The Comptroller serves as the Chair of the Supervisory Board. He may designate a representative to act on his behalf.


in 2006 to $900,000 in 2014.3 Furthermore, theCity has recentlyrealizedcombinedoperatingdeficitsinthegeneral,waterandsewerfundsthathaveapproached1percentofthecombinedexpenditures.Such operating deficits can risk triggering the reimposition of the“emergency period” under the Supervisory BoardAct and certainincreasedoversightofCityfinancesbytheSupervisoryBoard.

In2007, theCity, theCitiesofAlbany (representedby theAlbanyWater Board), Cohoes, Rensselaer andWatervliet and the VillageofGreenIsland(theAlbanyPoolCommunitiesorAPCs)joinedina comprehensive intermunicipal venture led by the Capital District Regional Planning Commission (CDRPC) to develop a Phase I Combined Sewer Overflows (CSO)4 Long-Term Control Plan (Plan).TheoriginaldraftPlanwassubmittedtotheNewYorkStateDepartmentofEnvironmentalConservation(NYSDEC)onJune11,2011,withthefinalPlanapprovedbyNYSDEConJanuary15,2014.The City’s participation is designed to help the Citymeet federalCleanWaterActgoalsbycompletingprojects topreventuntreatedeffluentfromenteringtheHudsonRiver.5 The entities will be charged for their proportionate share6ofthetotalexpendituresincurredrelatedto the Plan and any grant money that is received will be applied as a credittotheentities.AccordingtothePlanImplementationSchedule(Schedule)datedFebruary4,2015,thePlanwillhaveanapproximate$32.3millioncost to theCityover thenext13years.CDRPCwillbe maintaining the accounting records over the duration of the implementation of the Plan.

The Council also approved 15 other projects with a combined maximum estimated cost of almost $36.6 million during ouraudit period.These projects included, butwere not limited to, thereconstruction of various City infrastructure that was damaged in 2011byTropicalStormIrene,installationofawatersprinklersystemattheFrearParkgolfcourse,courtandpolicefacilityrenovationsandvarious street paving projects.

TheobjectiveofourauditwastoreviewtheCity’sfinancialcondition.Ourauditaddressedthefollowingrelatedquestion:

Objective

3 AsreportedbytheCityinits2014annualfinancialreportfiledwithOSC4 TheAPCscollectivelyownandoperate92CSOsthatdischargetotheHudsonandMohawkRiversandtheirtributaries.EachoftheAPCscontributescombinedsewageflowtoawastewatertreatmentplantownedandoperatedbyeithertheAlbanyCountySewerDistrictortheRensselaerCountySewerDistrict.

5 TheCityusescombinedsewersystemsthatcollectstormwaterrunoff,domesticsewage and industrial wastewater in the same pipe. During heavy rain and snow events,thecapacityofthesewersystemcanbeexceededandthecombinedseweroverflowwillbedischargeddirectlyintotheriver.

6 TheCity’sproportionateshareis34.76percent.


• Does the Council adopt realistic budgets that are structurally balanced, routinely monitor financial operations and takeappropriateactionstomaintaintheCity’sfiscalstability?

WereviewedtheCity’sfinancialconditionfortheperiodJanuary1,2012throughMay31,2015.

We conducted our audit in accordance with generally accepted governmentauditingstandards(GAGAS).Moreinformationonsuchstandards and the methodology used in performing this audit are includedinAppendixBofthisreport.Unlessotherwiseindicatedinthis report, samples for testingwereselectedbasedonprofessionaljudgment,asitwasnottheintenttoprojecttheresultsontotheentirepopulation.Whereapplicable,informationispresentedconcerningthevalueand/orsizeoftherelevantpopulationandthesampleselectedforexamination.

The results of our audit and recommendations have been discussed withCityofficials,andtheircomments,whichappearinAppendixA,havebeenconsideredinpreparingthisreport.Cityofficialsgenerallyagreed with our recommendations and indicated they planned to initiate corrective action.

The Council has the responsibility to initiate corrective action.Awrittencorrectiveactionplan(CAP)thataddressesthefindingsandrecommendations in this report should be prepared and forwarded to ourofficewithin90days,pursuanttoSection35ofGeneralMunicipalLaw.FormoreinformationonpreparingandfilingyourCAP,pleaserefer to our brochure,Responding to an OSC Audit Report,whichyou received with the draft audit report. We encourage the Council to makethisplanavailableforpublicreviewintheCityClerk’soffice.

Scope andMethodology

Comments ofLocal Officials andCorrective Action


Financial Condition

Financial condition may be defined as a City’s ability to balancerecurring expenditure needswith recurring revenue sources,whileproviding desired services on a continuing basis. A city in goodfinancial condition generally maintains adequate service levelsduring fiscal downturns and develops resources to meet futureneeds.Conversely,acitywithadecliningfinancialconditionusuallystruggles to balance its budget, suffers through disruptive serviceleveldeclines,haslimitedresourcestofinancefutureneedsandhasminimal cash available to pay current liabilities as they become due.

TheCouncilandofficialsareresponsibleforthefinancialplanningand management necessary to maintain the City’s fiscal health.To maintain good fiscal health, it is imperative that the Counciland officials develop and adopt realistic and structurally balancedbudgets; manage fund balance and cash balance levels; properly authorizecapitalprojects(projects),monitor theirfinancialactivityand close-out completed projects in a timely manner; identify and adjust to long-term changes; and develop comprehensive multiyear financialandcapitalplans.ToeffectivelymonitortheCity’sfinancialoperations and financial condition, the Council needs complete,accurateandtimelyfinancialinformation.

Thefinancialconditionofthegeneralandwaterfundsdeclinedoverthe last threefiscalyearsbecause theCouncil adoptedbudgets forthe general fund that were not structurally balanced and for the water fund that were not realistic and contained increasing amounts of interfundtransferstothegeneralfundtosubsidizethegeneralfund’soperations.Thegeneralfund’sfinancialconditionwilllikelydeclinefurther during 2015 because the adopted budget for 2015 is againnot structurally balanced. In addition, the adopted budget for thewaterfunddoesnotincludefundingtofinancewaterimprovementsthatwereincludedintheCity’scapitalplan.IftheCouncildecides,as in recent years, to amend the budget during the fiscal year tofinancethesewaterimprovements,thiscouldsignificantlyimpactthefinancialconditionofthewaterfund.

The Council adopted budgets for the sewer fund that were not realistic duringthelastthreefiscalyears.However,theCityrealizedoperatingsurplusesduring2013and2014becauserevenueshortfallswereoffsetbytheCitynotexpendingtheamountofbudgetedappropriationsin2013and2014andbecausetheCityreceivedasignificantunbudgetedrevenue in 2014.As a result, the financial condition of the sewerfund improvedover the last threefiscalyears.However, thesewer


fund’scashbalancesattheendofthelastthreefiscalyearswerenotsufficienttorepaytheamountsowedtothegeneralandwaterfunds.Asaresult,thesewerfundisstillnotfiscallyhealthy.Theadoptedbudgetforthesewerfundfor2015againdoesnotcontainrealisticestimates for revenues but will likely be offset again by overestimated appropriations.Asaresult,thesewerfund’sfinancialconditionmaynotimproveduring2015.

We also found that the Comptroller failed to maintain individual accounting records for each capital project (project) and the Council did notmonitor the financial activity of projects.As a result, oneproject we reviewed was overspent, project expenditures werefundedthroughtheuseofotherprojects’funds,debtproceedshavebeenimproperlycommingledwithotherCityfundsand$85,334indebtproceedswereusedforanunauthorizedpurpose.Inaddition,theCouncildidnotauthorizetheclosingoutofanycompletedprojectsduringourauditperiod,resultinginatleast13completedprojectsnotbeing closed out in a timely manner. When the City closes out all of itscompletedprojects,itistheresponsibilityoftheoperatingfundsto fundanydeficits,whichcould significantly impact thefinancialcondition of the operating funds.

TheCouncilalsodidnotreceiveadequatefinancialreports,theCity’sannualfinancialreports(AFRs)werenotfiledwithOSCtimelyandthe independent audits of the City’s financial statements were notcompletedinatimelymanneranddidnotincludeafindingrelatedtothelackofappropriateaccountingforcapitalprojects.Inaddition,theCouncilandofficialshadnotdevelopedamultiyearfinancialplanand a comprehensive capital plan that was in accordance with the Charter.Asaresult,theCouncil’sabilitytoeffectivelymonitorthefinancialoperationsandfinancialconditionoftheCityandtomakeinformedfinancialdecisionshasbeenhindered.

TomaintaintheCity’sfiscalstability,itisimportantfortheCouncilto adopt realistic budgets that are structurally balanced (recurring revenues finance recurring expenditures) and monitor the actualresults and budgeted estimates of each fund regularly throughout the year.Itisalsotheresponsibilityofofficialstoensurethattheleveloffundbalancemaintainedissufficienttoprovideadequatecashflow.Acontinuousdeclineinfundbalanceindicatesadeterioratingfinancialcondition.TheCityshouldmaintainareasonablelevelofunexpendedsurplus funds,7 which allows it to hedge against unanticipated expenditures, revenues shortfalls or both. This reasonable amount

7 Unexpendedsurplusfundsconsistsofunassignedfundbalanceinthegeneralfundandassignedunappropriatedfundbalance,lessanyamountforencumbrances,inthe water and sewer funds.

Operating Funds


should consider various factors such as timing of receipts and disbursements,volatilityofrevenuesandexpenditures,contingencyappropriations and reserves that have been established for various purposes. While fund balance can be appropriated in the budget to helpfinanceoperations,consistentlydoingso,insteadofplanningtouserecurringrevenuesources,candepletethefundbalancetolevelsthatarenotsufficientforcontingenciesandcashflow.

GeneralFund–During the last threefiscal years, theCouncil hasadopted general fund budgets that have resulted in no significantbudgetvariancesintotal.However,theCouncilbudgetedforplannedoperatingdeficits8ineachofthelastthreefiscalyearsbyappropriatingreserves9tohelpfinancethebudgets.Asaresult,wefoundthattheCityexperiencedplanneddeficitstotaling$1.9millioninthosesameyears and a decline in total fund balance in the general fund. Figure 1 illustratesthegeneralfund’sresultsofoperationsoverthelastthreefiscalyears.

8 AplannedoperatingdeficitoccurswhentheCouncilintentionallyadoptsabudgetinwhichestimatedrevenuesarelessthanappropriations,withthedifferencetobefundedwithappropriatedfundbalance,reservesorboth.

9 The Council appropriated reserves as a financing source in its budgets of$1,782,200for2012,$415,000for2013and$1,400,000for2014,foratotalof$3,597,200.

Figure 1: General Fund – Results of Operations2012 2013 2014

Beginning Fund Balance $13,793,900 $13,773,569 $12,933,142a

Operating Surplus/(Deficit) ($20,331) ($840,415) ($1,037,643)b

Ending Fund Balance $13,773,569 $12,933,154 $11,895,499

a The difference between the beginning and prior year ending fund balance is due to a prior year adjustment.

b Our review of the general fund’s accounting records for 2014 disclosed a receivable that was overstated by $2,254. As a result, we reduced the general fund’s total revenues by this amount in order to properly calculate the general fund’s operating deficit.

We also found other factors that contributed to the general fund realizing operating deficits during the last three fiscal years. Forexample, the 2013 and 2014 adopted budgets contained revenuesforthesaleofrealpropertythatwerenotrealizedtotaling$650,000and $600,000, respectively. This contributed to revenues beingoverestimatedbymorethan$1.4millionfor2013and$539,688for2014. Inaddition, thegeneral fundmade interfund transfers to thecapitalprojects fundduring2012and2013 thatwerenot includedintheadoptedbudgettotaling$911,470and$805,234,respectively.Instead, theCouncilamended thebudgetsduring thefiscalyear tomaketheseinterfundtransfers.However,wefoundthattheinterfund


transfers that weremade to the capital projects fund during 2012and2013exceeded theamendedbudgetamountsby$211,470and$76,375,respectively.

The general fund would have realized more significant operatingdeficits during each of the last three fiscal years if thewater funddid not subsidize the general fund’s operations through interfundtransfers totaling$6,416,000.10Without thesesubsidies, thegeneralfundwouldhaveexperiencedoperatingdeficitsduringeachof thelastthreefiscalyearstotalingmorethan$8.3million.

AlthoughtheCityhasasubstantialamountoftotalfundbalance,asignificantportionofitisrestrictedandmayonlybeusedforspecificpurposes.Specifically,betweenapproximately$8.6millionand$9.2millionof theCity’s total fundbalanceat theendof the last threefiscalyearswasrestrictedfordebtserviceassociatedwiththebondsissuedbytheCitytoliquidatethecumulativedeficits.Thesefundsmayonlybeused in accordancewith theenacteddeficitfinancinglegislation.Inaddition,betweenapproximately$1.5millionand$3.5million, or asmuch as 25 percent of theCity’s total fund balanceat the end of the last three fiscal years,was restricted for specificpurposes for which the City had established the reserves. Figure 2 illustrates the composition of the fund balance of the general fund at theendofthelastthreefiscalyears.

10The $6,416,000 in water fund subsidies consisted of $1,972,000 for 2012,$1,972,000for2013and$2,472,000for2014.

Figure 2: General Fund – Fund Balance Composition2012 2013 2014

Total Fund Balance $13,773,569 $12,933,154 $11,895,499

Less: Reserve for Debt $8,631,412 $8,771,852 $9,179,373

Less: Other Reservesa $3,483,133 $2,642,954 $1,457,522

Less: Nonspendable Fund Balance $30,241 $38,950 $30,490

Less: Assigned Unappropriated Fund Balance $684,841 $181,577 $153,625

Unassigned Fund Balance $943,942 $1,297,821 $1,074,489

a Other Reserves are comprised of a capital reserve, snow and ice removal reserve, insurance reserve, workers’ compensation reserve and unemployment insurance reserve.

Asaresult,whilethegeneralfundhasahealthytotalfundbalance,thegeneralfund’sunassignedfundbalanceofonly$1,074,489attheend of 2014 is only 1.6 percent of the 2015 general fund adoptedappropriationsof$66.1million.Inaddition,theCity’sotherreserves’balanceshavedecreasedby$2.9millionor67percentoverthelastthreefiscalyears,fromalmost$4.4millionatthestartofthe2012fiscal


yearto$1.5millionattheendofthe2014fiscalyear.11Furthermore,thegeneralfund’scashbalance12ofonly$987,40813attheendof2014isjust1.5percentofthe2015generalfundadoptedappropriations.TheCouncil’sadoptionofbudgetsthatwerenotstructurallybalancedduring2012through2014resultedinthedeclineofthegeneralfund’sfinancialcondition.

We reviewed theCity’s2015general fundbudget andproject thatbudgetedrevenuesforpaymentsinlieuoftaxes(PILOTs),14 mortgages taxes and interest and penalties on real property taxes have beenoverestimated15 by a total of $225,000. In addition, theCity againbudgeted revenues for the sale of real property totaling $650,000.This is the same property that the City budgeted to receive revenue forduring2013and2014butforwhichnorevenuewasrealized.AsofMay31,2015,theCityhadnotrealizedanyrevenuesforthesaleof realproperty.However, theMayor stated that theCity is in theprocessofnegotiatingandfinalizingapropertysaleforapproximately$650,000.Ifthesebudgetedrevenuesarenotrealizedduring2015,itcouldsignificantlyimpactthegeneralfund’sresultsofoperations.

We also question the reasonableness of certain budgeted appropriations.Forexample,budgetedappropriationsforequipmentand capital outlay totaled $122,219, although the City’smultiyearcapital plan that is included in the adopted budget includes the purchaseofvehiclesandequipmenttotaling$419,750.Inaddition,thebudgetonlyincludesa$650,000contingencyappropriation,whichrepresents less than 1 percent of the total budgeted appropriations of $66.1million.Asaresult,weconsiderthisamountnottobereasonablebecause itprovides theCitywith limitedflexibility in theeventofunforeseencircumstancesthatrequireadditionalfunds.Furthermore,allsixoftheCity’scollectivebargainingagreementsareexpiredandthe2015budgetdoesnotcontainprovisionsforanypotentialincreasedcosts associated with settling the collective bargaining agreements. By underfunding the contingency appropriation, the City’s abilityto pay any liabilities which may arise from contract negotiations in

11TheCityhaddepleteditssnowandiceremovalreserveasofDecember31,2014.12Weusedthegeneralfund’scashbalancesthatwererecordedasunrestrictedfor

our analysis.13Our review of the general fund’s accounting records for 2014 disclosedreceivablesthatwereoverstatedby$16,454.Thisresultedbecausechecksthatwere receivedby theCityprior to theendof thefiscalyearwere recordedasreceivables,althoughtheyshouldhavebeendepositedandrecordedascashsincetheywerereceivedbeforetheendofthefiscalyear.Asaresult,weincreasedthegeneralfund’sunrestrictedcashbythisamountforouranalysis.

14TheComptrollercouldnotprovideuswithaPILOTschedule supporting thisbudgeted revenue during our review. Therefore, we used historical data toperform our analysis of this budgeted revenue.

15TheCitybudgetedatotalof$1,950,000forthesethreerevenues.


2015willbelimited.Lastly,budgetedappropriationsfordebtservicepayments are not reasonable because the City budgeted $195,454less than theamounts thatwere included in theCity’sdebtserviceschedules.

Wealso found that the 2015 budgetwas not structurally balancedbecause the City is again relying on the appropriation of reserves totaling$725,000,asubsidyfromthewaterfundthroughaninterfundtransfer totaling almost $2 million and the sale of real propertytotaling$650,000,inordertofinancethegeneralfund’soperations.As a result, the City continues the budgetary practice of relianceon fundbalanceandnon-recurring revenuesasameans tofinancerecurringexpenditures,whichwilllikelyresultinthefurtherdeclineofthegeneralfund’sfinancialconditionduring2015.Officialsshouldcloselymonitor thegeneral fund’soperationsduring theremainderofthe2015fiscalyearandmakeanyadjustmentsthatarenecessarytopreventafurtherdeclineinthegeneralfund’sfinancialcondition.

Water Fund – The Council did not adopt realistic budgets during the lastthreefiscalyearsandtheadoptedbudgetscontainedincreasingamountsofinterfundtransferstothegeneralfundtosubsidize16 the general fund’s operations. Consequently, the water fund realizeda small operating surplus of $15,516 during 2012 and significantoperating deficits of approximately $4.8 million and $1.3 millionduring2013and2014,respectively.Asaresult,totalfundbalanceintheCity’swaterfundhasdecreasedbymorethan$6.1millionor67percentoverthelastthreefiscalyears,fromnearly$9.2millionatthestartofthe2012fiscalyearto$3millionattheendofthe2014fiscalyear.Figure3 illustrates theCity’swater fund fundbalance trendsoverthelastthreefiscalyears.

16Thewaterfundsubsidiesconsistedof$1,972,000for2012,$1,972,000for2013and$2,472,000for2014,foratotal$6,416,000.

Figure 3: Water Fund – Fund Balance2012 2013 2014

Beginning Fund Balance $9,173,570 $9,189,086 $4,347,204a

Operating Surplus/(Deficit) $15,516 ($4,841,883) ($1,311,807)b

Ending Fund Balance $9,189,086 $4,347,203 $3,035,397

Less: Nonspendable Fund Balance $0 $0 $117,960

Assigned Unappropriated Fund Balance $9,189,086 $4,347,203 $2,917,437

a The difference between the beginning and prior year ending fund balance is due to a prior year adjustment.b Our review of the water fund’s accounting records for 2014 disclosed a receivable that was overstated by

$352,147. As a result, we reduced the water fund’s total revenues by this amount in order to properly calculate the water fund’s operating deficit.


The Council did not adopt realistic budgets for the water fund duringthelastthreefiscalyearsbecausetheyconsistentlybudgetedrevenue estimates for metered water sales for the City17 that could notberealizedbasedonthewaterratesineffect.Specifically,during2012through2014,thewaterfundrealizedrevenuesaveraging$4.6million for metered water sales. However, the Council budgetedrevenue estimates formeteredwater sales averaging $5.1million,resulting in metered water sales being overestimated by a total of nearly $1.6 million over the last three fiscal years. This resultedalthough theCouncilandofficialshadhistoricaldata toaccuratelybudget this revenue source because water rates for the City have not increasedsince2007.

In addition, thewater fundmade interfund transfers to the capitalprojects fund during 2013 and 2014 thatwere not included in theadopted budget totaling $4,360,000 and $1,640,000, respectively.Instead, theCouncilamended thebudgetsduring thefiscalyear tomake these interfund transfers. These unplanned transfers were a significantcontributingfactortothetotalappropriationsforthewaterfundbeingunderestimatedduring2013and2014by$4.2millionand$831,778,respectively.

Thewaterfund’scashbalancehasalsosteadilydeclinedfrom$4.9millionatthestartofthe2012fiscalyearto$2millionattheendofthe2014fiscalyear,or15percentof the2015water fundadoptedappropriations. However, we found that the water fund had a netinterfundliabilityattheendof2014totaling$1.8million.Asaresult,if the City had repaid all interfund receivables and liabilities at the endof2014,thewaterfundwouldhavehadacashbalanceofonly$188,049,representingapproximately1.5percentofthe2015waterfund adopted appropriations. The Council’s adoption of budgetsthatwerenotrealisticandthegeneralfund’scontinuedrelianceonsubsidiesfromthewaterfundduring2012through2014resultedinthedeclineofthewaterfund’sfinancialcondition.

WereviewedtheCity’s2015waterfundbudgetandfoundthatthebudgeted revenues were reasonable and the budget was structurally balancedbecause thewater rates thatare ineffectduring2015aresufficient to fund the operating expenditures of the water fund.However, we question the reasonableness of certain budgetedappropriations.Forexample,budgetedappropriationsforequipmentand capital outlay totaled $127,250, although the City’smultiyearcapital plan that is included in the adopted budget includes the

17TheCityalsorealizesrevenuesfromthesaleofwatertotheCityofRensselaer,VillageofMenandsandTownsofEastGreenbush,NorthGreenbush,Brunswick,Poestenkill,Schaghticoke,WaterfordandHalfmoonbasedonwholesalewatercontracts.


purchaseofvehiclesandequipmenttotaling$460,000.Similarly,thebudget did not include an interfund transfer to the capital projects fund, although theCity’smultiyear capital plan that is included intheadoptedbudgetincludes$1.2millioninwaterimprovements.18IftheCouncildecides,asinrecentyears,toamendthebudgetduringthefiscalyeartomakeinterfundtransferstothecapitalprojectsfundto finance these expenditures, this could significantly impact thefinancialconditionof thewater fundduring2015.Officials shouldcloselymonitorthewaterfund’soperationsduringtheremainderofthe2015fiscalyearandmakeanyadjustmentsthatarenecessarytopreventafurtherdeclineinthewaterfund’sfinancialcondition.

Sewer Fund–Thesewerfundrealizedasignificantoperatingdeficitof $306,964 during 2012 and operating surpluses of $34,614 and$736,029during2013and2014,respectively.Asaresult,totalfundbalanceintheCity’ssewerfundincreasedoverthelastthreefiscalyears,from$398,583atthestartofthe2012fiscalyearto$862,266attheendofthe2014fiscalyear.Moreimportantly,thesewerfundwentfromadeficit $615,356unassigned fundbalance at the endof the2012fiscalyeartoa$482,594assignedunappropriatedfundbalanceattheendofthe2014fiscalyear,notincluding$379,672inrecordedencumbrances.19 Figure 4 illustrates theCity’s sewer fundbalancetrendsoverthelastthreefiscalyears.

18Expenditures forwater improvements have been funded through an interfundtransfer from the water fund to the capital projects fund in recent years.

19 Commitments related to unperformed contracts for goods and services predominately related to the Plan.

Figure 4: Sewer Fund – Fund Balance2012 2013 2014

Beginning Fund Balance $398,583 $91,619 $126,237a

Operating Surplus/(Deficit) ($306,964) $34,614 $736,029b

Ending Fund Balance $91,619 $126,233 $862,266

Assigned Unappropriated Fund Balance $706,975 $385,142 $862,266

Unassigned Fund Balancec ($615,356) ($258,909) N/A

a The difference between the beginning and prior year ending fund balance is due to a prior year adjustment.b Our review of the sewer fund’s accounting records for 2014 disclosed a receivable that was understated by

$352,147. As a result, we increased the sewer fund’s total revenues by this amount in order to properly calculate the sewer fund’s operating surplus for 2014.

c The sewer fund’s assigned unappropriated fund balance consisted of encumbrances that were in excess of the sewer fund’s total fund balance at fiscal year-end 2012 and 2013, resulting in a deficit unassigned fund balance being recorded for those years.

Althoughthesewerfund’sfinancialconditionimprovedoverthelastthreefiscalyears,theCouncildidnotadoptrealisticbudgetsforthesewerfundduringthelastthreefiscalyearsbecausetheyconsistently


budgeted revenue estimates for sewer rents20thatcouldnotberealizedbased on the sewer rates in effect.21Specifically,during2012through2014, the sewer fund realized revenues averaging$2.5million forsewer rents.However, theCouncil budgeted revenue estimates forsewer rents averaging $2.9million, resulting in sewer rents beingoverestimatedbyatotalofnearly$1.1millionoverthelastthreefiscalyears.TheCityrealizedoperatingsurplusesduring2013and2014becausetherevenueshortfallswereoffsetbytheCitynotexpendingthe amount of budgeted appropriations and the City received an unbudgetedrevenueof$352,147in2014foranemergencydisasterassistance reimbursement.

Thesewerfund’scashbalanceincreasedfrom$189,272atthestartofthe2012fiscalyearto$517,129attheendofthe2014fiscalyear,or12percentofthe2015sewerfundadoptedappropriationsof$4.3million.However,atthesametime,theamountthatthesewerfundowed to general or water funds at the end of the last three fiscalyearsalsoincreased.Specifically,thesewerfund’sinterfundliabilityat theendof the last threefiscalyears totaled$327,000,$655,767and$705,846.Asaresult,thesewerfund’scashbalancesattheendof the last threefiscal years of $134,719, $389,890 and$517,129,respectively,werenot sufficient to repay the amounts owed to thegeneralorwaterfunds.Asaresult,althoughthefinancialconditionofthesewerfundhasimprovedoverthelastthreefiscalyears, thesewerfundisstillnotfiscallyhealthy.Inaddition,thesewerfund’scontinued reliance on the general and water funds has contributed to theirdecliningfinancialcondition.

WereviewedtheCity’s2015sewerfundbudgetandwequestionthereasonableness of certain budgeted revenues and appropriations. For example, theCityhas againbudgeted revenue estimates for sewerrents thatweprojectwill notbe realizedbasedon the sewer ratesin effect.Although the City increased sewer rates by $0.67922 per 1,000gallons(30percent)from2014to2015,wedonotbelievethisrateincreasewillgeneratetheadditional$1,107,82723 of sewer rent revenue thatwas included in the 2015 budget compared to actualrevenuesrealizedin2014.Instead,weprojectthattheCitywillrealizerevenuesforsewerrentsofapproximately$3.7million,resultinginarevenueshortfallofapproximately$300,000.

20 The City also budgets another revenue for sewer rents from the County based on a contract with the County.

21TheCityincreasedsewerratesby$0.74per1,000gallonsfrom2012to2013.22TheCityincreasedsewerratesfrom$2.231per1,000gallonsofwaterusagein2014to$2.91per1,000gallonsofwaterusagein2015.

23WhentheCityincreasedsewerratesby$0.74per1,000gallonsfrom2012to2013,thisonlygeneratedapproximately$550,000inadditionalrevenue.


However,weprojectthatthisrevenueshortfallwillbeoffsetbecausewedonotanticipatethattheCitywillexpendtheentireamountofthebudgetedappropriationsthatwereincludedinthe2015sewerfundbudget.Specifically,thesewerfundbudgetedappropriationsrelatedtotheCSOPlanarenotreasonable.AccordingtotheScheduledatedFebruary4,2015,theCitywillincurexpenditurestotaling$1,235,718related to thePlan in2015.However, the adoptedbudget containsappropriationstotaling$1,788,000orapproximately$550,000morethantheamountoutlinedinthePlan.AsofMay31,2015,theCityhadonlyincurredexpenditurestotaling$260,388relatedtothePlan.

Although the budgeted revenues and appropriations were notreasonable,weconcludedthe2015sewerfundbudgetwasstructurallybalancedbecauserecurringrevenuesaresufficienttomeetrecurringexpenditures.Nonetheless,officialsshouldcloselymonitorthesewerfund’soperationsduring the remainderof the2015fiscalyear andmake any adjustments that are necessary to prevent a decline in the sewerfund’sfinancialcondition.

Subsequenttocompletionoffieldworkandbeforeissuingthisreport,weconductedabudgetreviewoftheCity’s2016proposedbudget.The budget review included findings detailing several revenuesthat appeared to be overestimated and several appropriations that appeared to be underestimated and cautioned that the provision for contingencies was minimal. City officials did not address ourfindingsastheyfinalizedthebudget.Tothecontrary,thecontingencyappropriationwasreducedbytheCity(from$600,000intheproposedbudget to $455,000 in the adopted budget).We again caution theCitythatthisbudgetprovidestheCitywithlimitedflexibilityintheevent of unforeseen circumstances and could easily result in further deteriorationoftheCity’sfinancialcondition.

Overall, the Council’s budgeting practices and lack ofmonitoringsignificantlycontributed to theCity’sdecliningfiscalhealthduringourauditperiod.ItisimportantthattheCounciladoptrealisticandstructurally balanced budgets and monitor the actual results and budgeted estimates of each fund regularly throughout the year. This will allow the Council to identify potential problems and take needed corrective action in a timely manner. The failure to do so could lead toafurtherdeteriorationoftheCity’sfinancialcondition.

Retirement Appropriations – Our review of the budgeted appropriationsforthegeneral,waterandsewerfundsalsodisclosedthat the City is changing its method of accounting for retirement


expenditures24during2015,whichwillresultintheCityrecognizingonly three quarters of their traditional retirement expenditures in2015.Asa result, the2015budget includesonly threequarters,orapproximately$5.7million,oftheCity’sestimatedretirementcostsandexcludes theapproximate$1.9million incostsassociatedwiththe period January through March 2016. However, in 2016 andfuture years, theCitywill be required to recognize100percent oftheir retirement costs each year. As a result, if retirement costsremainat2015levels,the2016budgetmustincludeanincreaseofapproximately$1.9millioninretirementappropriations,anamountwhichrepresentsapproximately10percentofthe2015taxlevy.

Furthermore, the City should record a prior period adjustment torecordonly2014retirementcostsin2014.Thiswouldresultinallofthe2015retirementcostsbeingrecordedin2015eventhoughthefirstquarterswerepaidin2014andthecostsforthelastthreequarters’costswillbepaidin2016.Thetimingofthepaymentmayhelpwithcashflow,butitdoesnotchangewhentheactualcostswereincurred.

Complete and accurate accounting records for projects are necessary for project management and proper financial reporting. Becauseprojects are budgeted on an individual project basis and legal and contractual requirementsmayvary fromoneproject to another, anindividual project fund should be established for each authorizedproject with corresponding individual accounting records maintained for each. The Comptroller is responsible for maintaining financialrecordsforeachprojectwithsufficientinformationtodocumenttheproject’scompletefinancialhistoryandestablishaccountability forresources provided for a particular purpose.

The Council should adopt a resolution at the inception of each project,identifyingtheproject,authorizingthemaximumestimatedcostandestablishinghowtheprojectwillbefinanced.TheCouncilisresponsible for monitoring the status of each project by periodically reviewing financial reports that compare actual revenues andexpenditurestotherelatedbudget.Thefailuretolimitexpenditures

24Historically theCityhasaccounted for retirementexpendituresusing thecashbasisofaccountingbyrecordingtheentireamountpaideachfiscalyearasanexpenditureinthatyear.However,theCity’sretirementbill,whichtheCityhastraditionallypaidinDecembereachyear,isfortheperiodcoveringAprilofthecurrentyearthroughMarchoftheensuingyear.Asaresult,theCity’spaymentshavecoveredthreequarters(ninemonths)ofthecurrentyear’sobligationsandonequarter(threemonths)ofthenextyear’sobligations.In2015,theCitydoesnotplanonmakingitspaymentinDecember,butwillinsteadmakeitspaymentin February 2016. In addition, the City is planning to modify its method ofaccountingforthisexpendituretorecordonlythethreequartersofthecostwhichisattributabletotheperiodofAprilthroughDecemberof2015inthe2015fiscalyear.Theremainingthreemonthswillberecordedasanexpenditurein2016.

Capital Projects


to available authorizations creates the risk thatmoneymay not beavailablewhenrequiredfornecessaryexpenditures.Inaddition,NewYorkStateLocalFinanceLaw(FinanceLaw)providesthatproceedsof bonds or bond anticipation notes may not be commingled with other City funds25andonlycanbeexpendedforthepurposeforwhichtheobligationswereissued.Furthermore,FinanceLawauthorizescitiesto apply proceeds of bonds or bond anticipation notes to reimburse other city funds temporarily advanced to pay for projects, so longas thebondsorbondanticipationnoteswereauthorizedbefore thetemporary advance of funds.

Onceaproject iscompleted, theCouncil shouldadopta resolutionto close the project and dispose of any unexpended balance basedon the project’s funding source(s). Unexpended funds originatingfrom bonds or bond anticipation notes must be applied to the related debt (transferred to the debt service fund) and unexpended fundsoriginating from interfund transfers or advances must be returned to the fund(s) that originally supplied the resources.

AccountingRecords,AuthorizationandMonitoring – The City did not maintain individualaccounting records foreachauthorizedproject.Instead, theComptroller accounted for all of theCity’s authorizedprojects inonegeneral ledger.Asa result,wecouldnotdeterminethe assets, liabilities and fundequityof eachof theCity’sprojectsnorcould theComptroller readilyextractdataon the revenuesandexpenditures of each individual project. This also contributed tobudgetstatusreportsfortheCity’sprojectsnotbeingpresentedtotheCouncilduringourauditperiod.Asa result, theCouncilcouldnoteffectivelymonitortheCity’sprojectsorensurethatexpendituresdidnotexceedtheauthorizedamounts.

Based on these weaknesses, we reviewed five projects26 that were authorized by the Council during our audit period to determine ifproject expenditures remainedwithin themaximum estimated costthatwasestablishedbytheCouncilandifprojectfinancingsourcesthat were established by the Council were sufficient to fund theexpendituresincurred.Wefoundthatforoneofthefiveprojects,the

25TheCouncilmay,byresolution,depositinasinglespecialaccounttheproceedsof two or more debt issuances but may not commingle debt proceeds with other Cityfunds,exceptmoneysappropriatedforthesameprojectforwhichthedebtwas issued.

26WeusedacomputerizedrandomnumbergeneratortoselectfiveprojectsthatwereauthorizedbytheCouncilduringourauditperiod.ThefiveprojectsconsistedoftheTomhannockReservoirDam–2013WaterImprovements(project604),2014General FundCapital Plan (project 608), RiverfrontNorth Extension (project609),2014StreetPavingProgram(project610)and2014DepartmentofPublicUtilities Capital Plan (project 611), which had authorized maximum costs of$4,360,000,$2,908,000,$1,125,000,$725,000and$1,640,000,respectively.


project expenditures exceeded the Council’s authorized maximumcost of $725,00027 by $425,261. Therefore, the project financingsourcesthatwereestablishedbytheCouncilwerealsonotsufficientto fund the expenditures incurred.As ofMay 31, 2015,we foundthat the general fund had only transferred to the capital projects fund $500,000ofthe$1,150,261incashneededtofundtheexpendituresthatwereincurred.Therefore,otherprojects’fundstotaling$650,261were used to pay for this project’s expenditures,28 resulting in the general fund owing this amount to the capital projects fund.

Three29 of the other four projects in our sample also used other projects’fundstopayforexpenditures.However,asofMay31,2015,only two of these three projects still owe the capital projects fund. Specifically,theCityhadincurredexpenditurestotaling$38,668forproject 60930 and$466,753 for project 611,31 but no cash had been transferred from the general fund or water fund, respectively, tofinance theexpenditures thatwere incurred.Asa result,asofMay31,2015,otherprojects’ funds totaling$505,421wereused topayfor these two projects’ expenditures, resulting in the general fundowinganadditional$38,668tothecapitalprojectsfundandthewaterfundowing$466,753tothecapitalprojectsfund.However,becausethe City did not maintain individual accounting records for each authorizedprojectandproject fundswerecommingled in thesamebankaccounts,officialscannotdeterminewhichprojects’fundshavebeenusedtopayotherprojects’expendituresand,correspondingly,which projects are owed.

TheComptroller’sfailuretomaintainindividualaccountingrecordsfor each authorized project prevented theCouncil frombeing abletoproperlymonitortheprojectsordeterminethefinancialconditionofeachproject.Inaddition,comminglingcashwithoutmaintainingaccuraterecordsandaccountabilityovereachproject’scashbalanceincreasestheriskthatoneproject’scashcouldincorrectlybeusedtofinanceanotherproject’sorfund’soperations.Withoutareliablebasis

27TheCouncilestablishedanauthorizedmaximumcostfortheprojectof$725,000,whichwastobefinancedwith$725,000fromthegeneralfund’scapitalreservethrough an interfund transfer from the general fund to the capital projects fund. ThisprojectwasfortheCity’s2014streetpavingprogram.

28The City actually incurred all of the expenditures for this project totaling$1,150,261priortotheCitytransferring$500,000incashfromthegeneralfundtothecapitalprojectsfundonDecember31,2014.Therefore,theCityusedotherprojects’fundstofinancealloftheproject’sexpenditurespriortoanycashbeingtransferred from the general fund to the capital projects fund.

29Project604,609and61130Thisprojectwastobefinancedthroughtheissuanceofserialbondsintheamountof$1,125,000.

31Thisprojectwastobefinancedwith$1,640,000infundbalancefromthewaterfund through an interfund transfer from the water fund to the capital projects fund.


for officials tomonitor the financial activity of projects andmakeinformedfinancialdecisions,theCityisatriskofoverexpendingotherprojects without identifying and addressing these overexpendituresin a timelymanner, which could significantly impact the financialcondition of the operating funds.

DepositandUseofDebtProceeds – We reviewed all proceeds from obligations that were received by the City during our audit period to verify whether they were deposited into separate bank accounts where required.Wefoundthatallproceedsfromobligationstotaling$15.2million32 that were received by the City during our audit period were notdepositedintoseparatebankaccounts.Instead,theproceedsfromobligations were all deposited into a commingled checking account33

thatcontainedsomeofthegeneralfund’scashandmultipleprojects’cash.Specifically,asofDecember31,2014,thecashinthischeckingaccount corresponded to one general fund cash account and 22 capital projects fund cash accounts that were recorded in the accounting records.As a result, the City commingled proceeds of obligationswithotherCityfunds,whichisnotincompliancewithFinanceLaw.Because the City commingled funds and did not maintain adequate accounting records, we could not determine if debt proceedswerebeing used for purposes other than for which the debt was issued.

However,we reviewedexpense ledgers foreachof theprojects forwhich debt was issued during our audit period to determine if the corresponding claim34foreachrecordedexpenditurewasforapurposeforwhichtheobligationswereissued.Wefoundexceptionswithoneofthedebtissuances.Specifically,theCityissuedabondanticipationnote35onAugust7,2014tobeusedforthedemolitionofbuildings,andtheCouncilauthorizedtheissuanceofthisdebtbyresolutiononApril 3, 2014.As a result, theCitywouldbe eligible to reimbursemoneysthatweretemporarilyadvancedtopayforexpendituresthatwere incurred prior to the issuance of the debt but that were incurred subsequent to thedateof authorizationof the issuanceof thedebt.Wefound that theCity incurredexpenditures related to thisprojecttotaling$446,329priortotheCouncilauthorizingtheissuanceofthebondanticipationnoteonApril3,2014.However,wefoundthattheCity financed $360,995 of the $446,329 in expenditures that wereincurred prior to the Council authorizing the issuance of the debt

32Theproceedsconsistedoftheissuanceofsevenbondanticipationnotes,whichincluded three renewals.

33Oncedepositedintothischeckingaccount,weverifiedthatsomeoftheproceedsfrom obligations were transferred to a money market account that contained funds of other projects and to a checking account that contained funds for the special revenue fund.

34Theclaimswereviewedtotaled$7,606,853.35In the amount of $2,083,000, with $1,000,000 being for the demolition of

buildings


throughotherfinancing sources, resulting in a balanceof $85,334.The City used proceeds from the bond anticipation note to reimburse the special revenue fund36 for moneys that it advanced to pay for the $85,334inexpendituresthatwereincurredpriortotheauthorizationdateofthedebt,whichisanunauthorizeduseofdebtproceeds.Asaresult,theCitywillneedtotransfer$85,334fromthegeneralfundto the special revenue fund to reimburse the project for the previous unauthorizeduseofdebtproceeds,whichwillnegativelyimpactthegeneralfund’sfinancialcondition.

Project Close-Out – The Council did not adopt a resolution to close any completed projects during our audit period. However, as ofMay31,2015,theCity’sbalancesheetforthecapitalprojectsfundcontainedatleast13projects37thatofficialsstatedhadbeencompletedbutwhich had not been closed out. Due to the state of the City’saccounting records and the commingling of project funds in the same bankaccounts,wewerenotabletodetermineifanyofthecompletedprojectshadanunexpendedbalanceoradeficit.

Withoutaproperclose-outofprojects,theCouncilcannotdeterminethetotalcostofeachproject,maybeunawareofprojectoverrunsandcannotbeassuredthatanyunexpendedfundsareproperlydisposedof.Inaddition,whentheCityclosesoutalloftheircompletedprojects,itistheresponsibilityoftheoperatingfundstofundanydeficits,whichcould significantly impact the financial condition of the operatingfunds.

GiventheCity’stenuousfinancialcondition,itisparticularlyimportantto properly account for projects because they impact the financialconditionoftheoperatingfunds.However,theComptrollerdidnotproperlyaccount forprojects, theCouncildidnot ask forfinancialinformation pertaining to projects and the independent auditors failed tobringthissignificantshortcomingtotheattentionofofficials.

The Council needs complete, accurate and timely financialinformationtoeffectivelymonitortheCity’sfinancialoperationsandfinancialcondition.TheCharterrequirestheComptrollertopreparequarterlyfinancialreports(quarterlyreports)fortheMayortopresentto the Council. The Comptroller should prepare a quarterly report to be presented to the Council that includes comparisons of actual revenuesandexpenditureswiththeamountsestimatedintheannualbudget (budget status reports) foreachoperating fund. Inaddition,

36TheComptrolleraccountedforthisprojectinthespecialrevenuefund,insteadofthecapitalprojectsfund,becauseheconsideredittobeacommunitydevelopmentproject instead of a capital improvement.

37We identified these projects based on separate balance sheet accounts beingrecordedonthebalancesheetthatcontainedtheprojects’assignednumber.

Financial Reports


becausetheCouncilisresponsibleformonitoringthefinancialstatusof individual projects, it should receive periodic financial reportscomparingactualrevenuesandexpendituresforeachprojectwiththerelated budget as well.

The Comptroller is also required to prepare and file anAFRwithOSCwithin120daysafterthecloseofthefiscalyear.WhileitistheComptroller’sresponsibilitytoprepareandfiletheAFR,theCouncilshould have procedures in place to review the report and ensure that the Comptroller completes and submits it to OSC by the deadline. The City’sfinancialstatementsarealsoauditedbyanindependentauditoronanannualbasis.BecauseindependentauditsexpressanopiniononthefairnessofthepresentationoftheCity’sfinancialstatements,canhelp identify conditions in need of improvement and can be a useful tool in providing oversight and review of financial operations, theCouncil should ensure that the City engages an independent auditor to audittheCity’sfinancialstatementsinatimelymanner.

Quarterly Reports–WefoundthatthequarterlyreportsfortheCity’soperating funds were not prepared and presented to the Council during the2012 through2014fiscalyears.Asa result, theCouncilcould not effectively oversee the financial operations of the City’soperatingfundsduringthesefiscalyears.However,monthlybudgetstatus reports for the City’s operating funds were prepared andpresented to the Council for the months of January and February2015.Subsequently,officialsdecidedthattheCouncilwouldonlybeprovidedwithbudgetstatusreportsfortheCity’soperatingfundsonaquarterlybasis.Inaddition,aspreviouslymentioned,theCouncilwasnotpresentedwithbudgetstatusreportsfortheCity’sprojectsduringourauditperiod.Asaresult,theCouncilcouldnoteffectivelymonitortheprojectsorensurethatexpendituresdidnotexceedtheapprovedbudgetaryauthorization.

AFRs – The Council did not ensure that the Comptroller prepared andfiledtheCity’sAFRwithOSCwithintheestablishedtimeframe.WefoundthattheCity’sAFRsforthe2012through2014fiscalyearswerefiledonJune28,2013,June24,2014andMay29,2015,or59,55,and29dayslate,respectively.TheComptrollerstatedthathehasnotfiledtheAFRsinatimelymannerbecauseofthelimitedstaffinglevels in his office. However, if thefinancial records are kept up-to-dateandaccurateduringtheyear,completingtheAFRshouldnotrequire substantial work beyond reporting the account balances already recordedinthefinancialrecords.ThefailureoftheComptrollertofiletheCity’sAFRswithOSCinatimelymannerhinderedtheCouncil’sabilitytomonitortheCity’sfinancialoperationsandhasresultedintheCitynotcomplyingwithGeneralMunicipalLaw.Inaddition,itpreventedtheCouncil,taxpayers,theStateandotherinterestedparties


accesstotimelyfinancialinformationwhichcanbeusedtomeasuretheCity’soverallfiscalhealth.

IndependentAuditReports – The City did not engage an independent auditortoaudittheCity’sfinancialstatementsforthe2012and2013fiscalyearsinatimelymanner.Asaresult,theindependentauditreportswere issued approximately nine months38 after the corresponding fiscal year. In addition, as ofMay31, 2015, the independent auditof the City’s financial statements for the 2014 fiscal year had notcommenced.Therefore, thecorresponding independentaudit reportwill again not be issued in a timely manner. The Comptroller stated that the City does not engage an independent auditor to audit the City’sfinancialstatementsuntilhehasfiledthecorrespondingfiscalyear’sAFRwithOSC,whichhasresulted in the independentauditreportsnotbeingissuedinatimelymanner.Asaresult,crucialauditedfinancialinformationhasnotbeenavailableinatimelymannertobeusedasabudgetingtoolortomonitortheCity’sfinancialoperationsandfinancialcondition.

Because performing an audit requires gaining an understanding of Cityoperations,documentinginternalcontrolsinplaceandbecomingfamiliarwith the accounting system, an initial audit requiresmorework than subsequent audits. For this reason it is common to contract for audits for a few years. This allows auditors to factor in the time savingsofsubsequentyears’auditsintotheirpriceandtoplanaheadto schedule and complete the audits in a timely fashion.

AnimportantoversightresponsibilityoftheCouncilistoplanforthefuture by setting adequate long-term priorities and goals. Multiyear plansprojectoperatingandcapitalneedsandfinancingsourcesoveranextendedperiod.TheCharterrequirestheMayortoprepareandsubmitasix-yearcapitalplantotheCouncilnolaterthanOctober1steachyear.Planningonamultiyearbasisallowsofficialstoidentifydeveloping revenue and expenditure trends, establish long-termpriorities and goals and consider the impact of current budgeting decisions on future fiscal years. Any long-term plans should bemonitored and updated on a continuing basis to provide a reliable framework for preparing budgets and to ensure that decisions are guided by the most current and accurate information available.

TheCouncilandofficialsdidnotdevelopamultiyearfinancialplan(financialplan).Hadsuchaplanbeendeveloped,theCouncilwouldhave had a valuable resource that would have allowed it to make more informedfinancialdecisions,whichmayhaveprevented theCity’sdecliningfiscalhealth.Nonetheless, thedevelopmentofafinancial

Long-Term Planning

38Theindependentauditreportsforthe2012and2013fiscalyearswereissuedonSeptember30,2013andOctober9,2014,respectively.


plan would be a useful tool for the Council to identify recurring sources ofrevenuesufficienttofinanceanticipatedrecurringexpenditurestomaintainareasonablelevelofunexpendedsurplusfundsatyearend.

We also found that, although the 2015 adopted budget39 contained a multiyear capital plan (capital plan), the capital plan was notcomprehensive because it did not include all of the elements required bytheCharter.Forexample,thecapitalplancoveredafive-yearperiodinsteadofthesix-yearperiodrequiredbytheCharter.Inaddition,thecapitalplandidnotincludetimeschedulesorthemethodoffinancingeachimprovementorcapitalexpenditure,asrequiredbytheCharter.BecausetheCity’scapitalplandidnot includefinancingsources, itlacked a critical component that the Council would need to assess theimpactthatfuturecapitalexpenditureswouldhaveonsubsequentyears’operatingbudgets.

ThefailureoftheCouncilandofficialstodevelopafinancialplanandacomprehensive capital plan that is in accordance with the Charter may leadtothefurtherdepletionoftheCity’sfundbalanceandundesirableconstraintsontheCity’sfinancialflexibilityinfutureyears.

TheCouncilandofficialsshould:

1. CloselymonitortheCity’sfinancesduringthe2015fiscalyeartopreventafurtherdeclineintheCity’sfinancialcondition.

2. Developandadoptgeneral,waterandsewerfundbudgetsthatincluderealisticestimatesforrevenuesandexpendituresbasedon historical data and supporting source documentation and are structurally balanced.

3. Developaplantoensurethatalloutstandingamountsthatareowed to other funds and projects are repaid.

4. DevelopaplantofundtheCity’sincreasein2016retirementappropriations based on theCity’s change in themethod ofaccountingforretirementexpendituresduringthe2015fiscalyear.

5. Take appropriate action to ensure that debt proceeds are depositedandexpendedinaccordancewiththerequirementsof Finance Law.

Recommendations

39TheCity’sadoptedbudgetsforthe2012through2014fiscalyearsalsocontaineda similar multiyear capital plan.


6. Develop a comprehensive financial plan and a capital planthatincludesalloftheelementsrequiredbytheCharter,andfrequently monitor and update the plans.

TheComptrollershould:

7. Maintain individual accounting records for all projects.

8. Provide the Council with periodic reports that compare actual revenuesandexpenditurestotheamountsbudgetedforeachproject to enable the Council to monitor projects to ensure that fundsareavailableandexpendituresarekeptwithinthelimitsofeachproject’sauthorization.

9. Continue to prepare quarterly reports for the Mayor to present totheCouncil,asrequiredbytheCharter.TheCouncilshoulduse these reportsasameans tomonitor theCity’sfinancialoperations.

TheCouncilshould:

10.Ensure that thegeneral fundreimburses thespecial revenuefund $85,334 for the unauthorized use of debt proceedsidentifiedinthisreport.

11.Adopt a resolution to close out completed projects anddevelop procedures to ensure that projects are closed in a timely manner and that the Comptroller properly disposes of anyunexpendedfunds.

12. Ensure that the Comptroller maintains accurate and timely financial records to enable him to file theCity’sAFRwithOSC in a timely manner.

13.Ensure thatCity officials engage an independent auditor toaudit theCity’sfinancialstatements ina timelymannerandverifythatthefinancialstatementscanbereliedontoreporttheCity’scompletefinancialposition,includingtheimpactofcapital project activity.


APPENDIX A

RESPONSE FROM LOCAL OFFICIALS

Thelocalofficials’responsetothisauditcanbefoundonthefollowingpages.


APPENDIX B

AUDIT METHODOLOGY AND STANDARDS

TheobjectiveofourauditwastoreviewtheCity’sfinancialconditionfortheperiodJanuary1,2012throughMay31,2015.

To accomplish our audit objective and obtain valid audit evidence, our procedures included thefollowing:

• WeinterviewedthePresidentandotherofficialstogainanunderstandingoftheCity’sfinancialmanagement policies and procedures. This included inquiries about the City’s budgetingpractices,theCity’smonitoringandaccountingproceduresfortheoperatingfundsandprojects,thepreparationoffinancialandcapitalplansand thedevelopmentofplans tomaintain theCity’sfiscalstability.

• WereviewedtheCity’saccountingrecordsforthegeneralfund,waterfundandsewerfundfor fiscal year 2014 to determine if theywere accurate. Specifically,we reviewed balancesheet accounts to verify whether they were properly recorded and supported and revenues and expenditurestodetermineiftheyweresupportedandrecordedintheproperfund.

• Wecomparedtheadoptedbudgetsforthegeneralfund,waterfundandsewerfundforfiscalyears2012through2014withtheactualresultsofoperationstodetermineifthebudgetswererealistic and structurally balanced.

• WeanalyzedtheCity’sfinancialrecordsand/orindependentauditreportsforthegeneralfund,water fundandsewer fundforfiscalyears2012 through2014 todetermine if thefinancialconditionofthegeneralfund,waterfundandsewerfundhaddeclined.Wealsoevaluatedanyfactors contributing to any decline.

• Wereviewedtheadoptedbudgetforthegeneralfund,waterfundandsewerfundforfiscalyear2015todetermineifthebudgetedrevenuesandappropriationswerereasonablybasedonhistorical data and supporting source documentation and whether the budgets were structurally balanced.

• WereviewedtheCity’saccountingrecordsforprojectsduringourauditperiodtodetermineifadequate accounting records were maintained for each project.

• Weassessed theadequacyof thefinancial reportsprovided to theCouncilduringourauditperiod.

• We reviewed five projects thatwere authorized by theCouncil during our audit period todetermine if project expenditures remained within the maximum estimated cost that wasestablishedbytheCouncilandifprojectfinancingsourcesthatwereestablishedbytheCouncilweresufficienttofundtheexpendituresincurred.


• We reviewed all proceeds from obligations that were received by the City during our audit period to determine if they were deposited into separate bank accounts where required.

• Wereviewedexpenseledgersforeachoftheprojectsforwhichdebtwasissuedduringourauditperiodtodetermineifthecorrespondingclaimforeachrecordedexpenditurewasforapurpose for which the obligations were issued.

• We reviewed the Council minutes during our audit period to determine if the Council adopted resolutions to close out completed projects. We also attempted to review all projects that were completedduring the2014fiscalyearandallprojects thatwerepreviouslycompleted thatwerestillaccountedforinthecapitalprojectsfundasofMay31,2015toverifywhetheranyunexpendedfundswereproperlydisposedof.

• WeverifiedthedatestheComptrollerfiledtheCity’sAFRsforthe2012through2014fiscalyearswithOSCtodeterminewhethertheywerefiledwithin120daysafterthecloseofthefiscalyear.

• WeverifiedthedatesthattheCityengagedanindependentauditortoaudittheCity’sfinancialstatementsforthe2012through2014fiscalyearstodeterminewhethertheyweretimely.Wealsoverifiedthedatesthatthecorrespondingindependentauditreportsforthe2012and2013fiscalyearswereissuedtodeterminewhethertheyweretimely.

• WereviewedtheCity’scapitalplanforthe2015fiscalyeartodeterminewhetheritincludedall of the elements required by the Charter.

WeconductedthisperformanceauditinaccordancewithGAGAS.Thosestandardsrequirethatweplanandperform theaudit toobtainsufficient,appropriateevidence toprovidea reasonablebasisforourfindingsandconclusionsbasedonourauditobjective.Webelievethattheevidenceobtainedprovidesareasonablebasisforourfindingsandconclusionsbasedonourauditobjective.


APPENDIX C

HOW TO OBTAIN ADDITIONAL COPIES OF THE REPORT

OfficeoftheStateComptrollerPublicInformationOffice110StateStreet,15thFloorAlbany,NewYork12236(518)474-4015http://www.osc.state.ny.us/localgov/

Toobtaincopiesofthisreport,writeorvisitourwebpage:


APPENDIX DOFFICE OF THE STATE COMPTROLLER

DIVISION OF LOCAL GOVERNMENTAND SCHOOL ACCOUNTABILITYAndrewA.SanFilippo,ExecutiveDeputyComptroller

GabrielF.Deyo,DeputyComptrollerTraceyHitchenBoyd,AssistantComptroller

LOCAL REGIONAL OFFICE LISTING

BINGHAMTON REGIONAL OFFICEH.ToddEames,ChiefExaminerOfficeoftheStateComptrollerStateOfficeBuilding,Suite170244 Hawley StreetBinghamton,NewYork13901-4417(607)721-8306Fax(607)721-8313Email:[email protected]

Serving:Broome,Chenango,Cortland,Delaware,Otsego,Schoharie,Sullivan,Tioga,TompkinsCounties

BUFFALO REGIONAL OFFICEJeffreyD.Mazula,ChiefExaminerOfficeoftheStateComptroller295MainStreet,Suite1032Buffalo,NewYork14203-2510(716)847-3647Fax(716)847-3643Email:[email protected]

Serving:Allegany,Cattaraugus,Chautauqua,Erie,Genesee,Niagara,Orleans,WyomingCounties

GLENS FALLS REGIONAL OFFICEJeffreyP.Leonard,ChiefExaminerOfficeoftheStateComptrollerOneBroadStreetPlazaGlensFalls,NewYork12801-4396(518)793-0057Fax(518)793-5797Email:[email protected]

Serving:Albany,Clinton,Essex,Franklin,Fulton,Hamilton,Montgomery,Rensselaer,Saratoga,Schenectady,Warren,WashingtonCounties

HAUPPAUGE REGIONAL OFFICEIraMcCracken,ChiefExaminerOfficeoftheStateComptrollerNYSOfficeBuilding,Room3A10250VeteransMemorialHighwayHauppauge,NewYork11788-5533(631)952-6534Fax(631)952-6530Email:[email protected]

Serving:NassauandSuffolkCounties

NEWBURGH REGIONAL OFFICETennehBlamah,ChiefExaminerOfficeoftheStateComptroller33AirportCenterDrive,Suite103NewWindsor,NewYork12553-4725(845)567-0858Fax(845)567-0080Email:[email protected]

Serving:Columbia,Dutchess,Greene,Orange,Putnam,Rockland,Ulster,WestchesterCounties

ROCHESTER REGIONAL OFFICEEdwardV.Grant,Jr.,ChiefExaminerOfficeoftheStateComptrollerThe Powers Building16WestMainStreet,Suite522Rochester,NewYork14614-1608(585)454-2460Fax(585)454-3545Email:[email protected]

Serving:Cayuga,Chemung,Livingston,Monroe,Ontario,Schuyler,Seneca,Steuben,Wayne,YatesCounties

SYRACUSE REGIONAL OFFICERebeccaWilcox,ChiefExaminerOfficeoftheStateComptrollerStateOfficeBuilding,Room409333E.WashingtonStreetSyracuse,NewYork13202-1428(315)428-4192Fax(315)426-2119Email:[email protected]

Serving:Herkimer,Jefferson,Lewis,Madison,Oneida,Onondaga,Oswego,St.LawrenceCounties

STATEWIDE AUDITSAnnC.Singer,ChiefExaminerStateOfficeBuilding,Suite170244 Hawley Street Binghamton,NewYork13901-4417(607)721-8306Fax(607)721-8313

dinapoli troy audit

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