Lockport Union-Sun & Journal Online

December 21, 2013

Audit raps Council, treasurer

Comptroller's report on city finances finds fault with unrealistic budgets

BY JOE OLENICK joe.olenick@lockportjournal.com
Lockport Union-Sun & Journal

Lockport Union-Sun & Journal — Poor accounting and budgeting practices are two major reasons for Lockport’s fiscal stress, according to an audit report released Friday by the New York State Comptroller’s Office.

In the report, auditors claim city officials did not use realistic estimates in developing the 2013 budget. Revenues were overly optimistic, resulting in operating deficits, auditors reported.

And during the year as a cash flow problem occurred, analysis was not being done routinely to foresee the problem, the auditors said. The city ended up borrowing $2.7 million to cover expenses through the end of this year.

It didn’t help that city officials were not working with accurate numbers. The Treasurer’s Office did not properly record or report the city’s financial position, the audit report charged.

If it had, it is very likely that city officials would have been aware of the city’s declining financial condition and could have taken corrective action sooner, auditors said.

The report was a result of the Comptroller’s Office sending auditors to Lockport after the city was designated as a municipality in “moderate fiscal stress” this past September. The audit took a look at finances from Jan. 1, 2012, through Oct. 9 of this year.

City officials worked closely with the auditors, so the contents of the audit report are not a surprise to them.

”There are things we can do better,” Mayor Michael W. Tucker said. “I take it as constructive criticism. We’re moderately stressed, we’re not on the verge of a control board or bankruptcy. But this is a red flag ... we take these findings seriously.”

Common Council President Anne McCaffrey, 2nd Ward alderman, said the Council is committed to making changes and getting the city back on financially solid ground.

Heightened monitoring of the city’s finances is a common theme in the audit report, so the Council will stay on top of the budget, McCaffrey said.

”We’ve already made some major corrections,” she said.

Auditors said as a result of not using realistic 2013 budget estimates, they believe the city will have deficits in its general, water, sewer and refuse funds, adding up to $2.3 million, for the year.

Certain budgeting practices were questioned by the Comptroller’s Office.

The report claims that, in fiscal year 2012, assets were overcounted and liabilities were undercounted in the city’s financial statements. Deficits should have been reported in the general, water, sewer and refuse funds in 2012, the report said.

”This inaccurate reporting likely contributed to the continuing cash flow problems the city experienced in its 2012 and 2013 fiscal years,” the report said.

Also, in the 2013 budget, employee overtime expenses — particularly fire and police overtime — and health insurance expenses both were underestimated. The Council had set lower numbers for both line items while banking on concessions from employee unions that never came through.

The auditors estimated the city will spend $513,000 more on overtime, and $717,000 more on health benefits, than was originally budgeted for 2013.

The city is looking for a new health care broker to drive down insurance costs, according to Tucker.

The 2014 city budget, adopted last month by the Council, represents a significant improvement in financial management, Tucker asserted. Sixteen employee positions were cut; that’s significant because personnel and contractual costs make up 85 percent of the city’s expenses, he said.

It helps that the budget numbers given to the Council for 2014 are more accurate, Tucker said.

”They have to trust those numbers and (last year) those numbers were inaccurate,” he said. “There’s enough blame to go around and I’ll certainly take my responsibility. But a mistake compounds the problem.”

City Treasurer Michael White said the budget will be monitored closely and frequently. The office has new accounting software that will make that easier, he said.

Inaccurate financial statements for 2012, generated by the treasurer’s office, were cited by the Comptroller’s Office as contributing to the city’s fiscal stress.

White said part of the problem was that his office suffered a hit in personnel with cuts and rapid turnover in 2011. A major illness left an accounting position open for two years.

Treasury staff members are in the process of correcting the accounting records now, according to the city’s official response to the audit. White is asking the Council to let him hire an experienced, third-party consultant to help with that.

The city’s response to the audit report was filed by Tucker, McCaffrey and White jointly. The response pointed out some actions already taken by the Council, including bringing in the Lumsden & McCormick accounting firm to help craft the 2014 budget, and committed administration to watch the city’s cash flow more closely. The Council and the treasurer agreed city department heads should be involved in monthly finance meetings from now on.

”In the past, the Council has met for finance meetings, but now the department heads will be in the room,” McCaffrey said. “We’ll be able to monitor and adjust accordingly. I think that’ll make a difference.”

Getting the city out of fiscal stress won’t occur overnight, White said.

”It’ll take a three-to-five-year plan,” he said.

In its response to the audit report, city officials disagreed with one comptroller’s recommendation, concerning imposition of a “tax overlay.”

A tax overlay is an additional amount of real property taxes raised to cover the amount of property taxes that are delinquent or not collected.

That means if only a percentage of property owners pay their taxes regularly, the city should take that into consideration and budget a higher levy.

An overlay isn’t needed, because the city eventually receives the money in some fashion, Tucker said.

In 2014, the city is getting a one-time $1 million increase in state aid to help cover its deficit. That was arranged by state Sen. George Maziarz, according to Tucker.

The state auditors recommended city officers look again at projected revenue and spending in the 2014 budget, and commit to getting routine cash flow updates from the treasurer’s office.

McCaffrey said the city will submit a written corrective action plan to the Comptroller’s Office within the next four to six weeks.

Contact reporter Joe Olenick at 439-9222, ext. 6241 or follow him on Twitter @joeolenick.