By Dan Murphy
State Comptroller Tom DiNapolil’s office sent the following letter to the City of Yonkers, in his yearly duty, to certify the City’s budget for fiscal year 2019, and to make comments on the way in which the City balanced its spending plan. The Comptroller’s letter summarizes the Yonkers budget, and answers many of the questions that our readers have asked.
Dear Mayor Spano and City Council Members,
By letter dated July 10, 2018, the Office of the State Comptroller, as Fiscal Agent for the City of Yonkers, determined that the City’s adopted budget for fiscal year 2018-19 and the related justification documents are in material compliance with the requirements of the Fiscal Agent Act. Prior to this determination the City’s budget is not effective and the City is not allowed to take action on the budget. However, it has come to our attention that the City took action on the budget prior to receiving approval by mailing tax bills in late June. Such action is not in compliance with the requirements of the Act.
Generally the Act requires the City to appropriate for each cost category at least as much as was appropriated or spent in the previous two years and to only anticipate receiving miscellaneous revenue in amounts no greater than the amounts received in the prior two years. If the City wants to appropriate less money or budget additional miscellaneous revenue, it must provide to us a detailed justification supporting the proposed action. While we have determined that the 2018-19 budget materially complies with the provisions of the Act, we wish to comment on the following issues which impact the City’s financial condition in the current and future years.
The City’s 2018-19 budget totals $1.2 billion. The budget includes operating and debt service funding of $615.6 million for the Yonkers Public Schools (District) and $575.2 million for the City. The 2018-19 budget is $36.5 million more than the City’s budget for 2017-18, an increase of 3.2 percent.
Nonrecurring Funding Sources
In prior years, we have expressed concern about the City’s practice of financing recurring operating expenditures with nonrecurring funding sources. The 2018-19 budget continues this practice of reliance on nonrecurring funding of $59.2 million to finance operating expenditures.
Fund Balance – The City has projected a general fund balance of $21.8 million at the end of the 2017-18 fiscal year. The City appropriated $18.3 million, or approximately 84 percent, of the projected fund balance from the general fund in the 2018-19 budget.1 The District appropriated $24.1 million, or 100 percent, of the projected fund balance from the general fund in the 2018-19 budget. In addition, the City appropriated approximately $2.1 million from the debt service fund, $506,733 from the library fund, and $406,166 from the sewer fund. The City’s use of fund balance to close gaps in the budget decreases fund balance that is available to cover unforeseen circumstances. It also exposes the City to cash shortages that will impact operations. We are concerned that the City continues to rely on nonrecurring revenue, such as fund balance, to balance its budget. City officials will have to replace this nonrecurring revenue in the 2019-20 budget.
Additional Aid – The 2018-19 budget relies on additional State aid of $8.8 million to provide municipal relief to the District. Although the aid will provide relief in the 2018-19 budget, this funding source may not be available in future years. The additional aid helped the District avoid layoffs and services cuts. However, the City’s reliance on additional State aid to finance District operating expenditures will likely create similar funding gaps in the future.
Specialized State Aid – The 2018-19 budget includes $5 million for specialized State aid from the New York State Financial Restructuring Board for Local Governments (FRB). The FRB offers grants or loans of up to $5 million to fiscally eligible municipalities. The Board has approved the application to undertake a comprehensive review of the City and after preliminary work, City officials have been assured that approval of the full $5 million in aid will be recommended to the FRB. However, the amount of funding for the City has not yet been formally approved by the FRB, as a result, there is a possibility that the City may not receive the $5 million revenue during the 2018-19 fiscal year. In the unlikely event that the aid is not received, the City has developed a contingency plan to reduce appropriations to cover this funding gap. Also, since the timing of the revenue is unknown but will likely be at least halfway through the year, there is potential for cash flow shortages depending on the timing of the payment. While the funding will provide relief in the 2018-19 budget, this funding source will not be available in future years.
Overall, the City is relying on $59.2 million of nonrecurring revenue to finance its 2018-19 operations. Although this funding provides relief in the 2018-19 budget, it will not be available in future years. Therefore, a potential significant funding gap will occur in the 2019-20 fiscal year that the City must address by finding an alternate source of revenue or by reducing appropriations.
Appropriations:
Police Overtime – The City has routinely exceeded budgeted amounts for police overtime costs. The City’s 2018-19 adopted budget includes overtime funding of $16.1 million for the Police Department. The City spent $17.6 million on police overtime in 2016-17 and approximately $17 million in 2017-18 (as of May 31, 2018). The City has not implemented procedures to reduce overtime so we expect the trend will continue. Based on our projections, the City will spend a total of $18.6 million on police overtime in the 2017-18 fiscal year. If historical trends continue and overtime savings are not realized, the appropriation for overtime could be underestimated by as much as $2.5 million.
Firefighting Overtime – The City has routinely exceeded budgeted amounts for firefighting overtime costs each year. The City’s 2018-19 adopted budget includes overtime funding of $10.4 million for the Fire Department. The City spent $11.1 million on firefighting overtime in 2016-17 and approximately $10.4 million in 2017-18 (as of May 31, 2018). Based on our projections, the City will spend a total of $11.3 million on firefighting overtime in the 2017-18 fiscal year. The City has not implemented procedures to reduce overtime so we expect the trend will continue. If historical trends continue and overtime savings are not realized, the appropriation for overtime could be underestimated by as much as $949,000.
Tax Certiorari – The adopted 2018-19 budget includes $500,000 for payment of tax certiorari claims. In 2016-17 the City settled claims for approximately $13.5 million and in 2017-18 the City has settled claims for approximately $6.3 million. The City issued bonds in the prior years to pay for tax certiorari claims and plans to borrow up to $15 million for tax certiorari settlements in the 2018-
19 fiscal year.
The continued practice of using debt to pay for these costs is imprudent. Tax certiorari claims are a recurring cost of doing business and should be paid from annual appropriations. The City will incur additional debt and interest costs by bonding the cost of tax certiorari claims instead of financing them in the operating budget.
Special Projects – The 2018-19 Executive Budget included $8.7 million and $2.1 million in funding for special projects in the water and sewer funds, respectively. However, the adopted 2018-19 budget eliminated this funding. According to City officials, similar special projects that have been removed are included in the capital budget, which will be funded through the issuance of debt. The City’s adopted capital budget includes debt issuances of up to $9.8 million for water fund improvements and none for the sewer fund. The City will incur additional debt and interest costs if it issues debt for these special projects.
Contingency Funds – The City’s adopted budget does not include a contingency appropriation for the general fund. However, the budget includes a contingency appropriation of $1.9 million for the water fund. In light of recent economic conditions, the significant budgetary concerns pointed out in this letter and the minimal remaining fund balance, it would be prudent for City officials to have contingency funding available for unforeseen increases in expenditures or revenue shortfalls. Any unused amounts in a contingency fund would help in starting to rebuild fund balance. City officials should establish a contingency appropriation at a level that would provide the City with flexibility in the event that it has to deal with unanticipated expenditures or revenue shortfalls.
Debt- The City’s outstanding debt has grown over 16 percent during the last 10 years. Since 2010, the City’s annual debt service obligations have risen 31 percent. The City will need $86.1 million to service its debt obligations during 2018-19. This amount represents about 7 percent of the City’s annual budget. A contributing factor to the debt increase is the City’s continuing practice of bonding for recurring expenditures, such as textbooks for the school district and tax certiorari costs, which should be included in budgeted appropriations.
Constitutional Tax Limit–The Constitutional Tax Limit is the maximum amount of real property tax that may be levied in any fiscal year. The State Constitution limits the taxing power of cities to 2 percent of the fiveyear average full valuation of taxable real property. With the 2018-19 budget, the City will have exhausted 92.3 percent of its taxing authority. The City’s ability to increase property taxes may be limited in future years if property values do not increase. The governing board cannot override the Constitutional Tax Limit.
Tax Cap Compliance– In addition to the Constitutional Tax Limit, the New York State Legislature and the Governor established a tax levy limit for local governments which was effective beginning in the 2012 fiscal year. The Law generally precludes local governments from adopting a budget that requires a tax levy that exceeds the prior year tax levy by more than 2 percent or the rate of inflation, whichever is less, unless the governing board adopts a local law to override the tax levy limit.
The City’s adopted 2018-19 budget includes a tax levy of $378,330,354, which exceeds the allowable levy limit by $16.3 million. To comply with the Law, the City Council adopted a local law overriding the tax levy limit,” writes Gabriel F. Deyo, Deputy Comptroller.
One question that may be asked after this letter would be, what other option did the Mayor and City Council have after raising property taxes by 5.9%x? besides additional cuts to the City’s workforce or the increasing of the ‘sin’ taxes, like the income tax surcharge and/or the real estate transfer tax?
The Comptroller’s office does not have to answer these questions, and chose not to offer any options or opinions on what the City leaders should do.
