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ROCHESTER---The Town of Gates in Monroe County went from a $1.7 million surplus in 2000 to a $2.8 million deficit in 2005, a decrease of $4.5 million, because of poor fiscal management and budgeting, including adopting unrealistic budgets, and lax oversight by the town board, according to an audit released Wednesday by State Comptroller Alan G. Hevesi. The 2000-2005 deficit of $2.8 million does not include an additional projected shortfall of more than $1 million in 2006.
"For years, the town has spent more money than it had and used fiscal gimmicks to cover it up. Worst of all, it has borrowed to pay for operating expenses, which means that it is just pushing costs off to the future. The supervisor says everything is ok because our auditors didn't find any money stolen, but that is a pretty low standard that he is setting for the town," Hevesi said. "Eventually the bill for this irresponsibility is going to come due, and taxpayers are going to be hurt. It is time for town officials to be honest with taxpayers about the true fiscal situation of the town."
The audit reviewed financial records and procedures of Gates from January 2001 to December 2005. In November 2005, the Comptroller's Office also released a review of the town's 2006 budget. Among the problems identified in the audit:
Spent More Than It Had. In 2000, the town had a surplus in its general fund of $1.7 million. At the end of 2005, it had a deficit of $2.8 million. That means over six years, there was a decline of $4.5 million. The town's 2006 budget is approximately $14.5 million.
Short-Term Borrowing. The town has avoided dealing with its continuing deficit by borrowing money and using other means, such as holding onto money that should have been paid to local school districts, to have cash to pay bills and payroll.
Appropriated Money that Did Not Exist. The town appropriated money that did not exist to pay expenses in the 2003, 2004, 2005 and 2006 budgets.
Poor Oversight. Even though the town's independent public accountant had warned the town board the last four years of problems, such as expenditures exceeding budget appropriations, the board took no action. In addition, the board did not receive key financial information from the town supervisor and had not updated some policies since 1977.
Credit Downgraded. Moody's Investor Services downgraded the town's credit rating in January 2003 from A2 to Baa1 with a negative outlook. When making the downgrade, Moody's cited the town's poor budgetary practices. This means that it is more expensive for the town to borrow money because it is a higher credit risk.
In 2000, a reassessment of property in Gates resulted in a decrease of assessed taxable value of more than $75 million. Between 1999 and 2004, the full value assessment of the town fell by 6.7 percent in contrast to an average gain of 12.4 percent by other towns in Monroe County. However, for a number of years the town did not adjust its budget to respond to this new reality.
"Gates faced a very serious problem because of declines in property tax assessments. Town officials should have responded with a long-term plan to manage the problem. Instead, they have used one gimmick after another to avoid making tough decisions," Hevesi said.
Town Supervisor Ralph Esposito challenged the report's findings but noted that some of the auditors' recommendations will be adopted. In his response to the audit, he calls the report biased and questions the impartiality of auditors. Specifically, he said:
"THERE IS NOT ONE CENT MISSING FROM OUR FUNDS. EVERY SINGLE PENNY IS ACCOUNTED FOR ON OUR BOOKS [emphasis in original document]."
"I believe this report is not only biased, but vindictive as well…Once I severely criticized the Comptroller's Office on Dec. 5, 2005, you expanded the scope of examination."
"You ignore the positive aspects of the annual 2005 audit by our independent public accountant."
"Everyone knows that you have to find something wrong to justify your existence. In fact, some of your recommendations make sense, and I will use them to make a good operation a better operation."
"It appears that rather than tackling the tough issues facing the town, Mr. Esposito is attempting to divert attention from the town's budget problems with his baseless accusations. Instead, town officials should be focused on developing an accurate financial plan for dealing with the town's problems," Hevesi said. "This would be the best way to serve the taxpayers of Gates, not throwing mud at professional, nonpartisan auditors who are simply doing their job."
State auditors refuted the comments of Esposito, noting:
Virtually any town with a situation such as Gates would be audited. The decision to audit the town was based on the Comptroller's ongoing risk assessment process which identifies key risk factors, such as severe fiscal stress. After identifying an estimated $317,000 deficit in Gates in 2002, auditors offered the town technical assistance but town officials refused the offer. State auditors continued to monitor the town's finances and, as the financial condition of the town worsened, determined that an audit was warranted.
The Comptroller's audits and budget reviews are conducted by professional, non-partisan auditors, who report objectively and factually on their findings. Government Auditing Standards (GAS) require auditors to follow defined standards when conducting audits and to maintain independence, and auditors complied with these standards at all times during the audit. The purpose of the audit was to determine if sufficient money was available to finance operations and whether the board had provided proper oversight of operations. The fact that no theft appears to have occurred is positive, but the town's control environment is so poor it is unclear if the town would detect fraud if it did occur.
The scope of the Comptroller's audit has remained the same from the beginning. The Comptroller's Office previously stated that the report would be completed in the first half of 2006.
The supervisor's comments about the town's 2005 CPA audit report are misleading. While the supervisor claims the town has a surplus of $16,763, compared with a 2004 operating deficit of $2.5 million, a significant reason for this was the use of one-time capital funds. The town's fiscal health should be determined largely by the financial position of its two largest operating funds (general and highway), which ran a combined deficit of $2.8 million in 2005.
Auditors also noted that even though all board members were invited to attend the exit conference for both the budget review and the audit released today, none attended. Only the supervisor attended these meetings. This raises additional concerns about the board's commitment to fulfilling its oversight responsibilities.
During the course of the audit, auditors learned that town officials were appropriating money that did not exist for its 2006 budget. In an effort to provide the town with an objective analysis of the proposed budget, auditors began a separate review of the town's 2006 budget. On November 9, 2005, the Comptroller's Office released this review, which found that the town's process for developing its annual budget was seriously flawed, the budget was not balanced and $325,000 had been appropriated from its fund balance, a fund that was actually running a deficit of $1.8 million, to pay 2006 expenses.
Rather than acting on any of the auditors' recommendations, the town attempted to discredit the findings of the budget review, as it also did with the audit released today, and instead adopted a budget that was structurally unbalanced and contained unreasonable projections. The board did not have to legally adopt its budget until Nov. 20, but chose to adopt the budget on the same day the Comptroller's office released the budget review.
Additional findings of the audit released , include:
Because the town has not been cash solvent since 2002, it has been unable to pay certain bills during the final months of 2002, 2003 and 2004 fiscal years. For example, checks prepared in November and December 2004 totaling $475,000 were not mailed until after December 31 when revenues for the next year were available.
The town supervisor made a number of interfund transfers that were not approved by the board and were not in accordance with state law. The supervisor used $785,000 from payment in lieu of taxes (PILOT) to pay for short-term cash needs, including payroll, that were due to the Spencerport and Gates Chili Central School Districts, and Monroe County. He also paid for some town operating expenses by using more than $600,000 in developer deposits, money being held by the town to guarantee completion of projects.
The town's independent auditor in its last four management letters identified deficiencies with expenditures exceeding budget appropriations, a lack of segregation of duties in the finance office and underutilization of the town's financial software. The supervisor and board failed to take corrective action on these matters.
The supervisor did not provide appropriate financial information to board members. The board did not require the supervisor to present periodic budgetary comparison reports, cash flow projections and fund balance estimates. As a result, the board was not aware of the specific problems causing the town's financial problems.
The board, while making some corrections, has not developed a comprehensive plan to address these operating deficits and to provide direction and leadership on resolving the deficit fund balances in the general and highway funds.
Because of poor financial management, the town has been forced to borrow increasing amounts to cover its cash flow problems. In August 2004, the town issued revenue anticipation notes (RAN) for $1 million to provide short-term financing. The board did not set aside cash in the general fund to repay these notes, as required by local finance law, nor did the board appropriate any money in the 2005 budget for repayment. Then in May 2005, the board issued another RAN for $1.9 million to pay off the first notes and provide more cash. While the board did appropriate money to pay this second RAN, it also adopted a budget with a $1 million shortfall for 2006. This leaves the question of whether the town will have to continue borrowing what are relatively large amounts considering it has a budget of $16 million, at additional cost to the taxpayers.
The board had not adopted comprehensive policies and procedures for many functions and operations, including payroll and personal services, debt management, budgeting, grant administration, cash receipts and disbursements, credit cards, travel and cell phone usage. Many other policies were outdated. For instance, the vehicle use policy has not been updated since 1977. In December 2005, the board took action to update and adopt several policies.
Auditors made a number of recommendations to the board and supervisor, including:
Develop a comprehensive plan for resolving the deficit fund balances and cash flow deficiencies, as well as long-term operation and capital plans.
Stop the practice of adopting unbalanced budgets that appropriate non-existent fund balances.
Stop the practice of making unauthorized interfund transfers and review all outstanding balances of these advances. Only advances that are permissible by law should be made.
Address all findings and recommendations made by the town's independent accountant.
Conduct a comprehensive review of all financial operations.
Require the supervisor to submit appropriate financial reports so board members can adequately monitor town finances.
Click here for a copy of the audit.
Click here for a copy of the 2006 budget review. 6-21-06
© 2006 North
Country Gazette
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