City of Buffalo

Department of Audit & Control

Budget Response
2019-2020 Fiscal Year
&
2020-2023 Four Year Financial Plan

Barbara Miller-Williams
Comptroller

May 9, 2019
 Charter of the City of Buffalo
§ 20-7 Comptroller's Assessment of Accuracy of Revenue and Expenditure Assessments.
[Amended 10-2-2012 by L.L. No. 1-2012, effective 10-2-2012]

“On or before the tenth day of May, the Comptroller shall submit to the council an assessment of
the accuracy of the revenue and expenditure estimates of the budget and the four-year financial
plan the mayor submits to the council. The comptroller shall opine on the sufficiency of the
financial plan and whether it contains sufficient data to support the outcomes projected.”

Introduction

Pursuant to the City Charter, and the Comptroller’s role as the City’s chief fiscal officer, I hereby
submit this assessment of the Mayor’s recommended budget for the fiscal year 2019-2020, as
well as the four-year financial plan for fiscal years ending 2020-2023.

While progress was made in some areas, this office has concerns about the revenues in the
proposed budget, and the City’s reserve position.

On the positive side, the property tax levy increased $2.5 million without an increase in
residential tax rates, and some revenues are more realistically budgeted. But the administration
continues to rely on revenue sources that are untested. While the pursuit of new revenue streams
is worthwhile, it is risky to rely on revenues in an adopted budget that appear uncertain or
premature, as prior years have proven.

If revenues do not come in as budgeted, reserves will be needed. Over the past two years, the
City has used $57 million in reserves to close its budget gaps, and according to our estimates,
could use another $10 million in the current year, or even as much as $27 million if past due
casino funds are not received.

The use of those reserves for the current year would deplete the City’s Rainy Day Fund, which
per the City Charter, should not be used to balance operations. Such a use of Rainy Day Funds
could cause a bond rating downgrade and negative findings on the City’s yearly financial audit.

The proposed budget for next year does not utilize any fund balance to balance its budget.
However, a potential shortfall would cause a further depletion of the Rainy Day Fund.

In addition to assessing the accuracy of revenue and expense estimates, this report will address
the City’s reserve position, the four-year financial plan, and the potential consequences of
adopting the recommended budget in its current form.

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 Revenues

The recommended budget includes revenues of $508.7 million in 2019-2020, a reduction of $4.9
million, approximately 1% from the prior year. Approximately $21 million of these revenues are
questionable, and require further information in order to corroborate these estimates.

Below is a chart showing budgeted amounts compared to prior and current year actuals, as well
as more responsible revenue estimates for each item:
A B C D E
Questionable Items 2019-2020 Current FY 2017-2018 Responsible Potential
included in the Proposed Actual as of Actual Budgeting Overestimated
2019-2020 Budget Budget 4/30/2019 Revenue (A-D)

Tribal Pact Casino $11,000,000 $0 $0 $0 $11,000,000

Revenue
Sale of City Owned 6,900,000 914,000 362,000 1,000,000 5,900,000
Real Estate
Entertainment 755,000 0 N/A 0 755,000
Ticket Fee
Gifts and Donations 1,250,000 132,000 0 150,000 1,100,000
Rental Dwelling 3,747,000 906,890 912,040 1,000,000 2,747,000
Registrations

Total $23,652,000 $1,952,890 $1,274,040 $2,150,000 $21,502,000

Tribal Pact Casino Revenue – Prior to 2016-2017, the City had been receiving approximately
$7 million per year from the Seneca Nation (via New York State) as the host community for the
Buffalo Creek Casino. A dispute between the Seneca Nation and New York State had stopped
those payments in 2016-2017.

In January 2019, a binding arbitration decision was delivered in favor of New York State,
finding that the Seneca Nation must continue to pay slot revenue sharing payments to the state
and host municipalities like Buffalo. As reported in the Buffalo News, The Seneca Nation
contends that this ruling violates federal law, and has asked the United States Department of
Interior to examine the arbitration panel’s ruling to determine if it made the correct decision. As
of this date, the timing and the final outcome of this review is unknown

The State itself has not included any Casino funds in its own budget for the upcoming fiscal year,
and has recommended that host municipalities do not either. Because of the uncertainty of the
timing of casino revenue, and the calculation of the amount of revenue that is to be received,
there is a significant amount of risk on relying upon this revenue item.

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Sales of City-Owned Real Estate – This is another source of revenue that is of concern, with
$6.9 million budgeted for 2019-2020. The City has only received $4 million in revenue in the
past five years combined, as you can see from the graph below.

30 Real Estate Sales $28.0

Budgeted vs. Actual

25 (in millions)

20

15
Budgeted Actual

10 $8.0 $8.0 $8.0

$7.0
$5.0 $4.0
5 $1.6
$1.0 $1.0 $0.4 $0.9

0
14-15 15-16 16-17 17-18 18-19 YTD Total

Actual revenue has been 14 percent of the $28 million that has been budgeted during that span.
In 2017-2018, the administration budgeted $7 million in real estate sales and only took in
$400,000. $8 million was budgeted in the current fiscal year, and to date, the City has received
$914,000.

The administration has indicated that it will be handling tax-delinquent properties differently
next year, foreclosing on them and taking title prior to the City’s In Rem Auction, effectively
bypassing the requirement of forwarding any gains to the county comptroller, who handles all
unclaimed funds for the county. Currently these gains can be claimed by whoever the title
holder and/or lien holders were at the time of the auction. Under the new process, the gains will
stay with the City as it will be the legal title holder at time of auction. The administration is
budgeting $4.8 million of the $6.9 million in real estate sales to come from this initiative. As in
the past with other new initiatives, we recommend a more conservative approach budgeting these
dollars until it’s had time to fully test this new process during next year’s In Rem auction.

Entertainment Ticket Fee – As was noted in the 2018-2019 Budget Response, the inclusion of
revenue from the proposed Entertainment Ticket Fee appeared to be premature. In fact, that was
the case, as the specifics of such a program have still yet to be defined. The 2019-2020 budget

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includes revenue of $755,000 (compared to $2 million in the prior budget). As legislation
enabling this revenue stream is yet to be approved, and the venues involved have obtained legal
representation to oppose the tax, we have concerns regarding its inclusion in the budget.
Additionally, this revenue stream may jeopardize the tax-exempt status of the City’s outstanding
and future bonds for capital improvements in the affected venues.

Gifts and Donations – The 2018-2019 budget for Gifts and Donations is $2 million, while the
amount realized year to date is $130,000. The budgeted amount for 2019-2020 is $1.25 million,
a reduction from the prior year’s amount. Any donations received to benefit the City’s operating
budget must be given without restriction. Any donations for capital projects should be included
in the City’s capital budget, not its operating budget. Additionally, according to the Office of the
New York State Comptroller, there is no authority for municipalities to solicit monetary
donations, as such practice is “contrary to public policy and, therefore, not a proper municipal
function.” (State Comptroller’s Opinion 74-1102 and 77-292) This prohibition does not forbid
the pursuit of established grants.

Rental Dwelling Registrations – This includes a new initiative requiring banks to pay the City a
license fee as part of any bank foreclosures that take place in Buffalo. This will allow the City to
more easily hold bank owned properties to higher maintenance standards on what are often
referred to as “Zombie” properties. The City is budgeting $2 million on a new initiative without
any prior results or enabling legislation in place. We recommend having some experienced
revenue generation before budgeting such a material amount.

Parking Meters – Although not noted in the table, this revenue source should be monitored.
The City increased the budget for this item by $1.5 million from the prior year. This is due to the
addition of more parking spaces as well as increasing rates in specific areas. The full
implementation of these changes did not occur until March 2019, only providing two months of
data. Averaging March and April, this budgeted revenue would appear appropriate, but often
parking meter revenue is negatively impacted by the cold weather months, for which we do not
have data on the new rates and parking spaces.

Expenses
The recommended budget includes $508.7 million in expenses for 2019-2020, a decrease of 1%
from 2018-2019 adopted budget.

Personal Services – This labor-driven line item represents $200.5 million of expenses, and
includes items such as salary, overtime, duty disability pay, and longevity payments. While
budgeted positions account for $208.8 million worth of expense, savings from “attrition” reduces

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this amount by $8.3 million. “Attrition” accounts for anticipated retirements and the expectation
that those positions will go either unfilled, or filled by an employee earning lower wages.

While attrition is accounted for in the recommended budget, vacant positions are not, which
could lead to savings on expenses. However, those savings could be wiped out by additional
overtime costs, which are budgeted at $17.4 million, despite recent trends indicating an expense
of significantly more than that amount.

Overtime Expense
(in millions)
$35.0

$29.4 $29.7
$30.0
$26.3
$25.0
$23.4

$20.0
$17.4

$15.0

$10.0

$5.0

$-
15-16 actual 16-17 actual 17-18 actual 18-19 projected 19-20 budgeted

The new Firefighters’ contract has had a significant impact on reducing overtime expense. Even
with the reduction in overtime, it appears that overtime expense is still under budgeted by $3 to
$5 million in 2019-2020.

Judgments and Claims – This expense is regularly underestimated, and with $2 million
budgeted in the 2019-2020 recommended budget, is most likely underestimated once again.

As seen in the following chart, the average annual expenditure for Judgments and Claims has
been approximately $4 million over the past six years, and was nearly $7 million just last year.

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 Judgments and Claims
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
Actual Actual Actual Actual Projected Recommended
Budget
$2,900,927 $3,624,789 $8,113,841 $6,931,482 $4,000,000 $2,000,000

Since the City is self-insured, this is an expense that can result in significant exposure. Without
any funds within the Unassigned Fund Balance, the City will be unable to set aside any
additional funds for potential exposure within the Assigned Fund Balance. In fact, the City only
has set aside $2.7 million of the estimated $8.3 million of potential legal settlements that existed
as of June 30, 2018. Therefore, it is likely that the current budgeted amount of $2 million is
understated, likely by millions of dollars.

The City is undertaking an initiative to improve the centralized billing and collection for
outstanding invoices as well as revising its collection policies and procedures. This is an area
where extra focus and resources are needed, and the expectation is that any additional expense
will more than pay for itself.

Fund Balance

The City’s reserves, known as Fund Balance, acts as a savings account for the City.
Unfortunately, in recent years it has been used to shore up budgets. $107 million in reserves
have been depleted the past eight years, and with $10-$27 million (depending on the receipt of
the $17 million in Casino Funds) potentially needed for the current fiscal year, the amount of
reserves used to close budget gaps will be about $120-135 million.

All of the City’s Fund Balance is currently set aside for specific purposes. The only category of
Fund Balance that can be used to fill budget gaps is Unassigned Fund Balance, which today has a
zero balance.

The depletion of the City’s Fund Balance has led both Moody’s and Standard & Poor’s to revise
the City’s bond ratings from “Positive Outlook” to “Stable Outlook.” Such actions are
precursors to rating downgrades from those rating agencies, as well as Fitch Ratings, the third of
the “Big Three” rating agencies. Downgrades lead to increased interest costs for capital
borrowing.

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As you can see from the chart below, the City’s bond rating has had a significant correlation with
the amount of Fund Balance it has.

Four-year Financial Plan

The four-year financial plan allows for increases in the tax levy of about 2% annually, and no
other significant increases in other revenue sources. Expenditures are budgeted to increase
approximately 1% each year of the plan. Given raises in union contracts, as well as inflation and
annual increases in employee benefits expense, these predicted expense amounts appear
understated. The four-year plan does not contain sufficient data to support the outcomes
projected. Also absent from the plan is a replenishment of the City’s Fund Balance.

Conclusion

While the 2019-2020 recommended budget balances on paper, it contains $21 million in
revenues that are of concern. Additionally, for the first time in recent years, expenses appear to
be budgeted very close to recent actual results, rather than containing some cushion that has
previously helped to offset some of the revenue shortfalls. So any shortfall of actual revenues
will have a negative impact on services and/or further deplete the City’s reserves.