City of Olean

Financial Condition and Internal Controls Over Financial Operations - Executive Summary

The City of Olean (City) is located in southern Cattaraugus County and encompasses approximately six square miles. The City is governed by its Charter and other general laws of the State of New York. The Common Council (Council), consisting of seven members, has the overall responsibility for the City’s operations. The Mayor, City Auditor and other administrative staff are responsible for overseeing and managing the City’s operations. The City’s reported 2005-06 operating expenditures totaled $13.6 million for the general fund, $3 million for the water fund, and $2 million for the sewer fund. The City’s expenditures were funded primarily with revenues from real property taxes, water and sewer rents, and State and Federal aid.

Scope and Objectives

During this audit, we interviewed appropriate City officials, examined financial records, and reviewed procedures of the City of Olean for the period June 1, 2005 to September 6, 2006. The objectives of this audit were to review the City’s financial condition and its internal controls over financial operations. Our audit addressed the following questions:

• What is the City’s present financial condition?
• Have City officials ensured that sufficient cash flow was available to finance operations?
• Have City officials developed and implemented a financial management system that accurately accounts for and reports the City’s financial activity?
• Does the Council routinely monitor budget activity and take adequate action to address recurring deficits in the general, water, and sewer funds?
• Does the City have an adequate plan in place to finance current and future capital projects?

Audit Results

The Council has not properly managed the City’s fiscal affairs resulting in a combined fund deficit of $3.2 million for the general, water, and sewer funds (operating funds) on May 31, 2006. The total fund balance for the operating funds deteriorated by $6.9 million¹ over just five years primarily because the Council aggressively estimated revenues and used overly optimistic expenditure projections in adopting its budgets. From June 1, 2001 to May 31, 2006, actual operating fund revenues were $2 million less than what was budgeted, while expenditures were $1.1 million more than what was budgeted. Moreover, as a means to reduce the growth of property taxes, the Council also used $3.3 million in fund balance (the City’s financial “safety net”) from June 1, 2001 to May 31, 2005 until it was depleted to its present deficit position.

The City’s 2006-07 projected operating results will further exacerbate the City’s fiscal problems. The City will likely end the 2006-07 fiscal year with a combined operating deficit of more than $1 million, further increasing the combined fund deficit to approximately $4.2 million.

Recurring operating deficits and the resulting cumulative fund deficits also have had a significant impact on the City’s cash position. Because the City has repeatedly not been cash solvent since the 2003-04 fiscal year, officials have employed several tactics to temporarily address cash flow deficiencies. These include requesting State aid payments be made earlier, borrowing from the Olean Urban Renewal Agency, using the ensuing year’s real property tax receipts to meet current year disbursements, paying bills late, improperly using capital project resources, and issuing a $3.8 million Revenue Anticipation Note (RAN) in October 2006. Despite these varied attempts, we believe that the City will again face a cash flow shortfall in February 2007. Furthermore, without the issuance of new debt or significant budgetary action, we believe that the City will be unable to pay back the $3.8 million RAN, due in August 2007.

There were a number of factors that contributed to the City’s financial stress. The City Auditor did not maintain timely, sufficient and accurate accounting records or provide the Council with periodic budgetary and cash flow reports. The City’s Annual Financial Reports were not filed in a timely manner, and the last audit report prepared by the City’s independent public accountants was for the fiscal year ended May 31, 2004, which was issued more than 600 days beyond the fiscal year end. Furthermore, the former Mayor provided misleading information to the Council and taxpayers by stating that the City was in good financial condition when, in fact, its fiscal position was becoming unstable.

Another significant contributing factor was that the Council was remiss in fulfilling its fiduciary duties on behalf of City residents and taxpayers. Some of these duties entail insisting that the City Auditor provide interim budgetary and cash flow reports, particularly since this official is directly accountable to the Council. The Council also did not actively monitor the City’s financial condition, adopt structurally balanced budgets, or prepare a long-term financial plan that could be relied upon to resolve the City’s persistent and substantial financial condition problems. In addition, the lack of a multi-year plan to comply with requirements for the Aid and Incentives for Municipalities program may jeopardize the receipt of this State aid, which totals more than $360,000.

Beyond the fact that the Council did not establish or implement a comprehensive financial plan, they rejected the Mayor’s plan for deficit financing in August 2006. There was no indication that the Council proposed any viable alternatives. The ramifications of its failure to take decisive action include higher interest costs, penalties for late payment, and the potential loss of financial assistance.

Finally, although the City has a four-year capital financing plan that was prepared in 2004, a review of that plan indicates that it is not being followed. Furthermore, funds previously designated or borrowed for capital projects were used to subsidize the operating funds. In addition to violating statute with respect to borrowed moneys, the City is unable to fund capital replacements and improvements, which is likely to result in higher costs that will further impair the City’s financial condition.

Comments of Local Officials

The results of our audit and recommendations have been discussed with City officials and their comments, which appear in Appendix B, have been considered in preparing this report. Except as specified in Appendix B, City officials generally agreed with our recommendations and indicated they will initiate corrective action. OSC comments on the City’s response are noted in Appendix C.