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March 22, 2007

 

State Audit Finds City of Olean Experiencing Serious
Fiscal Problems, Estimated Deficit of $4.2 Million

The City of Olean went from a $3.7 million combined surplus in 2001 to an estimated deficit of $4.2 million by the end of the 2006-07 fiscal year, a negative shift of $7.9 million, because of poor budgeting and fiscal management practices, according to an audit released today by New York State Comptroller Thomas P. DiNapoli. The city’s budget totaled $18.7 million for the 2005-06 fiscal year, and its fiscal year runs from June 1 through May 31.

The audit, which covered the period of June 2005 to September 2006, found that the primary causes of the city’s deficit were unrealistic estimates of revenues and expenses over several years and inadequate oversight. The city’s recurring deficits have led to serious cash shortages that forced the city to pay bills late, request state aid payments early, and issue a $3.8 million Revenue Anticipation Note (RAN). Auditors determined that unless new debt is issued or some other significant budgetary action is taken, the city will not be able to pay back the RAN in August 2007. Auditors also believe that the city will face a cash flow shortage again in 2007.

“The city’s fiscal condition has seriously deteriorated over the last five years to the point that it now has to borrow for operating expenses and delay paying bills. The obligation to protect the taxpayers’ interests was not fulfilled,” DiNapoli said. “It is critical that the city address the deficit now and develop a viable long-term financial plan to get the city back on solid financial ground.”

Among the findings:

  • Grossly inaccurate budget projections. From June 2001 to May 2006, revenues were $2 million less than what was budgeted, while expenditures were $1.1 million more than projected. The city repeatedly failed to make budget projections based on actual revenues and expenditures from previous years.
  • Structurally imbalanced budget for 2006-07. The city is projected to end the 2006-07 fiscal year with a combined operating deficit of more than $1 million, for a total accumulated deficit for the general, water and sewer funds of approximately $4.2 million. Auditors estimate that revenues will be $375,000 less than budgeted and that expenses will be $650,000 more than projected. The current mayor had proposed to use deficit financing to address cash flow and deficit problems, but the city council rejected his proposal.
  • Over use of fund balance. The city’s general fund had a surplus of almost $3.9 million in May 2001, or 31 percent of the subsequent year’s appropriations. However, five years later the city’s general fund had a deficit of $2.3 million, a decrease of $6.2 million.
  • Cash flow problems. The city’s recurring deficits have led to serious cash shortages since the 2003-04 fiscal year. The city has used several tactics to temporarily address these cash flow deficiencies, including delaying payments to vendors, using the ensuing year’s tax receipts, making significant interfund advances and requesting state aid payments early. In addition, the city issued a $3.8 million RAN in October 2006, but has no money set aside to pay back the RAN in August 2007. The city is also projected to have serious cash shortfalls in 2007.
  • Capital projects delayed. City officials used money designated for capital projects to pay for operating expenses. As a result, the city completed only seven of the 21 capital projects planned, has a deficit of nearly $51,000 for the capital projects fund and does not have sufficient funds to pay for existing projects (See Appendix A in the audit report).
  • Inadequate long-term financial plan. City officials have not developed a realistic, long-term plan to address its persistent and substantial fiscal problems. In order to obtain state aid under the Aid Incentives for Municipalities program, the city is required to develop a multi-year financial plan. If a plan is not developed, the city is at risk of losing more than $360,000 in state aid.
  • Poor accounting practices. The city auditor did not maintain timely or accurate accounting records. The city council was not provided budgetary or cash flow reports, nor were the city’s financial statements filed in a timely manner. Auditors found that the former mayor provided misleading information to the council and taxpayers by stating that the city was in good fiscal condition when, in fact, the city’s fiscal position was becoming unstable.

Among the recommendations provided by auditors to the city council:

  • Adopt a 2007-08 budget that has conservative estimates of revenues and expenditures that relies on historical data to avoid operating deficits.
  • Review an updated budget-to-actual comparison for the 2006-07 spending plan. All significant shortfalls should be identified and a plan developed to address them.
  • Analyze cash flow projections on a routine basis, ensure that staff is providing these and all reports in a timely manner, and use these reports to develop a plan to provide resources before shortfalls occur.
  • Require the city’s independent auditor to issue audited financial statements in a timely manner after the close of the city’s fiscal year.
  • Develop a comprehensive operational plan to address the city’s financial problems that is reviewed and updated annually.

Mayor David Carucci generally agrees with the audit findings, calling the audit “fair, objective and impartial.” He said the audit will be most beneficial to his office and agreed to implement the auditors’ recommendations. The city council has some disagreement with the audit findings, but is considering several of the auditors’ recommendations. Full responses from both are included in the audit.

The City of Olean is located in southern Cattaraugus County and has a population of about 15,300.

Click here for a copy of the audit.

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