Albany Water Board/Finance Authority:
More Public Authorities Out of Control
Poor Oversight Led to Cost Overruns, Huge Losses, Cash Flow Problems
The City of Albany Water Board and the Albany Municipal Water Finance Authority have experienced significant operating losses and capital project cost overruns for the past several years. This was caused by poor financial oversight, inaccurate budgets and uncontrolled spending and has led to rapid growth in water rates and cash flow problems for the City, according to an audit released today by New York State Comptroller Alan G. Hevesi.
“The Albany Water Board and Finance Authority are more examples of very poorly operated public authorities,” Hevesi said. “The result is huge deficits and fast growing costs for Albany water ratepayers.”
The audit found that:
- The Board lost a total of $12.5 million from 1999 through 2003. As a result, it went from a fund balance of $1.8 million in 1999 to a fund deficit of $10.7 million. This is a huge loss given the Board had a 2003 operating budget of $16.7 million.
- This caused cash flow problems for both the Board/Authority and the City of Albany.
- There were no controls on operating expenses, have which increased rapidly growing 34 percent from $12.5 million in 1999 to $16.7 million in 2003.
- There was absolutely no relationship between the capital budget and actual capital costs. For example, three capital projects were budgeted for $205,000 and actually cost $6 million.
- Revenue and cost estimates are very inaccurate.
- Water rates increased 25 percent over just two years, 2002 and 2003.
- The Board projects increases of six percent a year in the future, but that is based on severely underestimated growth in costs, so higher rate increases are likely.
- The Board has no plans to control costs or deal with its accumulated deficit.
“Bad management of the Water Board has resulted in year after year of losses and has left it with a huge deficit. Ratepayers will be forced to foot the bill,” Hevesi said. “The management got out of the hole by borrowing and they continue to rely on unrealistic projections for the future, which means there is no plan to fix the problems except for continuing to raise water rates.”
Combined with extraordinary cost overruns at construction projects, these operating losses caused significant cash flow problems for both the Water Board and the City’s operations that were solved only by the Board/Authority borrowing more than $70 million and the City receiving an acceleration of $7.4 million in State aid payments.
The audit found:
- Poor Forecasting May Mean Continuing Deficits. The forecasts contain revenue and expenditure estimates that are much more optimistic than the actual results in recent years, and have already been proven wrong. The Board/Authority projected a 39% increase in cash collections from 2003 to 2007. However, the actual 2003 cash collections were $3.4 million or 17% below the amount forecasted, and cash collections for 2004 remained 6.4 percent below budgeted estimates at the time of the audit. “While unanticipated circumstances may cause actual cash flow to deviate from expectations, forecasts are useless if the actual results stray too far over time,” Hevesi said.
- Overspending for capital projects. Auditors found that the Board/Authority spent $6.0 million, 29 times more than the $205,000 budgeted, on just three projects: the Onesquethaw Bridge Replacement, the Loudonville Reservoir and the Storage and Ultraviolet project. “Construction costs are always different than estimates before the work starts, but to budget $205,000 for three projects and actually spent $6 million shows a serious lack of management,” Hevesi said.
- Failure to monitor operations. Auditors found that Board/Authority officials did not review monthly financial reports for capital projects from the City Comptroller. These reports would help officials keep project spending within budget.
- Failure to meet bond covenants caused cash flow problems for City. Although they are required by bond covenants to collect revenues that fully fund operating expenses plus 115 percent of annual debt service costs, after expenses they only collected 104 percent of the debt service costs in 2001 and 59 percent of the debt service costs in 2002. The lack of revenues forced them to delay payments to the City, resulting in the Board owing the City $10.5 million in August 31, 2004.
- Future Revenue Increases Tied to New Metering devices. Officials assumed revenues would increase by approximately four percent in 2004 and 11 percent in 2005 as a result of the installation of new electronic radio-read metering devices. However, the Board/Authority did not present relevant data to assess whether the forecasts of revenues is reasonable. Delays in implementing the meter replacement program have contributed to the cash flow problems by requiring a substantial number of adjustments to customer account records, which has often increased the time between meter reading and collection.
“The Albany water operations’ financial condition has declined dramatically since 1999 because the Board/Authority has failed to take action to deal with recurring operating deficits, cash flow deficiencies and its accumulated deficit,” Hevesi said. “The failure to plan for or monitor operations means ratepayers will continue to pay more in the future, but the current plans still do not provide assurance that their money will be managed well.”
Authority and Board officials disagreed with many of the findings of the report. The Authority said that the deteriorating financial condition was the result of increased security costs at the City’s water supply sources stemming from the 9/11 terrorist attacks; federal and state aid cutbacks to the $3.7 million Loudonville Reservoir ultraviolet light treatment system project; and delays in raising water rates and implementing the City-wide radio-read meter replacement program. Their full response is included.
While these factors may have played a role in the current financial difficulties, there is a significant and chronic disconnect between projections of revenues and spending. It is incumbent upon the Board to manage operations and capital projects to stay within budgets.
Auditors recommended that the Board/Authority officials:
- Prepare a multi-year financial plan that shows how they plan to reduce their accumulated fund deficit and establish financial benchmarks to better judge the Board/Authority’s performance.
- Carefully monitor monthly cash flows so that they may reimburse the City for expenses in a timely fashion and to be sure they comply with the rate covenants.
- Monitor their operating expenses to keep spending within budget. Board members should obtain and review monthly capital project budget performance reports to help ensure greater accountability.
- Assess the impact of their meter replacement program has had on actual operating revenues and evaluate whether they should amend forecasted cash flows, planned rate increases and covenanted provision compliance.
The City of Albany Water Board and the Albany Municipal Water Finance Authority are two legally separate but financially interdependent entities that operate the City’s water operations and finance its capital improvements.
The Albany Water Board is run by a five-member board appointed by the Mayor and is empowered to collect fees and enforce rates. The Albany Municipal Water Finance Authority, a public benefit corporation overseen by a seven-member board, two of whom are appointed by the Governor and five whom are appointed by the Mayor, was established to issue debt for System improvement and construction costs. The system serves approximately 29,000 accounts and more than 100,000 users.
“Clearly, board members must increase their oversight of the water systems’ finances. This is just another example of the need for greater oversight of authorities at both the State and local levels, where too often a lack of accountability means that the public’s money is unprotected,” Hevesi said.
Click here for a copy of the Audit.
Albany Phone: (518) 474-4015 Fax:(518)
NYC Phone: (212) 681-4825 Fax:(212) 681-4468