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Schroeder warns of depletion of reserves, reliance on one-time revenues
Schroeder warns of depletion of reserves,
reliance on one-time revenues in budget report
Buffalo in strong financial condition, but dwindling fund balance could cause problems down the road, says comptroller
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Buffalo is in strong financial condition, said Comptroller Mark J.F. Schroeder in a charter-required report on the proposed budget, but closing budget gaps with reserves and one-time revenues could cause major challenges in the future.
“Decreasing revenues and rising pension and health care costs have made the task of balancing the budget especially difficult, said Schroeder. “But relying on fund balance and one-shot revenues could weaken the City’s finances and jeopardize its bond rating, especially if it becomes a trend.”
The mayor’s recommended budget uses $12 million in fund balance to close the budget gap in fiscal year 2013-2014. It will be the fourth consecutive year that reserves will be utilized to balance the budget.
In fiscal year 2010-2011, $12.8 million was used to balance the budget, $16.3 was used in fiscal year 2011-2012, and if the administration’s estimate of a $5 million budgetary surplus in fiscal year 2012-2013 is accurate, $10.6 million in fund balance will be needed in the current fiscal year, which ends June 30.
The total fund balance used for all four fiscal years, assuming all estimates are accurate, would be $51.7 million, which equates to an average of $12.9 million per year.
The ‘Big Three’ Credit rating agencies – Fitch Ratings, Moody’s and S&P – have repeatedly warned the City about relying on reserves to close budget gaps.
“The ongoing use of reserves and one-time revenues for recurring expenditures could pose significant challenges to future budgets,” wrote Standard & Poor’s in its April 1 rating report. Moody’s warned that “continued use of reserves beyond what’s currently expected” could make the city’s bond rating go down.
Buffalo currently has the highest bond ratings in its history, including an A+ from Fitch, an A1 from Moody’s, and an A from Standard & Poor’s. These ratings have allowed the Schroeder to refinance debt for the City and its school district at lower interest rates. Since April 2012, this effort has yielded savings of more than $62 million by reducing interest payments on the city’s debt.
“A potential downgrade by any of the three rating agencies would result in increased interest costs for the City, making it more expensive to borrow funds,” said Schroeder.
The rating agencies, however, are not the only ones monitoring the City’s use of fund balance. In January 2013, New York State Comptroller Thomas DiNapoli implemented the Fiscal Stress Monitoring System, a tool designed to determine the level of fiscal stress for each municipality in the state. Buffalo has not yet received its grade, and a significant factor used by the state comptroller in determining fiscal stress is fund balance.
“The level of a local government’s year end fund balance can affect its ability to deal with revenue shortfalls and expenditure overruns. A negative or low level of fund balance can affect the local government’s ability to provide services at current levels,” said DiNapoli’s report on the fiscal stress monitoring system.
Schroeder said the use of other one-time revenues for recurring expenditures is also a major concern. The budget includes the use of $12 million in state aid currently held by the Buffalo Fiscal Stability Authority. Including this appropriation, the city will have used $41.5 million of the $41.7 million in these funds since 2008, eliminating it as a resource in future years.
Another one-time revenue is the use of $4.2 million in proceeds from the Foreign Fire Insurance Tax, representing five years’ worth of payments that were being set aside pending ongoing litigation. This is not a recurring revenue source, as it will only generate approximately $300,000 annually in the future.
“The budget also includes a $9.6 million transfer from the parking enterprise fund, including the $4.4 million in fund balance, as well as a $5.2 million in revenue from an operating surplus,” said Schroeder. “This will be the third consecutive year surplus revenue from the parking fund has been ‘swept’ into to the general fund to subsidize other operations.”
One of the operations the general fund continues to subsidize is the solid waste enterprise fund. As of June 30, 2012, the solid waste enterprise fund had an accumulated deficit of $22.8 million. This deficit increased $2.5 million over the previous year, in spite of a $3.4 million transfer from the operating fund. Without this transfer, the loss from operations was $5.9 million, which represents 28% of the revenues brought in.
The contract for solid waste removal, which expires in two years, includes a fuel surcharge that has increased exorbitantly over recent years. At the inception of this contract in 2005, the applicable price per gallon of diesel fuel was $2.11, which translated to a fuel surcharge of $1.09 per ton of solid waste. The current price per gallon of diesel fuel is $3.97, which translates to a fuel surcharge of $13.19.
“This means that while gas prices have increased 88 percent over the past eight years, the fuel surcharge has gone up more than 1300 percent during that same time period,” said Schroeder. “This dramatic increase means that in 2005, the surcharge the City paid for transporting 138,000 tons of solid waste was $150,420, but now the City is paying more than $1.8 million for the same tonnage.”
Schroeder’s report also said that many of the one-time revenues that the City has relied upon in the 2013-2014 budget will not be available to the same extent in the future.
“In order to bring more security and stability to the City’s finances, it is imperative other recurring sources of revenue are identified and pursued,” Schroeder said.
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Photos by Angel Art LTP, compliments of the Greater Buffalo Convention and Visitors Bureau. Additional photos by Adrian Roselli, compliments of Algonquin Studios