State audit slams Glen Cove spending plan

The report … described a system so rife with weaknesses, lack of oversight, and vagueness that it was potentially open to abuse.”

N.Y. state comptroller’s office

Key recommendations by state auditors

- Adopt structurally balanced budget.
- Ensure routine expenditures are paid by annual appropriations.
- Bring interfund transfers into compliance with city charter and general municipal law.
- Adopt multiyear financial plan and review when updated.
- Adopt plan for fiscal improvement, setting goals and establishing performance benchmarks.
- Open budget process to independent audit.
- Ensure that claims, purchasing and payroll have additional level of oversight.

Source: Office of the New York State Comptroller

The New York state comptroller’s office issued its triennial audit of the City of Glen Cove’s finances last month, which was harshly critical of the city’s budget processes, oversight and internal controls. The report contrasted sharply with former Mayor Reginald Spinello’s assertions, after his electoral defeat last November, that he left the city in better shape than he found it.
The auditors revealed that the city’s total fund balance at the end of 2016 was $409,000 in the red. The deficit in the general fund is projected to exceed $2 million by the end of the year, with revenues from all sources declining by roughly 4.4 percent. This means that dealing with emergencies, such as the ongoing problems with the city’s water system, may force it to incur more debt.

The audit found that:

• The City council did not adopt structurally balanced budgets. The city relied on nonrecurring revenues, such as the sale of property, the issuance of debt and the use of interfund transfers to present balanced budgets. 
• The city’s use of these interfund transfers did not comply with its charter or with state general municipal law. 
• The city did not adopt a multiyear financial plan or a fiscal improvement plan, so the comptroller was unable to assure that its financial condition would improve. 
• The city had not designated an independent authority to audit claims and payroll.

City comptroller Sandra Clarson received the report in December, and forwarded it to the outgoing mayor and City Council. An updated version of the report, with the city’s responses and a detail of actions taken to date, was forwarded to the current administration on Jan. 12.
Of the four areas of concern, the first appeared most significant, because the sale of assets and the issuance of debt to cover shortfalls had the potential to leave the city without adequate resources with which to meet emergencies. “Borrowing to balance an operating budget with no realistic plan to replace the debt . . . can lead to a deteriorating financial condition,” the report stated. The use of debt and one-shot revenues to support recurring expenditures, such as payroll, administrative costs and the day-to-day operations of the city, it continued, “is a short-term solution and only temporarily defers the need to address structural imbalances . . . City officials should not rely on debt to finance recurring operating expenses.”
City officials issued bond anticipation notes totaling $4.9 million throughout the period covered by the audit. The notes were issued to fund $2.2 million in tax certiorari payments, $2.2 million in separation payments and $435,000 in legal judgments, but were not included in the city’s budgets for those years, the report added. “Tax certiorari and separation payments are routine costs of doing business,” it stated, “and these expenditures should be paid from annual appropriations.”

Interfund transfers
The auditors examined the use of interfund transfers, and found the city in violation of its own charter. Though the use of such transfers is common, the city charter allows them only from accounts that show a surplus, and only if they are paid back in the year in which they were made. The audit showed interfund transfers totaling almost $5 million from the general fund and the water fund in years when those funds showed deficits, auditors wrote. “Loans were not paid back at the end of each fiscal year as required by [general municipal law],” they concluded. The report detailed interfund loan balances owed by the recreation fund as well, totaling roughly $1.9 million at the end of 2016.
The city’s own audited financial statements attributed these year-end imbalances mainly to the time lag between the delivery of goods and services and reimbursement for them. Auditors wrote, however, that audited 2016 financial statements still had not been issued by August 2017. City officials could not offer adequate explanations, the report stated, “and the city’s accounting did not provide details of the loans’ purpose.” And the auditors found “no council resolution authorizing these transfers [to the recreation fund].”

Financial planning
“The city has not adopted a written multiyear plan,” the auditors wrote, “or a fiscal improvement plan.” Last April, the mayor and comptroller gave state authorities a multiyear projection that showed expenditures and revenues, as well as operating surpluses or deficits from 2012 through 2015. It also provided estimates for the years 2016 to 2022. Those estimates, however, failed to include fiscal performance goals, or establish “specific actions with quantifiable results [setting] benchmarks to assess progress and the actions taken,” the report stated.
City officials maintained that the general fund and the water fund would no longer have deficits as of 2018 and 2019, respectively. The city could not provide a basis for those projections, however, and because the city did not establish “a written [multiyear] improvement plan,” auditors had “no assurance that the financial condition will improve.
Finally, the state comptroller singled out inadequate oversight of claims processing and payroll. “The council has not designated an individual independent of the city’s purchasing or check signing process to audit all claims prior to payment,” the report said. The city charter requires the city comptroller to audit claims, but the comptroller is also responsible for signing all checks. The City Council reviews and approves claims, but no thorough audit of claims is ever performed.
Further, “the payroll clerk’s duties were not adequately segregated,” the report stated, because the clerk “was responsible for creating new employee profiles, making changes to employees pay rates, collection of employees’ time records, recording hours worked or salaries to be paid, and maintaining custody of paychecks until checks were picked up by department heads.” The report cautioned that “the payroll clerk performed all these duties without any oversight … The absence of adequate controls over processing payroll may leave the payroll system subject to errors and irregularities.”
The report emphasized that it found no evidence of wrongdoing. But it described a system so rife with weaknesses, lack of oversight and vagueness that it was potentially open to abuse.
The auditors offered a detailed list of recommendations, the most prominent of which were the adoption of structurally balanced budgets; making sure that routine operating expenditures are paid by annual appropriations in the city budget; ensuring that interfund transfers are conducted according to the city charter and state municipal law; and adopting a formal multiyear financial plan subject to regular review.
Speaking after the Jan. 16 pre-council meeting, Councilwoman Marsha Silverman, who ran for her seat on a platform of greater fiscal transparency, stressed the need for planning. “The action plan submitted by the prior administration is not sufficient to uphold our fiduciary duty to the public,” Silverman said. Based on her expertise in banking and finance, she added that “the consistent and repeated failure to comply with yearly comptroller’s reports — and now this audit — show the critical need for change from within.”
It will be a long process, Comptroller Clarson cautioned. “Change is always difficult,” she said, “and these municipalities [on Long Island] have gotten used to doing things a certain way. Nobody wants to raise taxes; nobody wants to cut services.” That is how cities such as Glen Cove, among others, end up reaching for the array of temporary fixes the report criticizes.