OFFICE

OF THE

NEW YORK STATE COMPTROLLER D IVISION OF LOCAL GOVERNMENT & SCHOOL ACCOUNTABILITY

City of Newburgh
Council Oversight and Revenue Enhancement Opportunities
Report of Examination
Period Covered: January 1, 2010 June 21, 2011 2012M-77

Thomas P. DiNapoli

Table of Contents

Page AUTHORITY LETTER 2

EXECUTIVE SUMMARY

INTRODUCTION Background Objective Scope and Methodology Comments of Local Ofcials and Corrective Action

5 5 5 5 6

COUNCIL OVERSIGHT Financial Records and Reports Financial Condition Recommendations

7 7 10 13

NON-PROPERTY TAX REVENUE Rental Registry Fee Utilities Gross Receipts Tax Cable Services Franchise Fees Recommendations

14 14 15 16 17

APPENDIX APPENDIX APPENDIX APPENDIX APPENDIX

A B C D E

Response From Local Ofcials OSC Comments on the Local Ofcials Response Audit Methodology and Standards How to Obtain Additional Copies of the Report Local Regional Ofce Listing

18 25 27 29 30

DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY

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State of New York Ofce of the State Comptroller

Division of Local Government and School Accountability October 2012 Dear City Ofcials: A top priority of the Ofce of the State Comptroller is to help local government ofcials manage government resources efciently and effectively and, by so doing, provide accountability for tax dollars spent to support government operations. The Comptroller oversees the scal affairs of local governments statewide, as well as compliance with relevant statutes and observance of good business practices. This scal oversight is accomplished, in part, through our audits, which identify opportunities for improving operations and City Council governance. Audits also can identify strategies to reduce costs and to strengthen controls intended to safeguard local government assets. Following is a report of our audit of the City of Newburgh, entitled Council Oversight and Revenue Enhancement Opportunities. This audit was conducted pursuant to Article V, Section 1 of the State Constitution and the State Comptrollers authority as set forth in Article 3 of the General Municipal Law. This audits results and recommendations are resources for local government ofcials to use in effectively managing operations and in meeting the expectations of their constituents. If you have questions about this report, please feel free to contact the local regional ofce for your county, as listed at the end of this report. Respectfully submitted,

Ofce of the State Comptroller Division of Local Government and School Accountability

OFFICE OF THE NEW YORK STATE COMPTROLLER

State of New York Ofce of the State Comptroller

EXECUTIVE SUMMARY

The City of Newburgh (City), located in Orange County, has a population of about 29,000. The City is governed by the City Council (Council), which is made up of the Mayor and four other elected members. The Council is responsible for the general management and control of the Citys nancial affairs. The City provides various services to its residents, including road maintenance, snow removal, public improvements, recreation and cultural activities, water, and general governmental support. Budgeted general fund appropriations for the scal years 2010 and 2011 were $43 million and $39 million, respectively. In recent years the City has experienced scal stress which has resulted in the City issuing decit nancing. Scope and Objective The objective of our audit was to examine the Citys nancial operations for the period January 1, 2010 to June 21, 2011. We extended our review of the gross receipts and franchise fees from January 1, 2008 to June 21, 2011 and extended our scope of multiyear plans and nancial condition through December 31, 2011. Our audit addressed the following related questions: Did the Council provide adequate oversight to ensure the Citys nancial stability? Are there opportunities for City ofcials to maximize non-property tax revenues?

Audit Results Over the past several years, the Council neglected its oversight responsibilities by failing to require City Managers and Comptrollers to maintain complete, accurate, and reliable nancial records and to prepare and present detailed and periodic reports to the Council for the purpose of evaluating the Citys nancial position and making informed nancial decisions. As a result of the Citys poor nancial records, the Citys independent auditor (CPA) issued a qualied opinion on the Citys 2007 nancial statements, and the audit of the 2008 and 2009 nancial statements were not completed until the middle of 2010. In addition, because of lack of complete nancial data, City ofcials could not prepare and le the Citys 2008, 2009, and 2010 annual nancial reports with the Ofce of the State Comptroller (OSC) in a timely manner. The poor condition of the Citys nancial records also led to the Council and City ofcials appropriating $5.5 million of unavailable fund balance to balance the 2010 budget. This action resulted in the 2010 general fund decit, the subsequent real property tax increase of 41 percent in the 2011 budget, and the authorization for the City to issue debt up to a maximum of $15 million to liquidate the 2010 reported DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 3 3

decits. Furthermore, because of these poor nancial records, we estimate that the City has paid more than $570,000 in interest charges for borrowings that they did not need. Due to the large number of non-owner occupied rental units in the City, the Council created an ordinance requiring the registration and monitoring of these properties. The $25 fee charged by the City to cover the costs of monitoring properties for code compliance is inadequate and is not equitable. About 84 percent of the violations written by City code inspectors were for non-owner occupied rental properties. The fees from those properties do not cover the cost of monitoring. Therefore, by changing to an annual fee for non-owner occupied rental properties, the City could generate up to $930,000 in additional revenue to cover the cost of monitoring rental properties and shift the burden to those property owners, while reducing the costs to the general tax base. Further, the City may have lost the opportunity to generate additional revenues because City ofcials failed to ensure that utilities gross receipts tax and cable service franchise fees are analyzed, monitored, and collected in entirety. City ofcials have not established written policies or procedures which outline the responsibilities and actions to be taken to analyze, monitor, and enforce the collection of these revenues. Without proper monitoring and analysis, there is a risk that the City may not collect all the revenues it is entitled to. Comments of Local Ofcials The results of our audit and recommendations have been discussed with City ofcials and their comments, which appear in Appendix A, have been considered in preparing this report. City ofcials disagreed with the ndings and recommendations in our report. Appendix B includes our comments on issues raised in the Citys response letter.

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Introduction
Background The City of Newburgh (City), located in Orange County, has a population of about 29,000. The City is governed by the City Council (Council), which is made up of the Mayor and four other elected members. The Council is responsible for the general management and control of the Citys nancial affairs. Per the Citys Charter, the appointed City Manager is responsible for the day-to-day management of the Citys operations and nancial resources under the direction of the Council. The City Comptroller (Comptroller), appointed by the City Manager and designated as Director of Finance, is responsible for managing the Citys nances. The Comptroller works under the supervision of, and reports to, the City Manager. The City Manager and Comptroller are collectively responsible for maintaining complete and accurate accounting records and providing reports to the Council with the information necessary to properly monitor nancial activities and make prudent nancial decisions while retaining the ability to provide key services to City residents. The City provides various services to its residents, including road maintenance, snow removal, public improvements, recreation and cultural activities, water, and general governmental support. Budgeted general fund appropriations for the scal years 2010 and 2011 were $43 million and $39 million, respectively. In recent years the City has experienced scal stress which has resulted in the City issuing decit nancing. Objective The objective of our audit was to examine the Citys nancial operations. Our audit addressed the following related questions: Did the Council provide adequate oversight to ensure the Citys nancial stability? Are there opportunities for City ofcials to maximize nonproperty tax revenues?

Scope and Methodology

We examined internal controls over the Citys nancial operations for the period January 1, 2010 to June 21, 2011. We extended our review of the gross receipts and franchise fees from January 1, 2008 to June 21, 2011 and extended our scope for multiyear plans and nancial condition through December 31, 2011. We conducted our audit in accordance with generally accepted government auditing standards (GAGAS). More information on such DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 5 5

standards and the methodology used in performing this audit are included in Appendix C of this report. Comments of Local Ofcials and Corrective Action The results of our audit and recommendations have been discussed with City ofcials and their comments, which appear in Appendix A, have been considered in preparing this report. City ofcials disagreed with the ndings and recommendations in our report. Appendix B includes our comments on issues raised in the Citys response letter. The Council has the responsibility to initiate corrective action. A written corrective action plan (CAP) that addresses the ndings and recommendations in this report should be prepared and forwarded to our ofce within 90 days, pursuant to Section 35 of the General Municipal Law. For more information on preparing and ling your CAP, please refer to our brochure, Responding to an OSC Audit Report, which you received with the draft audit report. We encourage the Council to make this plan available for public review in the City Clerks ofce.

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Council Oversight
The Council is responsible for managing and overseeing the Citys overall scal affairs and safeguarding its resources. To carry out its scal oversight responsibility effectively, the Council must ensure that the City Manager and Comptroller maintain complete, accurate, and reliable nancial information in order to monitor revenues and appropriations and timely and effectively address nancial condition problems. The nancial information provides the foundation for the Council to develop its budgets, safeguard City resources, and monitor the Citys scal affairs. Over the past several years, the Council neglected its oversight responsibilities by failing to require City Managers and Comptrollers to maintain complete, accurate, and reliable nancial records and to prepare detailed and periodic reports for the Council to use to evaluate the Citys nancial position and make informed nancial decisions. As a result of the Citys poor nancial records, the Citys independent auditor (CPA) issued a qualied opinion on the Citys 2007 nancial statements, and the audit of the 2008 and 2009 nancial statements were not completed until the middle of 2010. In addition, because of lack of complete nancial data, City ofcials could not prepare and le the Citys 2008 through 2010 annual nancial reports to the Ofce of the State Comptroller (OSC) in a timely manner. The poor condition of the Citys nancial records also led to the Council and City ofcials appropriating $5.5 million of unavailable fund balance to balance the 2010 budget. The action resulted in the 2010 general fund decit, the subsequent real property tax increase of 41 percent for the 2011 budget, and the authorization for the City to issue debt up to a maximum of $15 million to liquidate the 2010 reported decits. Furthermore, because of these poor nancial records we estimate that the City has paid more than $570,000 in interest charges for borrowings that they did not need. Financial Records and Reports Complete and accurate accounting records maintained on a monthly and annual basis provide the Council with essential information that it needs to effectively manage and safeguard cash and properly monitor the Citys nancial condition. The information in these accounting records provides the basis for the Council to monitor and manage the Citys nancial resources and develop its budgets, and for the Comptroller to prepare periodic reports. When nancial records are incomplete and inaccurate, accountability and effective management of nancial resources is signicantly weakened and any nancial decisions made based on such records could be awed. DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 7 7

The City is required to le an annual nancial report with OSC within 120 days after the close of the scal year, or by May 1. This report, also referred to as the Annual Update Document (AUD), provides the Council and City ofcials with the Citys nancial position at a point in time, and provides other stakeholders with a complete summary of the Citys nancial activities. When properly completed and led, AUDs increase the transparency of the Citys nancial activity. The City Manager appointed the Comptroller as Director of Finance to assist the City Manager and be responsible for recording nancial transactions and preparing periodic reports. Therefore, the City Manager and Comptroller are collectively responsible for maintaining complete and accurate nancial records and providing periodic reports to the Council with information useful and relevant to properly and effectively monitor the Citys nancial resources and make prudent and informed decisions that are in the best interest of taxpayers. From 2007 until the current Comptroller was hired in December 2010, the Citys nancial and accounting records were incomplete, inaccurate and unreliable. City Managers and Comptrollers failed to perform the routine and basic activities needed to maintain complete and accurate records. As a result, the Council lacked the reliable nancial information necessary, such as budget versus actual revenues and expenditures to date reports or cash ow statements, to manage the Citys nancial resources and properly oversee the Citys nancial condition. The Council failed to demand that the City Managers and Comptrollers maintain complete, accurate, and reliable nancial records and to prepare detailed and periodic reports to the Council. Council oversight was so diminished that the poor condition of the accounting records went unnoticed from 2007 through 2010. For example: City ofcials contracted with an outside CPA to audit the nancial statements as of December 31, 2007. The City lacked the records necessary for the CPA to complete the audit. The CPA issued a qualied opinion on the Citys nancial statements. Another CPA was hired to audit the nancial statements for scal years 2008 through 2010. The audit of the scal years 2008 and 2009 were completed in the rst half of 2010, while the audit of the 2010 scal year was completed in June 2011. Although the second CPA was able to complete the audits and express an opinion, the CPA issued a disclaimer that nancial information relating to the Local Development Corporation and Industrial Development Agency was not included, as the records were not available. The audit resulted in the need to

OFFICE OF THE NEW YORK STATE COMPTROLLER

prepare 90 adjusting journal entries to correct identied issues in the nancial statements. We reviewed the Citys books and records after the journal entries were made and found that the Citys nancial records did not agree with the audited nancial statements. Even with the audit completed, City ofcials had not closed the books and were still posting transactions to scal year 2010 records as late as September 2011. During our review in 2011, we found several instances where expenditures were posted to an incorrect period, and we identied two cash accounts totaling $185,508 that did not appear on the Citys records and had not been reconciled. In addition, the City ofcials were unable to provide a schedule of capital projects, and the Comptroller indicated that the records likely did not exist to create one. Due to poor recordkeeping and the lack of complete and accurate nancial information, City ofcials could not le AUDs on time for scal years 2008, 2009 and 2010. For all three scal years, City ofcials did not le the AUDs until October, making them at least 150 days late in each year. Because of such poor nancial records City ofcials were unable to develop an accurate budget for 2011. While an increase in tax levy was necessary to balance the budget, we found that City ofcials overestimated the levy that was actually needed. The Council and City ofcials raised the levy by 41 percent or $5.4 million, approximately $1.2 million more than was needed. Had City ofcials had access to an accurate picture of prior year actual expenditures, the tax levy increase could have been about 9 percent less.

The current Comptroller told us that the Council is now receiving monthly nancial reports. However, Council members rarely ask questions related to the reports. One Council member indicated that he did not know how to read the reports. Council members have not received any training related to scal oversight and monitoring. In addition, while the Comptroller had received training related to the nancial software and two clerks received payroll training, they have not received training that would assist them in maintaining more accurate nancial records. City ofcials have been aware of the issues with the nancial records but did not ensure that individuals responsible for maintaining these records received proper training, such as accounting classes offered by OSC and other municipal organizations. DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 9 9

Because the City Managers and Comptrollers failed to maintain complete and accurate nancial records and the Council took no action to address the poor recordkeeping, the Councils ability to monitor nancial operations was severely hindered, and the Citys nancial position was not known with certainty at any given point in time from 2007 through 2010. Financial Condition A local governments nancial condition has an impact on its ability to provide services on a continuing basis to its taxpayers. A local government is considered to have sound nancial health when it can: Maintain sufcient cash ow to pay bills and other obligations when due, without relying on short-term borrowings. Plan and nance capital acquisitions and improvement such as buildings, equipment, and infrastructure within the communitys ability to pay for such improvements.

The Citys deteriorating nancial condition is mainly the result of the Councils failure to require that City ofcials maintain complete, accurate, and reliable nancial records. Inadequate nancial information led to poor decisions in developing and adopting the annual operating budgets and a lack of enforcement of revenue collection (see Non-Property Tax Revenue nding). Fund Balance A key measure of a local governments nancial condition is the level of fund balance that it maintains. Fund balance is the difference between revenues and expenditures accumulated over time. Fund balance can be used to manage unexpected occurrences, such as, unanticipated shortfalls in revenues. Inadequate or decit fund balance limits the ability of local government ofcials to manage emergencies and other unanticipated occurrences. An important aspect of budget preparation includes a reasonable estimate of fund balance at the end of the scal year. There are two types of fund balance, restricted and unexpended surplus funds.1 Restricted fund balance represents moneys that the City has set aside and may only use for specic purposes. Unexpended surplus is the amount of fund ____________________
1

The Governmental Standards Board (GASB) issued Statement 54, which replaces the fund balance classications of reserved and unreserved with new classications: nonspendable, restricted, and unrestricted (comprising committed, assigned, and unassigned funds). The requirements of Statement 54 are effective for scal years ending June 30, 2011 and beyond. To ease comparability between scal years ending before and after the implementation of Statement 54, we will use the term unexpended surplus funds to refer to that portion of fund balance that was classied as unreserved, unappropriated (prior to Statement 54), and is now classied as unrestricted, less any amounts appropriated for the ensuing years budget (after Statement 54).

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balance that is uncommitted. The portion of unexpended surplus that is used to help nance next years budget is known as appropriated unexpended surplus. In preparing the budget for the 2010 scal year, City ofcials appropriated $5.5 million of fund balance to balance the budget. However, at the time of preparing and adopting the budget, City ofcials had no evidence that the funds were available due to incomplete and inaccurate accounting records. In fact, audited nancial statements received in July 2010 showed that the City had a decit fund balance of $1.3 million at December 31, 2009. Lacking certain knowledge that they had fund balance available to help nance the budget, City ofcials and the Council should not appropriate unexpended surplus as part of the budget. Consequently, City ofcials created an unbalanced budget which led to the 2011 tax levy increase and the 2010 general fund decit nancing. Decit Financing Decit nancing is the sale of debt securities in order to nance expenditures that are in excess of revenues. In 2010, City ofcials sought and received legislation, known as the Newburgh Fiscal Recovery Act (Act), which permitted the City to issue debt in an amount not to exceed $15 million to liquidate the actual decits in the general, special revenue, and capital projects funds existing on December 31, 2010. As authorized by the Act, in August 2010, City ofcials issued bond anticipation notes (BANs) totaling $12 million, because they believed the Citys decit would not reach $15 million. The legislation that created the Act also required OSC to review supporting documentation and certify the amount of the decit. We reviewed the records and information City ofcials provided, including the Citys independent auditors report for the scal year ended December 31, 2010. Based on the results of our review, we found at December 31, 2010: The general fund had an actual decit of $6,093,846. The special revenue fund showed no existing decit. The capital projects fund showed a decit of $8,903,622. However, due to the lack of complete and accurate nancial records, City ofcials were unable to provide the necessary records to substantiate the reported decit. Therefore, City ofcials withdrew their request to have the capital projects fund decit certied.

As a result, City ofcials issued about $6 million more in BANs than the City could justify. Had the City Council ensured that City ofcials DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 11 11

maintained complete and accurate nancial records, we estimate that the City would not have had to spend over $300,000 in interest on the unnecessary BANs that were issued. Tax Anticipation Note A tax anticipation note (TAN) is a shortterm debt obligation issued by local governments in anticipation of future tax collections. It provides local governments with cash for immediate or time sensitive needs and helps with the uctuations in revenue cycles, if the timing of receipts does not match the timing of expenditures. Local governments must review the need for issuing short-term debt by performing a thorough cash ow analysis. In November 2009, City ofcials issued a TAN for $5.6 million and renewed it in November 2010 and 2011 without a comprehensive cash ow analysis. The outstanding amount of the TAN on November 29, 2011 was about $5.2 million. However, the Citys bank statements as of October 31, 2011 showed cash balances totaling approximately $34 million. Given this information, the City could have paid off or retired the TAN and still had sufcient cash available. Instead, the TAN was renewed in November 2011 at an interest rate of 5.25 percent, and will become due in November 2012. As a result of this decision, City taxpayers are responsible for an additional $271,489 in unnecessary interest costs. The lack of comprehensive cash ow analyses, caused by the incomplete nancial records, made it difcult for City ofcials to determine the true and actual amount of cash the City had. If City ofcials had based the TAN renewal on the results of the cash ow analyses, they would have known that the City had sufcient cash on hand and paid off the TAN. Multiyear Plan Financial planning on a multiyear basis allows City ofcials to identify revenue and expenditures trends, set longterm priorities and goals, and avoid large uctuations in tax rates. It is important to monitor and update any long-term nancial plan on a regular basis to provide a framework for preparing budgets and to ensure that decisions are guided by the most accurate and current information available. Under the Act, City ofcials are required to submit quarterly reports and multiyear nancial plans to OSC. As required by the Act, the nancial plan shall also identify actions necessary to achieve and maintain long-term scal stability, including, but not limited to, improved management practices, initiatives to minimize or reduce operating expenses, and potential shared services agreements with other municipalities.

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The Citys plan does not identify actions necessary to maintain longterm scal stability and address the predicted decits. We asked to review any documentation to support the amounts in the plan and found that none existed. We further found that the plan was created and submitted by a nancial consultant, working with the City Manager, without any input from the Comptroller. Without the Comptrollers involvement and participation in the preparation of the plan, it is unclear whether the plan was prepared based on reasonable and reliable information. Therefore, the plan cannot be a useful tool to improve the Citys management of nancial resources and to achieve and maintain long-term scal stability. The turnover within the City Manager and Comptroller positions contributed, in part, to the incomplete and inaccurate nancial records. However, if the Council had exercised adequate oversight of the Citys nancial operations, including requiring adequate periodic reports from the Comptroller and requiring timely annual audits of the nancial records, the existing problems could have been identied and acted upon to correct them before the Citys nancial condition deteriorated to the point of scal stress. Recommendations 1. The Council should require the City Manager and Comptroller to maintain complete, accurate, and reliable nancial records and prepare periodic and timely reports for the Council to use to assess the Citys nancial position and make informed nancial decisions. 2. City ofcials should ensure that the AUD is led with the OSC in a timely manner. 3. City ofcials should identify training needs and ensure key personnel receive the appropriate and necessary training. 4. The Council should continue to closely monitor nancial operations and take appropriate actions to maintain the Citys nancial stability. Appropriate actions would include: appropriating only available unexpended surplus funds, maintaining documentation to support tax levy increases, preparing cash ow analyses to determine the necessary amount of short- and long-term debt to issue, and completing long-term nancial plans that include the Comptrollers input.

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Non-Property Tax Revenue

Local governments in good nancial condition collect sufcient revenues to pay short term bills and meet the current portion of long term debt obligations while funding services. Accordingly, City ofcials are responsible for ensuring the monitoring and collection of all revenues due to the City. To accomplish this, City ofcials must establish policies and procedures, which set forth the responsibilities related to the collection, monitoring, analysis, and enforcement of these revenues. The policies and procedures must also set forth the analysis to be performed and should identify steps to be taken if an issue is identied. To help alleviate the Citys scal stress, it is important for City ofcials to identify new sources of non-property tax revenue to help pay for the services provided by the City. In addition, good management practices provide that City ofcials monitor and analyze existing revenues to determine if the City is receiving the amount to which it is entitled. We identied a number of revenue enhancement opportunities that could help improve the Citys scal health. For example, the City could levy a fee for non-owner occupied rental properties that would cover the costs the City is currently incurring for this service. Further, City ofcials could generate additional revenues by providing adequate oversight and analysis of utility gross receipts tax and franchise fees currently in place. Had City ofcials been proactive, the City could have potentially generated between $560,000 and $930,000 annually to cover the cost of code enforcement. We also found that City ofcials did not establish policies or procedures for the enforcement of utilities gross receipts tax and franchise fees, and as a result, revenues due to the City were not being collected as effectively as possible. Because City ofcials failed to ensure that utilities gross receipts tax and franchise fees are analyzed, monitored, and collected in entirety, the City may have lost the opportunity to generate additional revenues to help fund City operations. Rental Registry Fee The Council determined that the City has a signicant number of non-owner occupied rental units. Owners of these units are less likely to maintain daily oversight of their properties to ensure compliance with applicable laws, rules and regulations. Therefore, the Council created an ordinance to protect the health, safety and welfare of City residents and to protect the Citys housing stock from deterioration. The ordinance established a program for registering and identifying residential rental properties and determining the responsibilities

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of owners of residential rental properties. The ordinance requires that rental property owners adhere to applicable code provisions governing the use and maintenance of rental properties, including provisions limiting the maximum occupancy for which a rental dwelling can be certied. This is accomplished through the Citys Code Department, which is responsible for inspecting properties and addressing complaints relating to unsafe conditions. The Citys rental registry ordinance has not achieved its intended objectives. Using information obtained from the assessment rolls, we determined that 53 percent of the 6,980 properties on the assessment roll are non-owner occupied rental properties. According to the Citys Code Department, monitoring and enforcement of rental properties accounts for approximately 70 percent of staff time, with an estimated cost to the City of $453,000 during 2011. An estimated 84 percent of the violations written by City code inspectors in 2011 were for non-owner occupied rental properties. In 2010, the City collected no revenue for this registry, as there was no initial fee to register; there is only a $25 fee to update the property status. Therefore, the current rental registry fee is completely ineffective in raising revenue to cover the costs of this service. We contacted six other cities in New York to determine their rental registry fees. Unlike the City, which charges $25 when a building is sold, the rental registry fees assessed by four of the six cities ranged from $10 to $100 per year. One city charges a $150 one-time fee per property, while another city charges a one-time fee of up to $900. If the Council changed the rental registry to an annual fee as shown in the following table, the City could generate up to $930,000 in additional revenue which would cover the Citys cost of monitoring these properties and shift the burden to the property owners, while reducing the costs to the general tax base. Table 1: Revenue for Rental Registry Fees Potential Fee Per Year Estimated Annual Revenue $150 $559,350 $250 $ 932,250 Utilities Gross Receipts Tax General City Law authorizes cities to impose a gross receipts tax on the sale of utility services. The tax can be equal to 1 percent of the gross operating income of utilities operating within City boundaries with gross operating income in excess of $500 for 12 months ending May 31. We reviewed the Citys processes and procedures for monitoring, collecting and analyzing utilities gross receipts. City ofcials have not established written policies or procedures which outline the DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 15 15

responsibilities and actions to be taken to analyze, monitor, and enforce the collection of this revenue. When the payee submitted the required paperwork and payment, the payment was entered into the nancial system and classied as gross utilities revenue, but the revenue is not identied as being from a particular payee. Therefore, City ofcials could not generate reports which detailed the amounts received by payee to date, making it difcult to easily analyze and identify uctuations in this revenue stream. While City employees reviewed the actual revenue at budget time, there was no in-depth analysis to determine the cause of uctuations or monitoring to ensure the City received all the revenues to which it is entitled. We analyzed the amounts of utilities gross receipts collected and found that the amount received declined from $341,125 to $275,950, or 19 percent, between 2008 and 2010. Without proper monitoring and analysis, there is an increased risk that the City may not receive all the revenues to which it is entitled. Cable Services Franchise Fees Franchise fees are governed by the Federal Cable Act. Under the act, municipalities are entitled to collect up to 5 percent of gross revenues, annually, that are derived from the operation of the cable system for the provision of cable services. An applicant for a competing franchise is required to le an application with the municipality, who evaluates the application and negotiates a franchise agreement which best serves the interests of the municipality and its residents. The City currently has agreements with two cable service providers. Under the terms of both agreements, the cable service providers are required to pay 5 percent of their gross revenues to the City within the time frames set forth in each agreement. Both agreements have a provision for the City to request additional information or audit the books of the franchisee. City ofcials did not have written policies or procedures in place to ensure proper collection, monitoring and analysis of franchise revenue and did not monitor the franchise fees received. Our review of the franchise fees indicated that the revenue had declined from $290,811 in 2008 to $270,084 in 2010. Upon further examination, we discovered that City employees incorrectly classied one payment of $22,768 as 2011 revenue, when it was for 2010 resulting in restated revenue for 2010 of $292,762. The misclassication may have been identied with proper monitoring and analysis, however, City ofcials accept any amount franchisees remit to the City without verication. Without proper monitoring and analysis, there is an increased risk that the City may not receive all the revenues to which it is entitled. We contacted another city and found that its ofcials require franchisees to submit supporting information for their review to determine if the 16 OFFICE OF THE NEW YORK STATE COMPTROLLER

payment received is complete and in compliance with the franchise agreement. Further, they contracted with an outside vendor to conduct a franchise fee audit and the city was able to recover about $50,000 in refunds. Without proper analysis of utilities gross receipts tax and franchise fees, along with effective and adequate monitoring and collection enforcement, the City cannot be assured that all the revenues to which it is entitled are fully collected. Further, by changing the rental registry, ordinance City ofcials could potentially receive signicant revenue to cover the Citys codes enforcement budget. Recommendations 5. City ofcials should establish an ordinance that equitably covers the costs the City incurs to monitor non-owner occupied rental properties. 6. City ofcials should establish policies and procedures which detail the responsibilities and actions to be taken to ensure all revenues are collected, monitored and analyzed.

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APPENDIX A RESPONSE FROM LOCAL OFFICIALS

The local ofcials response to this audit can be found on the following pages.

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See Note 1 Page 25

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See Note 2 Page 25

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See Note 3 Page 25

See Note 3 Page 25

See Note 3 Page 25

See Note 4 Page 25

See Note 3 Page 25

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See Note 3 Page 25 See Note 5 Page 25 See Note 6 Page 25

See Note 7 Page 25

See Note 3 Page 25

See Note 3 Page 25 See Note 8 Page 26

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See Note 3 Page 25 See Note 9 Page 26

See Note 9 Page 26

See Note 3 Page 25

See Note 3 Page 25

See Note 10 Page 26

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See Note 11 Page 26

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APPENDIX B OSC COMMENTS ON THE LOCAL OFFICIALS RESPONSE

Note 1 Our report covers the period January 1, 2010 through June 21, 2011. We recognize that the City continued to take action and make progress in addressing its nancial condition after our audit scope period. However, the City still has considerable nancial issues that require continued attention. Note 2 A signicant factor in the Citys scal stress occurred because City ofcials appropriated of $5.5 million of unavailable fund balance to balance the 2010 budget. This action resulted in the 2010 general fund decit, the subsequent real property tax increase of 41 percent for the 2011 budget, and the authorization for the City to issue debt up to a maximum of $15 million to liquidate the 2010 reported decits. Note 3 The ndings and conclusions as stated in the report are factually correct. The Citys response does not provide any evidence that the information is incorrect. Note 4 As previously communicated to City ofcials, the Ofce of the State Comptroller does not have the authority to initiate a State Control Board. Approval for State oversight must come from legislation enacted by the New York State Legislature and signed by the Governor. Note 5 The purpose of our annual review of the Citys proposed budget is to determine whether budgeted revenues are adequate to fund budgeted expenditures. Due to the poor condition of city nancial records, accurate information concerning prior year expenditures was not available to us or city ofcials at the time of our budget review. Therefore, we were unable to comment on the need for a tax levy increase at that time. Note 6 We did not comment on this issue because it was not within the scope of our audit. Our audit period ended on June 21, 2011. Note 7 During the exit discussion, we had a general discussion regarding the amount of acceptable fund balance. There is no established fund balance threshold for cities, other than that fund balance should DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 25 25

be reasonable. However, we generally accept the 5 to 15 percent range recommended by Government Finance Ofcers Association. The City Council and City ofcials should determine what they consider an acceptable fund balance after evaluating the Citys nances and cash ow needs. Note 8 City ofcials have not provided any subsequent information concerning the capital project decit after we informed them that the information provided was inadequate. Note 9 As stated in the report, City ofcials did not prepare a comprehensive cash ow analysis. The amount of cash available in the general fund was sufcient to retire the Tax Anticipation Note (TAN) and provide for the cash ow needs through January of the following year. City ofcials did not consider excess cash available in other funds, which could have been used in early February, if needed, to fund operations until February tax collections were received. Note 10 During our audit eldwork, the City Comptroller told us that she had no input in preparing the multiyear reports. Further, interviews with the Consultant indicated that he prepared the reports. The Consultant told us that the reports were adjusted to project a much poorer nancial condition. Note 11 As stated in the report, if the Council changed the rental registry to an annual fee similar to that of other cities, they could generate sufcient revenue to cover the costs that the City incurs to monitor non-owner occupied rental properties.

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OFFICE OF THE NEW YORK STATE COMPTROLLER

APPENDIX C AUDIT METHODOLOGY AND STANDARDS

Our overall goal was to assess the adequacy of the internal controls put in place by ofcials to safeguard City assets and monitor nancial activities. To accomplish this, we performed an initial assessment of the internal controls so that we could design our audit to focus on those areas most at risk. During the initial assessment, we interviewed City ofcials, performed limited tests of transactions, and reviewed pertinent documents such as City policies, Board minutes, and nancial records and reports. After reviewing the information gathered during our initial risk assessment, we determined where weaknesses existed, and evaluated those weaknesses for the risk of potential fraud, theft and/or professional misconduct. We focused our audit testing on those areas most at risk, which included the Council oversight and strategies for revenue enhancements. To accomplish our audit objective and obtain relevant audit evidence, our procedures included the following: We reviewed City policies. We reviewed the City Charter to determine the responsibilities of the City Manager and City Council. We interviewed Civil Service ofcial, Comptroller and staff and the City Council regarding training completed by ofcials. We reviewed prior audit reports and responses of our ofce and the CPA. We reviewed the organizational structure of City personnel. We reviewed the nancial reports provided to the Board and inquired with Board ofcials and the Comptroller about the timing and usage of those reports. We reviewed work papers from prior audits and documented issues identied including the fund balance appropriation and tax increase. We reviewed documentation pertinent to the decit nancing including various communications with our ofce regarding the certication. We documented communications with our ofce regarding issuance of the TAN. We reviewed the rst, second and third quarter multiyear plans submitted to our ofce and communications from our ofce to the City with regard to the submitted plans. We reviewed supporting documentation for the submitted multiyear plans and evaluated the plans to determine compliance with the Newburgh Fiscal Recovery Act. DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY 27 27

We recalculated amounts presented in multiyear plan to determine reasonableness. We researched laws and issues pertaining to gross utilities receipts and franchise fees. We interviewed City employees regarding the process used for collecting and monitoring the gross utilities receipts and franchise fees. We determined the total amount of receipts from 2008 through 2010. For 2010, we evaluated the composition of receipts by examining all supporting documentation for payments received. We contacted three other municipalities and determined obtained information pertaining to the gross receipts each one has received for comparison to the City. We reviewed the resolution pertaining to rental registry and reviewed the applicable Council minutes. We interviewed Comptroller staff and applicable Fire and Code Department staff to determine the process used for collecting and updating the registry. We evaluated the scope of properties affected by this legislation. We interviewed applicable City Code Department personnel regarding the amount of time spent monitoring City properties. We obtained the list of property violations generated through the Code Department and evaluated how many of the violations pertained to non-owner occupied rental properties. We obtained the assessment roll data from the assessor to determine which properties were owner occupied versus non-owner occupied.

We conducted this performance audit in accordance with generally accepted government auditing standards (GAGAS). Those standards require that we plan and perform the audit to obtain sufcient, appropriate evidence to provide a reasonable basis for our ndings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our ndings and conclusions based on our audit objective.

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OFFICE OF THE NEW YORK STATE COMPTROLLER

APPENDIX D HOW TO OBTAIN ADDITIONAL COPIES OF THE REPORT

To obtain copies of this report, write or visit our web page:

Ofce of the State Comptroller Public Information Ofce 110 State Street, 15th Floor Albany, New York 12236 (518) 474-4015 http://www.osc.state.ny.us/localgov/

DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY

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APPENDIX E OFFICE OF THE STATE COMPTROLLER DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY
Andrew A. SanFilippo, Executive Deputy Comptroller Steven J. Hancox, Deputy Comptroller Nathaalie N. Carey, Assistant Comptroller

LOCAL REGIONAL OFFICE LISTING

BINGHAMTON REGIONAL OFFICE H. Todd Eames, Chief Examiner Ofce of the State Comptroller State Ofce Building - Suite 1702 44 Hawley Street Binghamton, New York 13901-4417 (607) 721-8306 Fax (607) 721-8313 Email: Muni-Binghamton@osc.state.ny.us Serving: Broome, Chenango, Cortland, Delaware, Otsego, Schoharie, Sullivan, Tioga, Tompkins Counties NEWBURGH REGIONAL OFFICE Christopher Ellis, Chief Examiner Ofce of the State Comptroller 33 Airport Center Drive, Suite 103 New Windsor, New York 12553-4725 (845) 567-0858 Fax (845) 567-0080 Email: Muni-Newburgh@osc.state.ny.us Serving: Columbia, Dutchess, Greene, Orange, Putnam, Rockland, Ulster, Westchester Counties

BUFFALO REGIONAL OFFICE Robert Meller, Chief Examiner Ofce of the State Comptroller 295 Main Street, Suite 1032 Buffalo, New York 14203-2510 (716) 847-3647 Fax (716) 847-3643 Email: Muni-Buffalo@osc.state.ny.us Serving: Allegany, Cattaraugus, Chautauqua, Erie, Genesee, Niagara, Orleans, Wyoming Counties

ROCHESTER REGIONAL OFFICE Edward V. Grant, Jr., Chief Examiner Ofce of the State Comptroller The Powers Building 16 West Main Street Suite 522 Rochester, New York 14614-1608 (585) 454-2460 Fax (585) 454-3545 Email: Muni-Rochester@osc.state.ny.us Serving: Cayuga, Chemung, Livingston, Monroe, Ontario, Schuyler, Seneca, Steuben, Wayne, Yates Counties

GLENS FALLS REGIONAL OFFICE Jeffrey P. Leonard, Chief Examiner Ofce of the State Comptroller One Broad Street Plaza Glens Falls, New York 12801-4396 (518) 793-0057 Fax (518) 793-5797 Email: Muni-GlensFalls@osc.state.ny.us Serving: Albany, Clinton, Essex, Franklin, Fulton, Hamilton, Montgomery, Rensselaer, Saratoga, Schenectady, Warren, Washington Counties

SYRACUSE REGIONAL OFFICE Rebecca Wilcox, Chief Examiner Ofce of the State Comptroller State Ofce Building, Room 409 333 E. Washington Street Syracuse, New York 13202-1428 (315) 428-4192 Fax (315) 426-2119 Email: Muni-Syracuse@osc.state.ny.us Serving: Herkimer, Jefferson, Lewis, Madison, Oneida, Onondaga, Oswego, St. Lawrence Counties

HAUPPAUGE REGIONAL OFFICE Ira McCracken, Chief Examiner Ofce of the State Comptroller NYS Ofce Building, Room 3A10 Veterans Memorial Highway Hauppauge, New York 11788-5533 (631) 952-6534 Fax (631) 952-6530 Email: Muni-Hauppauge@osc.state.ny.us Serving: Nassau and Suffolk Counties

STATEWIDE AND REGIONAL PROJECTS Ann C. Singer, Chief Examiner State Ofce Building - Suite 1702 44 Hawley Street Binghamton, New York 13901-4417 (607) 721-8306 Fax (607) 721-8313

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OFFICE OF THE NEW YORK STATE COMPTROLLER