Jul 9


Buffalo’s in shaky fiscal shape

Depleted reserves, negative cash flow prompt City Hall to borrow millions from School Board to pay its bills

To hear Mayor Byron Brown tell the story, the City of Buffalo’s finances are strong and stable, and his finance team has constructed another in a series of sound, responsible budgets. 

Two important bellwethers put the lie to that narrative.

The first is the depletion of the city’s reserves. In the past decade, the Brown and the Common Council have used $107 million in reserves to close budget shortfalls. As a result, the city has no reserves left to plug future deficits.

The lack of reserves has contributed to a second problem — poor cash flow — that resulted in the city running out of money entirely in January. That prompted the city to borrow from what might appear an unlikely source: the Buffalo Public Schools. 

The city opened the year with what amounted to a negative balance in its checking accounts — more than $28 million in the red.

The hole grew deeper: By June 1, the city projected it would be more than $44 million in the red.

“Normally, you’re out of business,” Lovejoy District Council Member Richard Fontana, who chairs the Council’s Finance Committee, told Investigative Post. “If you’re running six months of negative cash flow, you don’t have money to pay the bills.”

The city kept borrowing from the school district for the next six months, until a massive installment of state aid arrived at the end of June, bringing the city’s cash flow back into the black for the first time in 2019.

School district to the rescue

The city is custodian of the school district’s money and has been using it this past year to avoid having to borrow month to month, week to week, in order today its bills. 

Happily, the school district has plenty of cash to lend. The district began its previous fiscal year on July 1, 2018, with $201.6 million in cash on hand. It expects, when the year’s books are balanced, to have started July 1 of this year with about the same amount.

Jim Heaney discusses the story on The Capitol Pressroom

Geoffrey Pritchard, the school system’s chief financial officer, attributed the district’s strong cash position to conservative budgeting. His team tries to overestimate expenses and underestimate revenues, he said, while keeping an eye on a four-year financial plan, one goal of which is to grow the district’s cash reserves.

State aid and the school district’s share of the county sales tax both exceeded the district’s projections this fiscal year. By improving data collection, Pritchard said, the district increased its federal Medicaid payments, too.

At the same time, the district’s per-student payment to charter schools has dropped because one charter school closed this year. (Another is closing this summer.) And the district has realized considerable savings from new contracts with its teachers and administrators, especially in healthcare costs.

“It’s still increasing,” Pritchard said of healthcare costs, “but we’re able to reduce those increases to almost a nominal amount. Where in the market people might be looking at a 5 or 6  percent increase, we’ve been flat for three or four years in health insurance.”

Those cost savings and extra revenues are like found money: Pritchard might have hoped, even suspected, they might materialize, but the district didn’t budget for them. As a result, they’re a bonus that adds to the school district’s positive cash flow. 

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By contrast, the Brown administration’s proposed budget for 2019-2020 includes $21 million in revenue that the city comptroller’s office has pegged as dubious. The comptroller has also warned that the mayor’s budget likely underestimates overtime costs for police and fire personnel, as it does nearly every year.

Those problems have plagued the Brown administration’s budgets for nearly a decade, since the recession of 2008-09. In the past two budget cycles alone, shortfalls created by overestimating revenues and underestimating expenses have eaten up $57 million in reserves.

If that pattern continues, it may put at risk the city’s credit rating. In the short term, it constricts cash flow. 

Protecting and increasing its reserves — what accountants refer to as fund balance — is part of the reason the school district has been able to maintain healthy cash flow.

“Fund balance drives the cash balance,” Pritchard said, referring to the district’s finances. He did not address the city’s situation directly. “You want to maintain a healthy fund balance in order to maintain a healthy cash balance.”

Cash Flow: City of Buffalo vs. Buffalo Public Schools

The school district’s budget is about twice as big as the city’s. But the city began the fiscal year with less than a quarter of the cash on hand the school district started with.

That’s partly because began the year with no “unassigned fund balance,” which is the name accountants give to reserves that can be used however the city sees fit — such as one-shot building projects, settling new labor contracts, or closing unanticipated budget gaps.

The city began the fiscal year with almost $92 million in reserves, but about $53 million of that is already earmarked for specific purposes. The remaining $38.7 million is the so-called “rainy day fund,” which, according to the City Charter, is not to be used except in case of an emergency.

Bad habits, hard to break

The comptroller’s office estimates the fiscal year that ended June 30 will result in a budget deficit between $10 million and $27 million, depending on whether the city receives its share of Seneca casino revenues by the end of August. The city has received nothing for hosting the downtown casino since 2016, though the fiscal year that just ended relies on $17 million in casino money to stay balanced. 

However, according to Fillmore District Council Member David Franczyk, it’s not simply the state’s dispute with the Senecas that has thrown the city’s budgets out of balance. Franczyk pointed to comptroller’s reports from recent years that take issue with the Brown administration’s budget assumptions, particularly in regard to revenue. 

Indeed, previous years’ assumptions about revenue from the sale of city-owned properties, for example, have proved overly optimistic. Those rosy but ultimately inaccurate projections account for more than $10 million in shortfalls in the last two budget cycles — shortfalls plugged with the city’s dwindling reserves.

“They’re overestimating the revenue,” Franczyk said, “making all kinds of projections that don’t mirror what’s happened in the past. The revenue coming in — which is affecting cash flow — is much lower than [they’re] projecting.”

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The mayor’s budget for 2019-20 relies on $11 million more from the Senecas, despite a warning from state budget officials that municipalities should not rely on or budget for casino money. 

That budget also includes $4.8 million to be generated from a new way of operating the city’s annual auction of properties seized in foreclosure for nonpayment of city taxes and fees. The new plan has met with reservations from members of the Council and is hotly contested by advocates for low-income property owners. As a result, the plan may not be implemented in time for the October auction.

The comptroller’s analysis of Brown’s 2019-20 budget proposal also cast a skeptical eye on a number of smaller lines — proposals to levy new fees on AirBnB operators, on banks that own so-called “zombie” properties, on ticket purchases at a handful of entertainment venues — none of which are sure things. 

In all, the comptroller identified $21 million in risky revenue assumptions in Brown’s 2019-20 budget.

The city currently has no formal plan in place to replenish its reserves, despite urging from bond-rating agencies — the firms that determine the city’s creditworthiness — that it adopt one.

Investigative Post sought comment from Mayor Byron Brown on these issues. Instead, the city  sent an email statement from Donna Estrich, the mayor’s finance chief. Estrich doesn’t think the city has a fund balance problem.

“The process for fund balance use and replenishment has historically served the city well,” Estrich said. “We aren’t seeking changes.”

The vicious cycle

As in most businesses and households, the city runs a predictable annual cycle of income and expenses: Some months the city takes in a lot of money, some months it pays out a lot; some months the city is flush, some months it’s scraping the bottom.

Thirty percent of the city’s revenue is state aid, Estrich pointed out in her statement. Buffalo’s subsidy from Albany arrives in three chunks: $19.1 million in December, $43.8 million in March, and $98.3 million in June.

Twenty-eight percent of the city’s revenue is property taxes. About half of that is received in July and August, and another third of it in December and January.

Expenses are more spread out. The exception is December, the city’s most expensive month by a long shot — almost by a factor of two. About $38 million in pension payments hit in December last year, along with about $20 million in debt service. In total, the city paid out more than $98 million in December 2018.

Because the city had less than $9 million on hand to meet those expenses, and no reserves to cushion the blow, those big payouts last December helped send the city $28 million into the red at the beginning of January.

Fontana, the chairman of the Council’s Finance Committee, told Investigative Post that borrowing from the school district to make ends meet beats short-term borrowing against future revenue — what’s called a revenue anticipation note, or RAN.

“A RAN costs you about a million dollars in interest. So you don’t want to do that needlessly,” Fontana said. 

Even if the borrowing could be done at half that price, he added, that’s money taken away from running city programs.

“So instead of selling a RAN to cover that shortfall in revenue, we are essentially dipping into the school board’s piggy bank, using their excess funds to fund our operation until such time as we pay back their piggy bank.”

Fontana said a lot of the city’s problems would be solved if Albany would spread out its subsidy payments over the course of the year. That’s not a new idea, and state government — which follows its own cash flow cycle — has demonstrated no interest.

Asked if the city’s cash flow problems weren’t caused by structural budgeting deficits, rather than the timing of state subsidies, Fontana shrugged: “It doesn’t help. But when you’re six months negative, it’s going to be a situation where timing could help tremendously.”

Monthly reports, little to no action

The city’s tight cash flow has concerned the mayor, comptroller and Common Council since at least last July. Back then, the possibility of shortages prompted meetings between all three branches of city government to discuss solutions. 

The Council reached a formal agreement with the mayor’s office: The comptroller would begin filing monthly cash flow reports with the Council. If, in any given month, the city’s cash on hand fell to two-thirds or less than the same month a year prior, the mayor’s office and the Council’s leadership would meet to address the issue.

Those meetings have not been frequent, though each of the shortages from January to June should have prompted one. There was a meeting at the end of May, however, according to the Council’s majority leader, Niagara District Council Member David Rivera.

“We were assured with proper justification that the city would end its fiscal year with a positive cash flow,” Rivera said of the recent meeting. “Currently the situation looks stable, but as the city continues to create new revenue streams, it is important we have these monthly reports.”

Rivera’s statement echoes that provided to Investigative Post by Estrich, the mayor’s finance commissioner.

“The City is projecting to have a budgetary surplus for year end and the cash flow reflects a positive year-end balance with no need to borrow,” Estrich said.

What was and what might be

Brown’s reputation as a prudent manager of city finances is a result of comparison to his predecessors, from whom he inherited a mess. 

In 1992, under Mayor Jimmy Griffin, the city was basically bankrupt. Its fund balance had dropped below zero, which led to tax hikes of 19.3 percent that year and 9.5 percent the following year, squeezing a populace already shell-shocked by the devastated local economy. 

The city’s credit rating was just a couple short steps above “do not lend.”

Griffin’s successor, Anthony Masiello, held the pieces together with the help of increased subsidies from state government, until 2002, when another looming budget deficit caused Albany to lose patience.

The state bailed out the city again, but in 2003 imposed the Buffalo Fiscal Stability Authority, or control board, which exercised draconian oversight of city budgeting. Among other measures, it approved all expenditures over $50,000; implemented a wage freeze on city employees; controlled the city’s borrowing; and mandated replenishment of the city’s reserves.

When Brown took office in 2006, the city was on the mend: Its credit rating was on the rise, its reserves growing. That path continued under Brown, whose administration proved adept at navigating the recession of 2008-09, which was especially hard on poor cities like Buffalo.

The control board, with an annual budget just shy of $1 million, moved from oversight (or “hard”) mode to advisory (or “soft” mode) in 2012. Its members, who meet monthly, appear unfazed by the structurally imbalanced budgets of recent years, and the subsequent depletion of fund balance.

“We are confident that we’re working well with the city and the school district to be sure that the concerns we have are being addressed,” Fred Floss, a control board director and SUNY Buffalo State economics professor, told Investigative Post. “So unless something changes we’re comfortable not being in a control status at this point.

Indeed, the drain on reserves over the past decade, and the cash flow crisis of the past six months, do not signify a return to the bad old days of the 1980s and 1990s.

But look where the arrows are pointing:

The chart above comes from an educational presentation about fund balance, along with a formal policy proposal governing its use and replenishment. Both were submitted earlier this year to the Common Council by Vanessa Glushefski, who was acting comptroller for about three months before being replaced by Barbara Miller-Williams and then fired. The chart is intended to illustrate the link between the city’s reserves and its credit rating.

Both items were “received and filed” by the Council.  That is to say, they’ve been buried.

In other words, neither the Council, the mayor, the city’s finance commissioner, nor its control board seem willing to address a problem that made the city so broke that it had to borrow from the school district for the first six months of this year.

Investigative Post

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