town of north norwich -...

Division of LocaL Government & schooL accountabiLity

o f f i c e o f t h e n e w y o r k s t a t e c o m p t r o L L e r

report of ExaminationPeriod Covered:

January 1, 2013 – December 12, 2014

2015M-54

Town of North Norwich

Budgeting

thomas p. Dinapoli

Page

AUTHORITY LETTER 1

INTRODUCTION 2 Background 2 Objective 2 Scope and Methodology 2 CommentsofLocalOfficialsandCorrectiveAction 2

BUDGETING 4 Budget Planning 4 Budget Monitoring and Control 8 Recommendations 9

APPENDIX A ResponseFromLocalOfficials 10APPENDIX B AuditMethodologyandStandards 14APPENDIX C HowtoObtainAdditionalCopiesoftheReport 15APPENDIX D LocalRegionalOfficeListing 16

Table of Contents

11Division of LocaL Government anD schooL accountabiLity

State of New YorkOffice of the State Comptroller

Division of Local Governmentand School Accountability July2015

DearTownOfficials:

A toppriorityof theOfficeof theStateComptroller is tohelp localgovernmentofficialsmanagegovernment resources efficiently and effectively and, by so doing, provide accountability for taxdollarsspenttosupportgovernmentoperations.TheComptrolleroverseesthefiscalaffairsoflocalgovernmentsstatewide,aswellascompliancewithrelevantstatutesandobservanceofgoodbusinesspractices.Thisfiscaloversightisaccomplished,inpart,throughouraudits,whichidentifyopportunitiesforimprovingoperationsandTownBoardgovernance.Auditsalsocanidentifystrategiestoreducecosts and to strengthen controls intended to safeguard local government assets.

Following is a report of our audit of theTown ofNorthNorwich, entitledBudgeting.This auditwasconductedpursuanttoArticleV,Section1oftheStateConstitutionandtheStateComptroller’sauthorityassetforthinArticle3oftheNewYorkStateGeneralMunicipalLaw.

This audit’s results and recommendations are resources for local government officials to use ineffectivelymanagingoperationsand inmeeting theexpectationsof their constituents. Ifyouhavequestionsaboutthisreport,pleasefeelfreetocontactthelocalregionalofficeforyourcounty,aslistedat the end of this report.

Respectfullysubmitted,

Office of the State ComptrollerDivision of Local Governmentand School Accountability

State of New YorkOffice of the State Comptroller

2 Office Of the New YOrk State cOmptrOller2

Background

Introduction

Objective

Scope andMethodology

Comments ofLocal Officials andCorrective Action

The Town of North Norwich (Town) is located in Chenango County (County),covers28.3squaremilesandservesabout1,800residents.Theelectedfive-memberTownBoard(Board)isthelegislativebodyresponsible for managing Town operations, including effectivelymanaging the Town’s budgets. The Town Supervisor (Supervisor)isamemberoftheBoardandservesastheTown’schiefexecutiveofficer and chief fiscal officer.TheBoard appointed a bookkeeper(Comptroller)toassistwiththeSupervisor’sday-to-dayaccountingresponsibilities.

The Comptroller, as the Town’s budget officer, leads the budgetcreation process and consults the Town Clerk (Clerk) and Highway Superintendent for suggested budget line amounts related to their respectivedepartments.TheComptroller,Board,ClerkandHighwaySuperintendent meet to create the budget prior to the public hearing andadoption.TheBoardisresponsibleforadopting,monitoringandcontrolling the budget.

The Town provides various services to its residents, includinghighway maintenance, snow removal and general governmentsupport. The Town’s 2014 budgeted appropriations in the generalfundandhighwayfundstotaled$573,350,fundedprimarilywithrealpropertytaxes,salestax,Stateaidandmortgagetax.

The objective of our audit was to determine if Town officialseffectively planned, monitored and controlled the Town’s budget.Ourauditaddressedthefollowingrelatedquestion:

• DidtheBoardeffectivelymanagetheTown’sbudget?

We examined theTown’s budgets and financial operations for theperiodJanuary1,2013 throughDecember12,2014.WeexpandedourauditperiodbacktoJanuary1,2012andforwardtoDecember31,2014toreviewfinancialtrends.

We conducted our audit in accordance with generally accepted governmentauditingstandards(GAGAS).Moreinformationonsuchstandards and the methodology used in performing this audit are includedinAppendixBofthisreport.

The results of our audit and recommendations have been discussed withTownofficialsandtheircomments,whichappearinAppendixA, have been considered in preparing this report. Town officials


generally agreed with our recommendations and indicated they have taken,orplantotake,correctiveaction.

The Board has the responsibility to initiate corrective action. Awrittencorrectiveactionplan(CAP)thataddressesthefindingsandrecommendations in this report should be prepared and forwarded toourofficewithin90days,pursuanttoSection35oftheGeneralMunicipalLaw.FormoreinformationonpreparingandfilingyourCAP, please refer to our brochure, Responding to an OSC Audit Report,whichyoureceivedwiththedraftauditreport.Weencouragethe Board to make this plan available for public review in the Town Clerk’soffice.


Budgeting

Budget Planning

TheannualbudgetisafinancialplanforTownoperationsindicatingthe Board’s allocation of resources. The Board is responsible formakingsoundfinancialdecisions thatbalance the levelofservicesdesiredby theTown’s residentswith theabilityandwillingnessofthe residents to pay for them. The budget appropriations (estimated expenditures) should reflect theknownneeds forTownoperations,and the budget should provide for their financing by estimatingknownrevenues.Inaproperlyandstructurallybalancedbudget,thetotalfinancingsourcesareequaltotheamountofappropriations,andrecurringexpendituresarefinancedbyrecurringrevenues.

The Board did not effectively manage the Town’s budget. TheBoard-adoptedbudgets for the highway fundwere not structurallybalanced, as they used non-recurring revenues to fund recurringexpenditures.Inthegeneralfund,theBoardalsousednon-recurringmortgage tax revenues to fund recurring expenditures, as well asto fundnon-recurring expenditures and tobuild fundbalance.TheBoard developed general fund budgets before learning how much the Townwouldreceiveinmortgagetaxrevenues,butdidnotamendthebudget once it learned how much these revenues would be.

Because the Board did not make budget amendments when necessary, multiple budget line items were overexpended in boththe general and highway funds. This caused both funds’ overallbudgetstobeoverexpendedin2013,andthehighwayfundbudgettobeoverexpendedin2014.Additionally,theBoarddidnotestablisha goal for fund balance levels and did not monitor available fund balance; as a result, it planned to appropriate fund balance in thehighway fund which was not available. Lastly, the Board did notfund its long-termplans, instead relyingonunplanned revenues toimplementthem,or–inthecaseoftheTown’svehiclereplacement–deferring implementation due to lack of funds.

The Board must adopt structurally balanced budgets that provide for recurringrevenuestofinancerecurringexpendituresforalloperatingfunds. The Board may also use non-recurring revenues such asappropriated fund balance1 as a financing source. However, sincenon-recurringrevenuesarefinite, theyshouldnotregularlyfinancerecurring expenditures, and fund balance should be appropriated

____________________1 Aportionoftheunrestrictedfundbalanceestimatedtobeavailableatyearendcan be designated (appropriated) to help finance a fund’s operations for thesubsequent year.


only if it is available. The Board should adopt budgets that include realisticestimatesofrevenuesandexpendituresbasedonhistoricaltrends. The Board should also estimate the fund balance that will be available at year end that could be appropriated. Finally, it isimportanttoestablishlong-termprioritiesandgoalsandtodevelopcomprehensive, multiyear capital plans that estimate the costs ofcurrentandfuturecapitalassets,andincludeaportionofthesecostsin the annual budgets.

The Board adopted budgets that were not structurally balanced and reliedonnon-recurringrevenues topayforrecurringexpenditures.From2012to2014,theBoardappropriatedfundbalanceinboththegeneral andhighway fundsbut didnot have touse it in2012and2014,duetoreceivingunexpected(unbudgeted)moneys.Whilethisunexpected revenue was fortuitous, relying on one-time revenuescould potentially deplete the Town’s resources or jeopardize itsabilitytoprovideservices.Further,theTowndidnotproperlyfunditslong-termplansandalsousedunbudgetedrevenuestofundstructuralimprovements.

BudgetVariances:HighwayFund–Thehighwayfundbudgets for2012through2014didnotincorporaterealisticrevenueestimatesandappropriations.AlthoughtheBoardroutinelyreceivedmorerevenuein thehighwayfund thanbudgeted, itwasnotalwayssufficient tooffset theoverspendingofbudgetedappropriations.Specifically, in2013, theTownended theyearwithasignificantoperatingdeficit.Further,theTown’sunbudgetedrevenuein2012and2014contributedtooperatingsurpluses;asaresult,the$25,000inappropriatedfundbalance for each of those years was largely unnecessary.

Figure 1: Highway Fund – Budget vs. ActualDescription 2012 2013 2014 Totals

Budgeted Revenues $270,000 $396,500a $296,050 $962,550

Actual Revenues $335,690 $435,270a $494,924 $1,265,884

Variance: Revenues $65,690 $38,770 $198,874 $303,334

Appropriations $295,000 $421,500 $321,050 $1,037,550

Expenditures $316,757 $607,305b $355,442 $1,279,504

Variance: Expenditures ($21,757) ($185,805) ($34,392) ($241,954)

Operating Surplus/(Deficit) $18,933 ($172,035) $139,482 ($13,620)a Thisincludes$115,000ofappropriatedreservesthattheComptrollerreportedasarevenueontheTown’sbudgetand

annualfinancialreport.b TheTown’sexpendituresspikedin2013duetoemergencyroadrepairafterawashoutandtheplannedpurchaseofatruck.

The Board stated that the budget variances were due to the timing of road repair reimbursement, emergency disaster-related revenuesandexpendituresandthedifficultyinprojectingfuturerevenuesandexpenditures.Realisticbudgetingpracticeswouldhelpreduceyear-to-yearfluctuationsandenableTownofficialstomaintainanadequatelevel of fund balance.


BudgetVariances: General Fund –The Board had planned to use$88,000 in fund balance from 2012 through 2014. However, thegeneralfundreceivedsignificantunbudgetedmortgagetaxrevenuesin2012and2014totaling$270,000;specifically,$135,000ineachofthoseyears.Asaresult,thegeneralfundhadoperatingsurplusesof approximately $101,000 in 2012 and $111,000 in 2014. Thesesurpluses more than offset the $47,000 operating deficit of 2013,resultinginanetsurplusof$164,000duringthethree-yearperiod,and eliminated the need to use fund balance as a funding source. Similartothehighwayfund,thefollowingamountsofappropriatedfundbalancewerenotused:$25,000for2012and$35,000for2014.

In2013,theBoarddecidedtoperformrenovationsafterlearningtheTown would receive more mortgage tax revenues in 2014. Theserenovationsledto$39,000innon-recurringexpenditures.Thebudgetwasnotamendedtoaccountfornon-recurringactivity,andthisledtosignificantbudgetvariances.

Figure 2: General Fund – Budget vs. ActualDescription 2012 2013 2014 Totals

Budgeted Revenues $207,450 $215,100 $217,300 $639,850

Actual Revenues $348,424 $234,783 $362,852 $946,059

Variance: Revenues $140,974 $19,683 $145,552 $306,209

Appropriations $232,450 $243,100 $252,300 $727,850

Expenditures $247,516 $281,871 $252,180 $781,567

Variance: Expenditures ($15,066) ($38,771) $120 ($53,717)

Operating Surplus/(Deficit) $100,908 ($47,088) $110,672 $164,492

TheBoard-adoptedbudgetsforboththehighwayfundandthegeneralfundforthe2015fiscalyeargenerallyincorporatedrealisticrevenuesand appropriations. However, in 2012 and 2014, large revenuevariances occurred because of unanticipatedmortgage tax receiptsand emergency management aid.

Maintaining Fund Balance–TheBoarddidnothaveaplannedgoalforsufficientfundbalancelevelsbecausetheyreliedontheSupervisorandComptrollertomaintainthem.Further,theBoarddidnotreceivereportsoffundbalancelevelsduringbudgetcreation,butnonethelessincluded appropriations of fund balance in its adopted budgets for bothoperating funds.However, the2014appropriationof$25,000in fund balance for the highway fund was not available at the end of 2013.TheComptrollertoldusheincludeditbecauseheanticipatedsignificant reimbursement revenue2 in 2014. This reimbursementrevenuewasnotincludedinthe2014budget,andtheapproximately

____________________2 FromtheFederalEmergencyManagementAgency(FEMA)andtheNewYorkStateEmergencyManagementAssociationforrepairingaroadwashout.


$22,000actuallyreceivedwasnotsufficienttoprovideavailablefundbalanceforthe$25,000appropriation.Thehighwayfundreportedapositiveunrestricted fundbalanceat theendof2014onlybecausethebulkofthereimbursementrevenue,intheamountof$144,000,isexpectedtobereceivedin2015andwasrecordedasrevenueforthefiscalyearended2014.

FundingofLong-TermPlans–TheBoard’s implementationof theHighway Superintendent’s road maintenance goal, certain capitalprojects and vehicle replacement was delayed because these plans were not adequately funded.

• RoadMaintenance–TheHighwaySuperintendentestablishedagoalofworkingonallroadsevery10years.3However,the2013annualagreementbetweentheHighwaySuperintendentand the Board for road maintenance spending did not meet this goal because of a lack of funding. The Board approved a roadmaintenanceagreementthatmetthegoalin2014afterofficialslearnedofanincreaseinfundingfromtheNewYorkStateConsolidatedLocalStreetandHighwayImprovementProgram(CHIPS).

• CapitalProjects–TheBoardundertookmajorcapitalprojectstorenovateTownbuildingsin2013and2014afterreceivingsignificantnon-recurring,unbudgetedmortgagetaxrevenues.Althoughthiswasanappropriateuseoffunding,thecapitalimprovements were not formally planned and were undertaken only when the Board learned the Town would receive the unbudgeted revenues.

• Vehicle Replacement – The Town has an informal vehiclereplacement plan that the Board has not funded during our auditscopeperiod;asaresult,theTownrecentlyreplacedatruck thatwas inservice for17yearseven though theplancallsforvehiclereplacementafter10years.

Board members told us the recurring expenditures could not befundedwithoutsignificanttaxincreases,whichtheywerereluctanttoimplement.Failuretoplancapitalimprovementsandrelianceonnon-recurring revenues to pay for road repairs and capital improvements couldleadtopublicpropertyreachingastateofdisrepair,ultimatelydrivingcostsup,whiletheTownwaitsforfunding.

____________________3 Fulfillingthisgoalrequiresworkingon3.37milesofroadperyear.


The Board should monitor the budget and ensure that appropriations are available and budgeted revenues are received before being spent. This includes routinely reviewing budgetary status reports that show theoriginalbudget,anyauthorizedamendments,actualtransactionstodate(i.e.,year-to-daterevenuesandexpendituresbyaccountcode)and the variance between the amended budget and actual transactions. Before appropriations are overspent, theBoard should take timelycorrectiveactiontoamendthebudget,asauthorizedbylaw,orcontrolspending.

The Board did not routinely monitor the Town’s actual resultsagainst the budgets or take any steps to control spending when actual expendituresexceededappropriations.TheBoardreceivedmonthlybudgetarystatusreportsfromtheComptroller;however,thereportsdidnotshowthevariancesbetweenappropriationsandexpenditures,and the Board did not make budget amendments when needed,resultinginoverdrawnexpenditurelineitemsduringthescopeperiod.

GeneralFund–In2013, theTownoverspentnineexpenditurelineitemsbyatotalof$53,199,resultingintheoverexpenditureof thegeneral fundbudget for theyear. In2014, theTownoverspent10expenditurelineitemsbyatotalof$15,910inthegeneralfund.Whilethisdidnotcausetheoverallgeneralfundbudgettobeoverexpendedin2014,therepeatedrelianceonunbudgeted,non-recurringrevenuesplaces the Town at risk of depleting its fund balance and not having the resources to provide essential services.

Highway Fund – In 2013, seven highway expenditure line itemswereoverspentby$197,534;andin2014,fiveexpenditurelineitemswere overspent by a total of $46,098. Because of this significantoverexpenditure, the highway fund’s total budgeted appropriationswereexceededbyover$34,000in2014.

Board members told us they relied on the Comptroller and Supervisor tomakeanymodificationsnecessarytocontrolthebudget.Theydidnot direct the Comptroller to make any budget amendments during 2013or2014ortakeotheractionstoensureappropriationaccountswere not overdrawn.

The failure of Town officials to develop and adopt realistic,structurallybalancedbudgets–whichprovideforrecurringrevenuesto finance recurring expenditures – contributed to declining fundbalanceswithout theBoard’sknowledge. If this trendcontinues, itmayeventuallyimpairtheTown’sabilitytocontinueprovidingvitalservices.

Budget Monitoring and Control


Recommendations TheBoardshould:

1. Create realistic, structurally balanced budgets based onhistorical trends.4

2. Obtain projections of year-end fund balance during budgetcreation and determine whether fund balance will be available before it is appropriated.

3. Setgoalsforfundbalancelevels.

4. Use non-recurring revenues as a funding source for non-recurringexpenditures.

5. Createmoreformalandcomprehensivelong-termplansandprovide funding for these plans in the budget.

6. Obtain budgetary status reports that quantify the variancebetween the budgeted amounts and the actual year-to-daterevenuesandexpenditures.

7. Utilize the Comptroller’s monthly budget-to-actual reportstomakebudgetmodificationsduringthefiscalyear,orenactappropriatespendingcontrolsbeforeanexpenditurelineitemis overspent.

____________________4 GuidanceisavailableintheOSCpublicationUnderstanding the Budget Process

at www.osc.state.ny.us/localgov/pubs/lgmg/budgetprocess.pdf.


APPENDIX A

RESPONSE FROM LOCAL OFFICIALS

Thelocalofficials’responsetothisauditcanbefoundonthefollowingpages.


APPENDIX B

AUDIT METHODOLOGY AND STANDARDS

OuroverallgoalwastoassesstheTown’sbudgetsandfinancialoperationsfortheperiodJanuary1,2013throughDecember12,2014.WeexpandedourauditperiodbacktoJanuary1,2012andforwardtoDecember 31, 2014 to reviewfinancial trends.To achieve our objective and obtain valid auditevidence,ourproceduresincludedthefollowing:

• WeinterviewedTownofficialsandemployeesandreviewedmonthlyreportstotheBoardandBoard minutes of monthly meetings.

• Weanalyzedtherevenues,expendituresandoperatingsurplusesordeficitsinmajorfundsoverthelastthreefiscalyearstogainanunderstandingofTownoperations.

• We compared the actual amounts spent and received by the Town during each of the last three fiscalyearstotheadoptedbudgetstoidentifyanysignificantvariances.

• We reviewed all available long-term planning documents and adopted budgets to assesswhetherthelong-termplanswereincludedintheTown’sbudgets.

• WeanalyzedtheTown’sannualfinancialreportsandadoptedbudgetstodeterminewhethernon-recurringrevenuesreceivedbytheTowninthelastthreeyearswerespentonrecurringexpendituresandwhethertheBoardbudgetedtoappropriateunavailablefundbalance.

• We compared budgetary status reports to adopted budgets on a month-by-month basis toidentifyoverspentexpenditurelineitems.

• Wecomparedthe2015budgetwithanaverageofthelasttwocompletedfiscalyears’actualrevenuesandexpenditurestoidentifyanysignificantchanges.

WeconductedthisperformanceauditinaccordancewithGAGAS.Thosestandardsrequirethatweplanandperform theaudit toobtainsufficient,appropriateevidence toprovidea reasonablebasisforourfindingsandconclusionsbasedonourauditobjective.Webelievethattheevidenceobtainedprovidesareasonablebasisforourfindingsandconclusionsbasedonourauditobjective.


APPENDIX C

HOW TO OBTAIN ADDITIONAL COPIES OF THE REPORT

OfficeoftheStateComptrollerPublicInformationOffice110StateStreet,15thFloorAlbany,NewYork12236(518)474-4015http://www.osc.state.ny.us/localgov/

Toobtaincopiesofthisreport,writeorvisitourwebpage:


APPENDIX DOFFICE OF THE STATE COMPTROLLER

DIVISION OF LOCAL GOVERNMENTAND SCHOOL ACCOUNTABILITYAndrewA.SanFilippo,ExecutiveDeputyComptroller

GabrielF.Deyo,DeputyComptrollerNathaalieN.Carey,AssistantComptroller

LOCAL REGIONAL OFFICE LISTING

BINGHAMTON REGIONAL OFFICEH.ToddEames,ChiefExaminerOfficeoftheStateComptrollerStateOfficeBuilding,Suite170244 Hawley StreetBinghamton,NewYork13901-4417(607)721-8306Fax(607)721-8313Email:[email protected]

Serving:Broome,Chenango,Cortland,Delaware,Otsego,Schoharie,Sullivan,Tioga,TompkinsCounties

BUFFALO REGIONAL OFFICEJeffreyD.Mazula,ChiefExaminerOfficeoftheStateComptroller295MainStreet,Suite1032Buffalo,NewYork14203-2510(716)847-3647Fax(716)847-3643Email:[email protected]

Serving:Allegany,Cattaraugus,Chautauqua,Erie,Genesee,Niagara,Orleans,WyomingCounties

GLENS FALLS REGIONAL OFFICEJeffreyP.Leonard,ChiefExaminerOfficeoftheStateComptrollerOneBroadStreetPlazaGlensFalls,NewYork12801-4396(518)793-0057Fax(518)793-5797Email:[email protected]

Serving:Albany,Clinton,Essex,Franklin,Fulton,Hamilton,Montgomery,Rensselaer,Saratoga,Schenectady,Warren,WashingtonCounties

HAUPPAUGE REGIONAL OFFICEIraMcCracken,ChiefExaminerOfficeoftheStateComptrollerNYSOfficeBuilding,Room3A10250VeteransMemorialHighwayHauppauge,NewYork11788-5533(631)952-6534Fax(631)952-6530Email:[email protected]

Serving:NassauandSuffolkCounties

NEWBURGH REGIONAL OFFICETennehBlamah,ChiefExaminerOfficeoftheStateComptroller33AirportCenterDrive,Suite103NewWindsor,NewYork12553-4725(845)567-0858Fax(845)567-0080Email:[email protected]

Serving:Columbia,Dutchess,Greene,Orange,Putnam,Rockland,Ulster,WestchesterCounties

ROCHESTER REGIONAL OFFICEEdwardV.Grant,Jr.,ChiefExaminerOfficeoftheStateComptrollerThe Powers Building16WestMainStreet,Suite522Rochester,NewYork14614-1608(585)454-2460Fax(585)454-3545Email:[email protected]

Serving:Cayuga,Chemung,Livingston,Monroe,Ontario,Schuyler,Seneca,Steuben,Wayne,YatesCounties

SYRACUSE REGIONAL OFFICERebeccaWilcox,ChiefExaminerOfficeoftheStateComptrollerStateOfficeBuilding,Room409333E.WashingtonStreetSyracuse,NewYork13202-1428(315)428-4192Fax(315)426-2119Email:[email protected]

Serving:Herkimer,Jefferson,Lewis,Madison,Oneida,Onondaga,Oswego,St.LawrenceCounties

STATEWIDE AUDITSAnnC.Singer,ChiefExaminerStateOfficeBuilding,Suite170244 Hawley Street Binghamton,NewYork13901-4417(607)721-8306Fax(607)721-8313

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