Municipal Solutions proposes strategy to eliminate city fund balance deficits

Jeffrey Smith, president of Municipal Solutions talks with Controller Matt Agresta and members of the common council

The City of Amsterdam could eliminate its fund balance deficits in five years or less if the right actions are taken soon, according to Jeffery Smith, president of Municipal Solutions, the city’s long-time financial advisory firm. However, a hefty tax increase of 10% to 12% for the next fiscal year is likely to be part of the solution.

Smith discussed the city’s financial situation and the steps he believes are necessary to get the situation back on track with council members during a finance committee meeting yesterday.

“Once you’ve lost the fund balance, it’s probably going to take you five years to go through the process and make some very tough decisions along the way,” he said.

He quoted updated numbers on four city fund balance deficits from the 2017-2018 fiscal year which he said have resulted from expenditures exceeding revenues.

  • Sewer fund: -$192,826
  • Transportation fund: -$ 1,348,348
  • Golf course fund:  -$772,059
  • General fund: -$6,027,556

According to Controller Matt Agresta, the numbers have been reported to New York State in the city’s 2017-2018 Annual Update Document (AUD), but have yet to be confirmed by the state. The numbers have also not been audited yet.

Smith said the total of all fund balance deficits is just over $8.3 million. However, he noted the water fund and the sanitation fund both have positive fund balances. According to the most recent AUD, the water fund is positive $3,440,734 and the sanitation fund is positive $590,603.

According to Smith, the city has made inter-fund loans from funds with positive fund balances to balance the ones with deficits, but that practice can’t continue forever.

The solution, according to Smith, is to seek approval from the New York State Legislature to engage in “deficit financing” which could either involve one large 10-year loan which would bring all the negative fund balances back to zero, or a series of short-term bond anticipation notes (BAN’s).

He recommended the latter solution so that the city is not locked into a long-term commitment at a high interest rate.  In a report presented to the council, he wrote that Moody’s had withdrawn the city’s credit rating, resulting in “junk bond” interest rates for any future borrowing.

“I don’t feel that we should be locking in these deficit bonds now paying a very high interest rate…because I think we can take corrective actions, over the [first three] years which can eliminate those deficits before we have to lock-in anything long-term,” said Smith.

“Let’s do the BAN’s, and then we can make improvements and then the market will see those improvements and the interest rates will go down,” he added.

Although Smith thinks that the city may not have to borrow the full $8.3 million, the cost of the borrowing will require taxes to be raised.

“Tax rates are going to have to go up,” he said. “That will send a message to the investment community that you are serious.”

Mayor Michael Villa, who is beginning work on the 2019-2020 budget, said that any tax increase needs to be set aside specifically to pay for the debt.

In order to raise taxes above the state-mandated tax cap, a resolution must be passed by the council by at least four out of the five members.

In order to engage in the deficit financing, the city must also have its deficit certified by the state comptroller’s office.

Smith said that the work that has been done to bring the city up-to-date on it’s required state reporting and audits have only recently made it possible for the deficit to be officially certified by the state.

In addition to the borrowing, Smith said the city must take steps to end the “historical overestimating of revenues, underestimating of expenditures” that have caused the deficits to grow and adopt more conservative numbers in the next budget, as well as to start multi-year budget and capital project planning.

Resolving the dispute between Montgomery County and the city as to the amount of property tax the city owes to the county could also help the situation. The general fund balance was lowered by $1.5 million on the advice of the city’s auditors in 2016 in order to reflect the county’s position. However, Villa said that there is support on the county legislature to write off the discrepancy which would allow the city to adjust the fund balance back up. Villa urged members of the council to work with the legislature on the issue.

Smith expressed optimism that the city could find its way out of the situation based on his experience with several other New York State cities with similar problems that he has worked with in the past.

“I can say that every one of the cities I have worked with after going through the deficit financing process, is in much better fiscal shape today than they ever were when they went in,” he said.

Tim Becker

Tim Becker is the owner of Anthem Websites Inc. which publishes The Compass. He serves as both editor and a writer.