Unanswered financial questions part 1: inter-fund loans

As the city moves closer to obtaining deficit financing – borrowing what could be as much as $8 million to correct its fund balance deficit problem – several unanswered questions remain that I believe are crucial to properly understanding and addressing the situation.

The first question in a nutshell is: how much does each city fund owe the other?

To better understand this question and why it is important, I’ll back up a step and ask a different question: if the city spent a total of $8 million more in expenses than it received in revenue, where did the cash come from to pay those expenses?

This question has been answered – generally – already. In a meeting on January 15, 2019 with common council members, the mayor, the controller, and Jeffery Smith, president of Municipal Solutions, the city’s long-time financial advisory firm, Smith stated that the city has been borrowing money from funds with positive fund balances to cover expenses in funds that were running into the negative.

So in other words, the city borrowed from itself.

When one fund borrows money from another, it’s called an inter-fund loan. Unlike a fund balance transfer, a loan is expected to be paid back. When a fund loans money to another, the amount is booked to a line labeled “due from other funds” and counted as an asset to that fund. The fund that borrows the money books the amount to a line labelled “due to other funds” which is counted as a liability.

To get a better picture of this, we can look at the city’s most recent annual update document (AUD) for the 2018-2019 fiscal year which was recently submitted to New York State. We can also look at audit reports from past fiscal years. These reports contain the total amounts “due to” and “due from” each fund.

For instance, at the end of the 2018-2019 fiscal year, the general fund, which is the fund with the biggest deficit, owed a total of $4,805,031 to other funds. The year before, it owed $4,460,154. The transportation, golf course, and sewer fund, which also have negative fund balances, each owed amounts in the $1 million range. See the notes at the end of this article for all the exact totals for all the funds.

The two funds with the biggest “due from” amounts are the water fund, which is owed a total of $2,089,157 from other funds, and the capital projects fund, which is owed a total of $5,096,136 from other funds as of the end of the 2018-2019 fiscal year.

So just from this information, we can tell that most of the cash to cover the deficits in the general, transportation, golf course, and sewer funds, probably came from a combination of the water fund and the capital projects fund. There simply aren’t any other funds with due-from’s large enough to cover the due-to’s in the funds with negative balances.

While the water fund is an enterprise fund which is allowed under New York State law to supplement the general fund, the capital projects fund contains money that was borrowed, via bond anticipation notices (BAN’s) specifically for large infrastructure projects or major equipment purchases. More on that later.

So what are the specific amounts that each fund loaned to another? That seems like a pretty simple, basic question, doesn’t it? What numbers were added up to get those totals? Apparently, the answer is a big mystery.

The first step I took to find the details of the inter-fund loans was to send an information request to the controller’s office through the city clerk’s office in March 2019. Controller Matt Agresta’s response (in the form of an email back to the city clerk) was forwarded to me:

KVS [accounting system] cannot accurately provide that information. While I could get information on a portion of the due to/due from, there is no way for me to generate the information that is being requested by Mr. Becker. The reason for that is a result of the poor implementation of KVS when it was brought into the city. Whomever was responsible for setting up that portion of the system did not do so, and as a result, we cannot give accurate figures on the requested information.

The city’s KVS accounting software was not being used correctly before Agresta took office in 2014, which was a primary factor in creating the financial mess that we are only now finally getting a handle on. However, great progress has been made under Agresta’s watch, so it surprised me that this issue with the software had not been addressed yet.

While pondering that response, I next had a chance to ask the question in-person to Joseph Klimek, who represented the EFPR Group, the city’s auditing company, at a council meeting in May 2019 during which the 2017-2018 audit reports were being reviewed. He replied that the answer to my question was in one particular audit report. Of course, I didn’t have any of the audit reports with me during the meeting because no city officials who I asked were willing to give me a copy until after the meeting.

When I received the reports after the meeting, I checked the one that Klimek had indicated and only found the totals for each fund, similar to what I had found on previous years’ reports. I followed up with an email to Klimek, asking for clarification. He replied “check again” and reiterated that the information I was looking for was in the report he had originally indicated. After I replied, specifying the exact page I was looking at and re-stating that I saw totals and no other details in the rest of the report, he replied, “any other response should come from the city.”

That’s fine, EFPR Group is a private company and not obligated to give me any information directly. However, the city certainly is obligated.

So, I thought further, if the city’s accounting system couldn’t provide the answer, how did EFPR Group calculate those totals? Even if EFPR Group wouldn’t tell me directly, they should be able to explain themselves to a city official if asked, right?

So I talked with former mayor Michael Villa, who at least agreed it was a relevant question. I talked with Agresta again. I submitted another information request with a wider scope, asking for any communication between the city and EFPR Group which referenced the inter-fund loans, which yielded nothing. I also talked to several council members, and the only one who finally got back to me who actually said he had called EFPR Group to ask about the information I was looking for was former alderman Dave Dybas. He didn’t recount the exact details of the conversation, and he indicated they talked about other subjects as well. But ultimately, he said he did not get the information from them.

At that point, I felt stuck – pondering why such a simple question was so hard to answer.

One interesting fact I uncovered is that New York State General Municipal Law has very strict rules about inter-fund loans, also referred to as “inter-fund advances.”

Read the text of the law here
Read a simplified explanation from the NY Comptroller’s office here (pdf)

To summarize the law: 1) Any inter-fund loan has to be approved by the same method as any other budget transfer, which is by a resolution passed by the council and signed by the mayor. 2) Accurate records have to be kept detailing each loan. 3) Inter-fund loans have to be paid back by the end of the same fiscal year.

I’ve been covering the common council for over six years now, and I’ve don’t recall ever seeing a resolution authorizing an inter-fund loan.

It’s possible that lack of accurate accounting records in the past created situations where where city officials didn’t have correct fund balance numbers, and money from one fund could have been erroneously appropriated by another that used the same bank account.

However, given that one of Agresta’s first actions when he took office in 2014 was to move the capital projects fund to it’s own dedicated bank account, it’s puzzling to me how any inter-fund loans from that fund could not be intentional and recorded.

It also continues to puzzle me why no one else in city government has been able to provide any answers either.

After taking a hiatus from the story for a while, not really wanting to write a story about unanswered questions, I took it up again recently with Mayor Michael Cinquanti. He doesn’t have any answers yet either, which I understand, because he’s only been in office for a couple months. However, he indicated at last Tuesday’s council meeting that the city is nearing the point where it will pursue deficit financing. I strongly believe that the question of inter-fund loans is one of four questions that need to be answered before the final decision is made on the amount to borrow for.

In summary, it’s important to know the details of how the inter-fund loan totals were calculated for several reasons. First, to comply with New York State law, which is reason enough by itself. Second, to hold our elected leaders accountable for their decisions in regards to the city finances. And third, to understand exactly where deficit financing cash should ultimately end up once it’s injected into the city coffers.

Given what we do know about the inter-fund loans, the largest amount of deficit financing funds should end up going back to the capital projects fund. But that leads to another big question. That’s the subject of the next article.

Additional notes:

Inter-fund loan totals per the 2018-2019 fiscal year AUD
(Submitted to NY State, but un-audited as of 3/5/2020):

General fund due-from other funds: 1,779,839 (asset)
General fund due-to other funds: 4,805,031 (liability)
Sanitation due-from: 662,941
Sanitation due-to: 437,573
Golf due from: 0
Golf due-to: 957,867
Transportation due-from: 0
Transportation due-to: 1,369,147
Water due-from: 2,089,157
Water due-to: 524,608
Sewer due-from: 425,207
Sewer due-to: 1,866,503
Capital projects due-from: 5,096,136
Capital projects due-to: 0

General fund due-to history: