Understanding the comptroller’s advice on the water fund


The New York State Comptroller’s office recently released a review of the City of Amsterdam’s 2020-2021 budget. The report detailed many areas of the budget process that need to be improved. You can view the report online here. The report’s advice on the city’s water fund is one section in particular which I believe could be mis-interpreted by both city officials and residents. Fortunately, the comptroller’s office was able to clarify the advice in the report, shedding some additional light on how the water fund’s finances should be looked at and documented in the future.

On page 3 of the report, it reads:

The adopted water fund budget is unbalanced…The Council should not adopt water fund budgets that are unbalanced and include anticipated financing sources in excess of the projected expenditures and other uses.

On first read, one might conclude that the comptroller’s office is supporting the opinion that some have expressed locally that the city should not ever set water rates to generate even a dime more in water revenues over what is required to operate the system.

This viewpoint was reflected in the proposed 2018-2019 budget which included a 17% reduction in flat water fees for city residents, which would bring budgeted revenues exactly equal to budgeted expenses. In previous years, rates were set to generate a surplus in order to transfer money to the general fund, reducing the property tax levy. Rates were kept flat that year, rather than reduced, and remained flat for the next two budgets as well. The fund generated a surplus in each budget year, but not enough to cover the transfers to the general fund, but that’s another issue.

New York State General Municipal Law 94 clearly gives municipalities who operate a water system the right to charge rates that generate a surplus which can be used for other purposes:

…such municipal corporation may earn from and out of such operation a fair return on the value of the property used and useful in such public utility service, over and above costs of operation and necessary and proper reserves. Profits resulting from the operation of such a public utility service may be used for the payment of expenses or obligations incurred by such municipal corporation for municipal purposes…

So I reached out to the comptroller’s office to see if they could explain the apparent contradiction between their advice and the state law.

Deputy Press Secretary Tania Lopez responded and explained that the city could still generate a surplus to transfer to the general fund, but it had to be properly documented.

If, for example, within that budget there were a provision to have revenues exceed expenditures in order to provide a contribution from the water fund to a reserve fund or to transfer to the general fund then that would be considered sound budgeting and would still result in a balanced budget. 

In this case, however,  the city had an unbalanced budget because they were raising more than needed for expenditures with no provision in the budget as to why the additional revenue was needed.

So essentially, the water fund budget should include a line-item expense for the amount of surplus the city decides they want to shoot for. That way, revenues and expenses will show as equal. Then if actual expenses and revenues are close to budget, the fund will have a surplus which can then be transferred to the general fund to reduce property taxes in the following fiscal year.

A few years ago, the target surplus was listed as a line-item in the budget, but there was a problem with that as well according to the city’s auditing firm EFPR Group. Their issue was that the general fund shouldn’t be balanced based on a projected surplus from the water budget during the same fiscal year, but rather by a transfer of the water fund balance that has already been accumulated. In other words, the transfer between the water fund and general fund should be based on a positive fund balance in the water fund that has already been verified to exist from the previous fiscal year.

It’s for that reason EFPR Group didn’t count several budgeted transfers from the water fund to the general fund, causing the fund balance to balloon to several million dollars.

Controller Matt Agresta used EFPR Group’s recommendations to show the transfer for the last three budgets.

Now if you look at the actual budget for 2020-2021, you’ll probably think everything I just wrote is wrong, because it shows expenses are greater than revenues, but it’s because they’ve added the fund balance transfer to the total expenses. Why, I don’t know, like I mentioned, it’s formatted according to EFPR Group’s recommendations. But it’s clear the comptroller subtracted that number back out in order to do their analysis, and you can see a chart of how they looked at the funds on page 2 of their report.

So putting both pieces of advice together – the budget needs an expense line item that clearly shows the city’s intent to generate a certain surplus for the next fiscal year, but as a policy, the city should not spend anything from that line. This will show revenues equal to expenses which is a balanced budget. Then the fund balance transfer should be shown to be an appropriation of existing fund balance from the previous fiscal year, not the same year’s projected surplus.

So while it’s clear we can legally set rates to generate a surplus which can be used to lower our city property tax, whether we should or not is another question. I’ve consistently argued that we should, but that’s a question to debate another day!

Tim Becker

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