Analysis of the comptroller’s water fund warning


Four straight years of no increases in water rates, while at the same time depending on seven-digit transfers from the water fund each year to reduce city taxes isn’t a sustainable financial plan for the City of Amsterdam. The possibility that the water fund balance could be depleted was proven and well-publicized at least a year ago. Yet in Mayor Michael Cinquanti’s proposed budget for 2021-2022, we see virtually no water rate increase (.25%) and the exact same $1.3 million appropriation of fund balance to transfer to the general fund as we had last year.

In a letter released on Friday, the New York State Comptroller’s Office gives a very clear warning:

We caution city officials that the water fund’s continued appropriation of fund balance to finance interfund transfers to the general fund could eventually result in the unhealthy depletion of the water fund’s fund balance.

You can read the entire review here

So how bad is it?

First, I have to recap a few things…

Last year, I did some basic math to see what the projected fund balance for the water fund would be at the end of 2020-2021 using the last known audited fund balance at the time, which was from the 2018-2019 audit report, and then adding budgeted revenues and subtracting budgeted expenses and balance transfers from the 2019-2020 budget and the proposed 2020-2021 budget. I used budgeted numbers because no one had actual numbers, they weren’t known yet.

The result I got was $163,807 at the end of 2020-2021.  Here’s the article where I showed my math.

So after that, in the final version of the budget, the council reduced the budgeted transfer for 2020-2021 from $1.6 million to $1.3 million. So, the new projected amount would be $415,179. Still not enough to cover the proposed 2021-2022 transfer.

But wait, budgeted numbers are, of course, just estimates. After the last budget was passed, the city later completed it’s state-required annual update document (AUD) for the 2019-2020 fiscal year which provided us updated actual figures for the water fund. And, thankfully, actual expenditures for the fund were far below what was budgeted. Although it’s worth noting, these figures have not been audited.

Here’s a comparison of what was budgeted in the water fund versus the actual results for 2019-2020:

Budgeted revenues: 5,939,435
Actual revenues: 5,915,002

Budgeted expenses: 5,809,649
Actual expenses: 4,720,955

Budgeted transfer to general fund: 1,600,000
Actual transfer to general fund: 1,000,000

Wow! So expenses came in over $1 million below budget. And someone, at some point, decided to transfer less to the general fund than was approved by the council. Because of that, we were left with an astounding $2,605,954 fund balance as of June 30, 2020.

What is the reason for expenses coming in so low? One of the main contributing factors, according to Agresta, was that the contingency line, budgeted at $700,000 was not fully used.

So using the budgeted figures for the current fiscal year (because we don’t have the actual values yet), we can come up with a new estimate

2019-2020 Ending fund balance (per AUD, not audited): $2,605,954
+ 2020-2021 budgeted revenues: 5,939,011
– 2020-2021 budgeted expenses: 5,640,856
– 2020-2021 budgeted transfer: 1,348,629
= Estimated fund balance end of 2021: 1,555,480

Yay! So there should be enough for the proposed transfer.

But what about next year? Budgeted revenues and expenses in the proposed budget are not set to generate any surplus, but it still calls for a $1,348,629 transfer.

Estimated fund balance end of 2021: 1,555,480
+ 2021-2022 proposed budgeted revenues: 5,920,097
– 2021-2022 proposed budgeted expenses: 5,920,097
– 2021-2022 proposed transfer: 1,348,629
= Estimated fund balance end of 2022: 206,851

So if actual values end up being close to budgeted, we’d only end up with a $206,851 fund balance at the end of 2022, which obviously is far short of the amount needed to keep up with the seven digit transfers.

But will expenses continue to come in under-budget like they did last year? The current and proposed budget also contain a $700,000 contingency line. Should we expect that line to continue to be underutilized? If so, shouldn’t the line be changed? Otherwise, what’s the point of a budget?

So what should be done?

One option is to remove or reduce the transfer. But according to the budget spreadsheet released by the city, if the $1.3 million transfer were eliminated, property taxes would have to be raised a whopping 24% to make up the difference. That translates to about an extra $359 per year for a property assessed at $80,000. So even if the transfer were only cut in half, it’s still a double-digit percentage tax increase.

The other option is to cut $1.3 million in expenses.  Good luck. Ideas for cost savings come up every year, but finding that much to cut, or even half that amount, seems unlikely based on past performance.

Lastly, we could raise water rates.

I have yet to receive an “on the record” reason for what has effectively been a four-year freeze on water rates.  The freeze began in the 2018-2019 budget under former mayor Michael Villa, then continued in the 2019-2020 budget, then Cinquanti continued the freeze in 2020-2021 and in the proposed 2021-2022 budget.

How much would water rates have to be raised to make up $1.3 million? It’s a little more difficult to figure that out from the budget worksheet, but it looks like it could require an increase of about $134 per year to the single unit flat rate.  That would reflect an overall 31% increase in rates which is huge, but would still cost most single-family or two-family property owners less than a property tax increase to raise the same amount.

So there’s the numbers and there’s the options.

My concern is that there seems to be a somewhat irrational sentiment out there that somehow setting rates to generate a surplus is somehow morally/ethically/legally wrong. The fact is that New York State General Municipal Law 94 explicitly states that the city can generate a surplus from it’s water system and use that surplus for the general fund. Even in light of that, the attitude seems to persist.

In Cinquanti’s State of the City Address earlier this year, he said in regards to past water fund surpluses, “These revenues have provided a fiscal lifeline to our city coffers during these last few years of fiscal crisis, but it is time to depend less on these revenues for any purpose other than to re-invest them back into our own water system.”

Cinquanti cited the need to devote money to maintain the pipeline from the city’s watershed region. This is all well and good, however, most major capital projects depend on issuing bonds for funding, spreading out the cost over ten years which makes sense to avoid cash-flow problems.

I have yet to hear a clear argument to why depending less on water revenues is in the best interest of the city. Our “fiscal crisis” is far from over, with the city listed prominently as #2 on the comptroller’s list of the most fiscally distressed municipalities in the state.

In my opinion, not utilizing all potential sources of revenue for the city is, quite frankly, fiscally irresponsible.

It’s worth pointing out that the water fund issue is complicated by the fact that the city sells water to both the Town of Florida and the Town of Amsterdam at a rate 50% higher than what is charged to city residents. The city’s water lines have been a key ingredient in the growth of these two areas.

Back in 2014 during a public budget discussion, former alderman Ron Barone expressed concern about the reaction of Town of Amsterdam Supervisor Tom DiMezza to the proposed increase to water rates for the 2014-2015 budget. I’ve gotten off-the-record accounts from other officials who have expressed similar sentiments.

I believe the needs of the surrounding towns, as they are paying customers, should certainly be considered. However I believe the discussion should be brought out and discussed publicly so city taxpayers can understand the full situation.

In the end, the mayor and council members are going to have to make a hard decision one way or the other. They either have to find another $1 million or so in revenue or cut that amount in expenses or use a combination of the two. The status quo can’t be maintained. Perhaps by keeping the contingency line higher than needed each year, they can create a “stealth surplus” of sorts, but even that is going to become questionable after a few years if actual values don’t consistently match what is budgeted.

If concerns from the surrounding towns are a factor in the decisions being made for the water fund, then both city and town officials need to bring those concerns out in public so they can be properly weighed against what’s best for the city.

Tim Becker

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