- Town Supervisor -
1 Temple Drive
Tuxedo NY 10987
Click below to review the 2015 Financial Audit Summary
Fiscal Situation: November 2015
The Town of Tuxedo enters 2016 facing a serious fiscal challenge. I have been working part-time in the Town’s finance department since March, yet I did not perceive the full extent of the situation until we began preparing the 2016 budget earlier this fall. Our initial estimates going into the budget planning process showed that the Town faced a gap between projected expenditures and revenues of $1.6 million, or 16%. More recent estimates, which include compulsory increases in expense items such as health insurance and pension costs, and a reduction in estimated revenues, place this hurdle in excess of $2 million.
Compounding the urgency of this disparity is that according to recent projections, I expect the Town to end fiscal year 2015 with an available town-wide fund balance of approximately $11,000, which is 0.1% of our 2015 expenditures. This fact means that the Town does not have the ability to roll out a restructuring over the next few budget years, because there is no available fund balance to ease any cuts in over several budget years. It is unlikely and inappropriate to borrow from the future to solve today’s problems, in my opinion, and incrementally more expensive to do so following a downgrade of Tuxedo’s credit rating in August.
The purpose of this article is to discuss, in plain English, the situation that the Town is in currently. In spite of numerous Town Board meetings and countless hours of discussion with the public, I still find that taxpayers and employees who will all be impacted by the proposed changes remain confused and some are unaware of the full depth of what is going on.
I have not been able to reduce the cause of the fiscal stress to any single event. The difficulties that we face as a municipality are the compounded effects of several years of inattention and of deferred decisions (can-kicking). The damage was not done all in a single year, and it simply will not be fixed in a single year.
So that is the bad news. The good news is that we are now facing the situation with open eyes. My hope is that the severity of the situation will refocus our elected officials and employees and force us to work together moving forward. This is not the time for anger or finger-pointing. Now is the time to set aside political and personal differences and unite toward a common goal of a stable and efficient Town government focused on providing quality services for its citizens.
Events Leading to Fiscal Year 2016
My personal concerns with the Town’s budget extend for at least the prior nine budget years. Although independent verification is difficult, it appears as if several line items were inappropriately adjusted across the Town’s different funds going back to the 2005 and 2006 budget years. These changes went unnoticed until the Office of the State Comptroller General audit report for the 2012 and 2013 budget years which was issued in January of 2015. Because going back and trying to fix nine budget years is likely an impossible and burdensome task, I have chosen to focus my attention on the last few years.
The most likely cause of the lack of fiscal discipline is simply that detailed financial information was not made available to the Town Board or the taxpaying public. The previous independent auditor for the Town of Tuxedo did not deliver financial statements for FY 2012 and 2013 until November of 2014, thus detailed information concerning the Town’s financial situation during a critical time was not available going into the 2014 or 2015 budget planning processes. Our public officials for at least two budget years were flying blind. That auditor’s contract has not been renewed, and the Town hired a professional and competent auditor in 2015, whose assistance to me personally has been critical in gaining an understanding of the situation.
According to the Town’s new auditor, in 2013 the town’s expenses exceeded revenues by $593,694, primarily due to decreased revenues from real property rents (Perfect Cut, $224,060) and a town-wide property tax cut ($302,379). That left the Town of Tuxedo with no available funds to deploy and in fact entered the 2014 budget year with a negative fund balance exceeding -$200,000. The end of 2013 and beginning of 2014 seems to have been the “worst” that the situation has been at any point.
For reasons that are difficult to understand, beginning fiscal year 2014 with an available fund balance of -$204,928, the Town’s adopted budget showed revenues of $8.54 million vs. expenses of $9.52 million. The Town-wide tax levy increase in 2014 was only 1.6%, with the budget gap close to $1 million being filled by appropriating fund balances that simply did not exist. As bad as things are today going into 2016, if 2014 had played out as budgeted, the Town would have entered 2015 facing serious fiscal jeopardy to the tune of -$1.18 fund balance at year’s end.
Fortunately, gifts and donations received by the Town from developers in 2014 and 2015 totaling $2.25 million brought Tuxedo back from insolvency. However, because the imbalance between expenditures vs. revenues was not resolved during these budget years, these surplus funds will be exhausted by year-end 2015 The Town of Tuxedo will enter FY 2016 with a net fund balance around $11,000 without much room for error. As a municipality, Tuxedo has run out of both time and money.
Therefore, my conclusion is that a fiscal restructuring was necessary two years ago. Only serendipity and private donations negotiated by our officials from potential developers have allowed the Town to remain intact financially since 2013. We can pin our hopes to increased property tax and other private source revenues from planned developments, but as I learned in the Army and now as a financial planner, “hope is not a plan.”
The impact of losing these private revenue sources is significant. The town-wide (A) fund experienced a -38.6% tax levy decrease in fiscal year 2015. While it may have been prudent to return these one-time revenues directly back to the tax base, in effect that set up a “fiscal cliff” situation going into the 2016 budget year, because corresponding A-fund costs are at the same level or higher than they were two years ago. In order to “break-even” with 2014 expenses the fund’s tax levy must increase by nearly 80%. My strong recommendation to future public officials is absolutely never to use one-time, non-repeating revenues to pay for ongoing, structural expenses such as employee salaries and benefits. Doing so places undue stress on both the Town’s employees and taxpayers.
To illustrate the size of the gap, appropriations (expenses) in fiscal year 2015 were budgeted at $9.85 million, while total revenues from all sources were $9.12 million, including a total tax levy of $6.54 million. If appropriations in 2016 remain at $9.85 million or above, assuming that no private sources of revenue are presented, the tax levy would need to increase by approximately $1.4 million. If this were the case, the average taxpayer would see a property tax increase of approximately 28%, likely an undue hardship for many taxpayers. As mentioned previously, because of statutory cost increases projected for 2016, the actual tax levy increase would be closer to $2.17 million, or a 33.2% tax levy increase. This would clearly have a very harmful effect on the taxpayer.
Thus, the gap between revenues and expenses is not minor, and is structural in nature. As it exists, the Town simply cannot provide its current level of services without a drastic tax levy increase. That leaves our officials with only two real options to reduce deficit this large: decrease expenses or increase property taxes.
To make matters more complicated, the individual fund balances themselves are not uniform, are quite imbalanced, and will be for some time. The town-wide (A) fund, for example, had a healthy fund surplus entering 2015 of $811,860 and is projected to end 2015 at approximately $648,642. However, the town-outside-village fund (B) entered 2015 with a large deficit of -$1,271,030, and is projected to end the year at -$1,063,211. Because each fund corresponds to a slightly different tax base, the surplus in the A fund cannot be directly applied to “extinguish” the deficit in the B-fund, but rather through changes in future budgets impacting each funds revenue and expenses.
The negative fund balance in the town-outside-village (B) fund is the most significant at more than $1 million. While there are no exact guidelines on when this fund should return to a positive balance, it would be responsible to begin to restore the balance with a reasonable plan to be completed in 2-3 budget years. That would require either decreases expenses or increasing revenues by approximately $300,000 per year. The town-wide highway fund (DA) also has a negative balance of $328,133, which mostly governs snow removal and operation of highway vehicles and equipment. Since these two funds are where the largest fund imbalance exists, the DA- and B-funds should be the focal point for cost savings or tax levy increases. The DA-fund is primarily used for snow removal, machinery, and other highway-related tasks, while approximately 91% of B-fund expenditures go towards law enforcement, with the other 9% toward planning/building/zoning. The only remaining option outside of decreasing expenses significantly in these funds is to raise property taxes.
Fortunately, the town-wide (A-fund) and other non-major funds enjoy fund surpluses which have allowed the Town to remain solvent. In theory, the $648,642 of surplus in the A-fund, for example, could be returned to the tax base to “soften” the impact of any proposed tax levy increases. However, because the total government fund balances are projected to begin 2016 around $11,000, it would not be prudent to return these fund balances to their underlying tax bases until such a time that town-wide finances are healthy. Any returns of available fund balance must be offset by a tax levy increase somewhere else in the budget. The Town must be careful to ensure that it has enough operating funds to remain solvent in 2016 and beyond to avoid the situation it faced in 2013.
Thus, the priorities for the 2016 fiscal year: 1) create a balanced budget that 2) reduces expenditures and increases revenues while having a minimal impact on services and the tax base, 3) begin to restore negative fund balances.
The 2016 Budget address many of the concerns through a combination of cost savings measures such as salary reduction and renegotiated contracts. However, much of the fiscal damage – particularly the deficit in the B-fund – is simply too much to resolve in a single budget year. Thus, 2016 should be the beginning of a long process that will ultimately result in the Town of Tuxedo returning to a strong fiscal foundation.
2016 Budget Summary
Working with the Supervisor and Town Board, the finance department has prepared a 2016 Budget for review and potential adoption by the Town Board. Highlights of the budget Include:
• Town-wide reduction in appropriations (spending) of $1.68 million (-17.1%)*
• Town-wide reduction in revenues of $652,159 (-7.2%)
• Town-wide tax levy increase of $649,412 (9.9%)
• Approx. $3 reduction of spending for each $1 of tax levy increase
• Fund balance restoration of $300,000 (B and DA funds)
Town-wide (A) fund:
• Affects general government support departments such as Supervisor and administration, Town Clerk, Town Court, Recreation, and Youth
• Reduction of $605,700 of total expenditures (-19.6%)
• Reduction of $26,801 in elected salaries (Clerk & Highway Superintendent due to turnover)
• Reduction in other general government support salaries due to planned reduction in service hours and elimination of all employee stipends for medical insurance and smaller job functions
• Suspension of Recreation & Youth programs
• Reduction of $9,000 in janitorial services contract
• Redistribution of $47,982 of Workers Compensation premium (to other funds; A-fund is primarily office work, low overall cost of $0.20 per $100 of salary)
Town-outside-village (B) fund:
• Affects Police, Building, Planning, Zoning, and Architectural Review departments
• Reduction of $871,700 of total spending (-26.4%)*
• Reduction of $624,738 of salaries through elimination of three full-time positions and 63% reduction in planned overtime
• Reduction of $189,847 of total benefit costs
• Redistribution of $92,844 of Workers Compensation premium (to other funds)
Highway town-wide (DA) fund:
• Affects Highway Department
• Reduction of $384,376 of total spending (31.5%)*
• Reduction of $40,000 of snow removal expenses (due to not accepting Orange County contract)
• Redistribution of all Brush & Weed costs ($256,509) to DB fund
• Increase of $38,288 of Workers Compensation from other funds
• Redistribution (and partial reduction) of $166,762 of benefits to DB fund
Highway town-outside-village (DB) fund:
• Affects Highway Department
• Increase of $264,593 of total spending (79.0%)
• Reduction of $279,660 of salaries through elimination of four full-time positions
• Increase of $38,365 in Workers Compensation from other funds
• Increase of $158,925 of benefits from DA fund
Sewer District (SS) fund:
• Affects Highway Department
• Decrease of $113,208 of total spending (-33.6%)
• Decrease of $39,070 in salaries
• Reduction of $18,887 in benefits
• Retiring of $58,000 of debt service (schedule completed 2015)
*Note that these figures include the reduction in appropriations of $1.38 million as shown on the “Budget Summary” page plus $300,000 of fund balance restoration in the B and DA funds. These can be seen as budget code 9620.N.
Impact on Property Taxes
In spite of nearly $1.7 million in spending reductions, property taxpayers in the Town of Tuxedo will see a property tax increase in 2016. The two primary reasons for the tax levy increase are 1) the lack of private gifts & donations revenues enjoyed in 2014-2015 that will not repeat in 2016, and 2) the Town cannot use existing fund balances to reduce property taxes as it did in 2015 ($678,000). The town-wide tax levy increase for all taxpayers is expected to average 9.9%. This is obviously a very difficult situation for all taxpayers, and in great excess of the Town’s 2016 tax levy cap of 0.7%.
Note that this increase is not uniform across the tax base – taxpayers will see a varying level of tax levy impact depending on whether or not their property is subject to B and DB (Town Outside Village) taxes, and whether or not they are part of any special districts. Note as well that the full impact should be reduced by 1) projected Orange County property tax levy increase of +2.0% (estimated), and 2) a slight expansion of the property tax base in all funds due to reassessment.
The tax levy impact per-fund can be seen on the “Tax Rate Schedule” page but is summarized as A +84.6% (significant decrease in the 2015 levy, lack of private revenue sources), DA -10.1% (reorganization), B -16.5% (reorganization and deficit reduction), DB +248.6% (reorganization), and special districts -4.6% (reorganization).
The “average” property full market valuation in Tuxedo is approximately $489,000 according to realty data tracking sources such as Realtor.com and Zillow. Using a $500,000 full market value, that translates to a taxable assessed value of $88,500.
This average taxpayer should see an estimated property tax increase of $365 due solely to the projected Town tax levy increase for a Town Outside Village property, and an estimated property tax increase of $389 for a Town Inside Village property.
Note that unit charges (sewer, drainage) are not calculated in this estimate as they are unit charges and are difficult to estimate. The A/DA/B/DB funds involve the majority of the tax base.
Pending final board approval, here is an estimated worksheet for a property with a full market value of $500,000 and at various valuations:
William Sweet CFP®, Bookkeeper
Michael Rost, Town Supervisor
At Monday’s Town Board meeting, we received a full report from the town’s new auditor covering Fiscal Year 2014. We believe firmly in creating a new era of transparency and accountability here in Tuxedo, and the entire report and presentation can be reviewed here.
After a long discussion of the findings, Hema Easley at the Times Herald Record wrote an article about it here.
I had many concerns about the Town’s fiscal condition coming into office in 2014 and sought assistance from various individuals and agencies in evaluating the situation. That led to the State Comptroller General conducting an audit for the period of January 2013 to January 2014, but we were only made aware of the findings of this review in January of this year. The independent auditors from New York State confirmed some of my concerns - their report can be read here. http://www.tuxedogov.org/news/officeofthenewyorkstatecomptroller-financialoperationsaudittownoftuxedo
We took swift and immediate action. Since none of the issues raised by the Comptroller were evaluated by our independent accountant and auditor, we terminated our relationship and sought new professional help with the accounting team at Cooper Arias. The new auditors, Andrew Arias in particular, spent four months reviewing our records for 2013 and 2014, and did an outstanding job. This resulted in a restatement of balances going back two accounting years to more accurately reflect reality. Cooper Arias was instrumental in bringing many issues to light, and the Town Board takes their findings very seriously.
Although we only received the full audit report in July, we have already made several changes internally that will address the concerns found by Cooper Arias and Mrs. Easley. We have hired two new financially-savvy individuals - one in the finance department, and one on our Town Board - who have the skills and expertise to implement common-sense policies and procedures to fix the problems that exist. We have segregated duties and responsibilities within our financial management, updated our internal controls, outsourced our payroll processing, and are implementing time clocks in several departments. Since our accounting software is generations out-of-date, we evaluated four accounting systems earlier this year, one of which will be implemented on January 1st, 2016.
While the report was sobering, we welcome the findings as it reflects an accurate picture of the Town’s fiscal condition prior to 2015. I assure you that this year and moving forward will be different. The damage wasn’t done in a year, and although we have come a long way, many of the issues continue to require attention and thoughtful action.
The audit report of our Town’s finances has been completed and published. You can access the full report here http://www.tuxedogov.org/news
The audit raised serious concerns about the Town’s accounting. I would like to point out the following:
Below is an article that appeared in the Times Herald Record.
State blasts Tuxedo's poor bookkeeping
By Hema Easley
Posted Jan. 20, 2015 @ 7:24 pm
An audit by the state Comptroller's Office offers a scathing rebuke of Tuxedo's fiscal controls and accounting methods, saying the poor bookkeeping makes it impossible for the state, and the town itself, to determine its true financial condition.
The audit, which covers the period Jan. 1, 2013, to Jan. 29, 2014, found that the supervisor delegated the town's accounting responsibilities to an untrained bookkeeper without providing oversight. The Town Board, in turn, depended on the supervisor's financial updates to make decisions, without ensuring he provided sufficient and adequate information.
The audit also found that certain account balances in the town's ledger did not agree with the audited financial statements. The Town Board and the supervisor also did not ensure that all money spent was for proper town purposes.
The town's accountant did not assess internal controls, ensure financial records were complete or account for court revenue, making Tuxedo's annual audits unreliable, the Comptroller's Office said.
The audit covers the final year of the administration of former supervisor Peter Dolan. Mike Rost, the current supervisor, said he was aware of issues in the town's finances coming in and had asked the Comptroller's Office to perform an audit.
The results were not a surprise. The town was already facing a $1 million deficit, and in October the Comptroller's Office included Tuxedo in its list of municipalities in fiscal stress. In April, the credit rating firm Moody's downgraded the town to A3 from A1 with a negative outlook.
The town received a copy of the audit and accompanying recommendations in December, but Rost and the Town Board had already started implementing changes during the summer in consultation with the Comptroller's Office.
The town let go the accountant who had been overseeing the town's finances for more than a decade, and hired the accounting firm Cooper Arias. It has proposed reducing the responsibilities of its bookkeeper, sending him on training for municipal accounting, and hiring a Certified Public Accountant to provide oversight.
In addition, Tuxedo hired New York City-based Alvarez & Marsal to analyze current policies, establish proper controls, make cost-saving recommendations and assist with police and highway contracts. The consultants were also tasked with helping the town with financial planning for one-, two-, five- and 10-year outlooks.
I want to inform you on where we stand on several items, as we close out the third quarter and head into the final quarter of 2014. We are busy working on the 2015 budget, while navigating through the challenges of getting through 2014 with the available funds remaining in our account. Had it not been for the $1.5M negotiated payment from the Genting organization, we would have been forced to seek a tax anticipation note to bridge the shortfall in revenues versus expenses of approximately $1.7 million dollars. I have detailed the cause of the negative balance, below. Fortunately, the payment from Genting is guaranteed and not contingent upon the awarding of the casino license.
There has been much spirited discussion surrounding the board’s decision to expand the scope of work of our consultants, Alvarez and Marsal, to conduct a thorough review of the Town’s operations. The decision to sole source them the project was out of necessity and was only made after counsel vetted the decision as being lawful. They will review and benchmark our organizational structure, salaries, security, financials, policies, union contracts and our various processes. They will build a financial model that looks forward to the future and reflects the changes we expect to see in our town with the development of Tuxedo Farms and the continued growth of non-tax paying entities, such as the WatchTower Group. This project will be funded from the $1.5M we received from Genting, at no cost to the tax payers. The information we gain from this process will prove invaluable for this board, as well as future boards, since we will have a sound financial plan and foundation to build on.
The town board has recently outsourced the handling of the town’s payroll and installed security cameras at several facilities to safeguard town property. This is the first step in a process to improve controls and to meet State audit requirements.
The State Comptroller’s office is finishing its review of the town, and will be sharing their findings with the board members before publishing the report. This should take place within the next 30-days. Additionally, for the second straight year Tuxedo has been placed on the State Comptroller’s list of municipalities that are susceptible to fiscal stress. http://www.osc.state.ny.us/localgov/fiscalmonitoring/munis_stressed.htm
Our long term relationship with the independent town accountant has come to an end, as the board voted to bring in a fresh set of eyes to review our books. Ted Eglit has served the Town well over the past 17 years, but we feel it is time for a change. We wish Ted the best in his future endeavors.
We met with the operators of the mulch facility and that was followed by a board meeting to receive legal counsel. The lease was terminated due to their continued violations and fines that become the responsibility of the Town. There will be more meetings to come as we work on a strategy to manage down the material from our property.
Our final 2015 budget must be submitted by November 20th, and much work has been done already. Staying below the 2% tax cap will be challenging and difficult decisions will have to be made. All options are on the table as we look to cut costs and increase revenue.
I feel it is important to point out a series of facts: The town was thought to carry a positive fund balance of $950,000 into fiscal year 2014. In reality, not only did we not carry any reserves forward into 2014, but we also had to pay $750,000 of 2013 bills with 2014 revenue. When I took office on January 1st, I assumed a $1.7M cash shortfall.
Much has been made about the Annual Update Document, http://www.tuxedogov.org/news/2013annualupdatedocument
that is filed with the State Comptroller’s office each year, stating we had a negative fund balance to close the year. People have asked, “Where is the money?” The fact is that we never had the money. Just two weeks after submitting the final 2014 budget stating that we would carry nearly $1 million into 2014, our bank account was empty because the 2013 budget over estimated our tax revenue and under estimated our costs. That is a lethal combination when it comes to a town or family budget.
The link below will take you to our budget web page. http://www.tuxedogov.org/departments/budget
I invite to you to become familiar with the many expenses that the town must cover, and hope you will understand the difficult planning that must be undertaken and hard choices that lie ahead. Since nearly 80% of Tuxedo is protected parkland, we do not have a lot options for raising revenues beyond our property tax rolls. I also welcome your suggestions in dealing with our fiscal situation.
The problems are real but, together with the town board, we will find lasting solutions to move Tuxedo on a firm financial footing.
Supervisor-Town of Tuxedo