Observations Regarding Reported FY2012 Budget Deficit

Recently (Summer, 2012) the City Administration stated that the FY2012 deficit that they anticipated in January, 2012, became a reality. In addition to the information included in the report below, which is still applicable, everyone should also know the following:

In January, the anticipated deficit was reported to be $4.4M and resulting from an anticipated $2.5M shortfall in revenues and an anticipated $1.9M in over-expenditures. At that time the City Administration said they would cut costs to fill the hole on the expenditure side of the budget.
In March, 2012, around the time when the City Council was being asked to approved the new positions created by the City Administration, the City Council was told that the expenditure side of the deficit was resolved through department-level cost cutting and other actions identified in a March 5, 2012, memo from the Finance Director (click link to read).
After the 2012 fiscal year ended, and while gearing up for a referendum battle, the City Administration reiterated its report of a multi-million deficit for that year. Now, however, it had grown to $4.7M. What people don't know about this number is that it includes $0.5M in unbudgeted revenues provided by the State of Connecticut. These are revenues unknown to the City Administration in their January, 2012, report. As such, when comparing apples-to-apples, the "real" deficit comes to $5.2M
Included in the "confirmed" deficit number is $1.7M on the expenditure side of the books. Again, this issue was reported solved in March, 2012.

These points raise additional (to those included in the information below) unanswered questions. With all the reported cost cutting, how did the deficit reported in January, 2012, increase by $800,000? Also, how did the City incur $1.7M in new (after March, 2012) over-expenditures?

The City Council is considering contracting with its current auditors to perform more indepth evaluations of what happened with the FY2012 finances. Hopefully, the questions raised here and below will be answered as a result.

Please review the report, Observations Regarding Reported FY2012 Budget Deficit (.pdf). It raises many questions regarding the City Administration's reported FY2012 deficit. An executive summary of the report is provided below.

Executive Summary

The Administration of the City of New London, Connecticut, reported a projected City budget deficit of $4,390,409 for the fiscal year 2011-2012 (FY2012). Although estimated deficits for the preceding and following fiscal years were also reported by the Administration, the evaluation presented herein focuses on FY2012. The reported deficit in FY2011 will be evaluated next and that for FY2013 will be evaluated as part of the budget review process beginning in April, 2012.

This report details efforts undertaken to 1) confirm that the changes made by the prior City Council were accurately accounted in the FY2012 Adopted Budget, 2) identify the amount of expenditures made in FY2012 that are in addition to the amount approved in the FY2012 appropriation ordinance, 3) determine the accuracy of the reported FY2012 budget deficit, and 4) find potential areas for savings during the rest of the fiscal year, should any FY2012 deficit be confirmed.

The evaluation included review of numerous sources of financial information and documents provided by the Administration, the submittal of several dozen questions, and conversations with individuals knowledgeable about the City’s finances. Several observations are made as a result of the evaluation:

1. The $83,241,246 included in the FY2012 Proposed Budget was reduced to $81,845,722 in the FY2012 Adopted Budget. While the total amount of the changes accounted in the FY2012 Adopted Budget was within approximately $100,000 of that approved by the City Council, several adjustments were made without City Council approval (e.g., a reduction of expected Debt Service from $5,537,729 to $5,105,621).

2. A total of $886,715 is estimated to be the result of actions taken by the Administration to support changes made during the city government transition after the 2011 election. While not all costs will be incurred, actions taken by the City Council to curb those costs took place after the financial snapshot used to determine the reported deficit was taken. As such, transition costs would be included in the reported deficit.

3. An estimated $3,704,912 is calculated as the sum of identified items contributing to the reported FY2012 deficit. Of this amount, only $448,345 appears to be the result of legitimate unexpected cost increases (in excess of those identified in No. 2 above) and revenue losses. The other $3,256,567 is considered the overestimated amount of the reported deficit prediction and comprised of items such as vacant positions, overestimated expenditures, department level expenditure adjustments, inaccurate revenue expectations, unaccounted revenue streams, and excluded revenues already received.

4.Within the FY2012 budget there exists an estimated $736,604 in immediate savings through the end of the fiscal year resulting from maintaining currently vacant positions as vacant and projected decreases in year-end Energy & Utilities and Fringe Benefits & Insurance costs. These funds would be available to offset any confirmed deficit.

Based on the observations presented herein, after accounting for unexpected expenditures (including those from the transition), FY2012 should end with an estimated budget deficit of $1,133,842 as opposed to the reported amount of $4,390,409. This would have the effect of reducing the alleged three-year “$12Million Deficit” to a three-year “$5.5Million Deficit” (with many questions still outstanding). If identified savings opportunities are employed, FY2012 could end with an estimated budget deficit of $397,238. A smaller deficit, or surplus, is possible depending on the amount of transition costs approved by the City Council and answers to outstanding questions raised herein.

Some estimates made during this evaluation required financial information that was either unavailable or not provided. To compensate, conservative practices were used in several areas of the evaluation (e.g., excluding associated FICA reductions when incorporating overtime cuts). Therefore, it is recommended that the City Council consider implementation of a forensic audit of all City finances to accurately identify the financial state of the City.