State audit shows Long Beach's fiscal decline

A state audit released last week found that officials have mismanaged the city’s finances since 2014 and failed to create a multiyear financial plan, which has led to annual operating deficits totaling $8.5 million over the past four fiscal years.

The audit by State Comptroller Tom DiNapoli’s office was conducted in two parts, and examined the city’s separation payout practices in the 2017-18 fiscal year — as the Herald reported last week — and its overall financial condition from July 2014 to June 2018 (see box).

According to the audit, the city relied on excessive borrowing to cover expenditures, and adopted budgets that were not structurally balanced. Further, city officials did not adequately monitor annual spending plans. The rapid decline in the city’s fund balance, the audit stated, “resulted from poor budgeting practices by city officials, including unrealistic estimates of revenues, the use of non-recurring funding sources in the general fund and the lack of long-term financial planning.”

“The council and city officials did not fully understand the impact of appropriating fund balance and issuing debt to pay for separation payments each year,” the report continued. “As a result, they did not adopt structurally balanced budgets that provided for sufficient recurring revenues to finance recurring expenditures.”

According to the report, city officials attributed revenue shortfalls in fiscal 2017-18 to licensing and permit fees dependent on projects not completed, and “unusually” bad weather that resulted in beach closures. Additionally, the council’s decision to issue $550,000 in bond anticipation notes instead of $1.62 million in bonds to pay for separation payments also hurt the city.

“The practice of issuing debt to finance recurring expenditures such as separation payments is imprudent because recurring expenditures should be funded by recurring revenue sources,” the report stated. “Continued reliance on debt to fund recurring expenditures will diminish the city’s ability to finance needed services in future budgets …”

No multiyear financial plan
Among the audit’s other key findings: the city manager has not prepared a multiyear financial plan, including a fiscal improvement plan, in accordance with local finance law.

In May 2017, DiNapoli endorsed then City Manager Jack Schnirman in his run for Nassau County comptroller, just two days after Schnirman floated a $93.5 million budget for the 2017-18 fiscal year, which officials said was within the state’s tax cap. It was touted as the administration’s sixth consecutive balanced budget, after Long Beach teetered on the brink of bankruptcy in 2012.

The audit, however, found that the City Council balanced the budgets from fiscal 2014-15 through 2017-18 by including a total of $7 million in debt proceeds as anticipated revenue. In 2017-18, Long Beach had a $5.2 million operating deficit.

“The council actually issued $8 million of bonds from 2014-15 through 2016-17,” the audit stated, “and used another $2.1 million of fund balance in 2017-18 to finance separation payments.”

Schnirman cited a $24 million turnaround of the city’s “rainy day fund” after the administration inherited a $14.7 million deficit, as well as improved credit ratings from Moody’s Investors Service. Long Beach, he said during his 2017 campaign, replenished its unassigned fund balance, or reserve fund, to $9.4 million as part of the administration’s “smart recovery.”

The audit, however, stated that the city’s unassigned fund balance dropped to a deficit of nearly $814,000 by June 2018. The city’s general fund ended the 2018-19 fiscal year with an operating deficit of $800,000, which resulted in an increase in the general fund’s total unassigned fund deficit to more than $1.6 million on June 30. Schnirman became county comptroller on Jan. 1, 2018, and there have been three acting city managers since he left.

“Because the city manager did not prepare a multiyear financial plan, including a fiscal improvement plan, there is no assurance that the city’s financial condition will improve,” the audit stated.

“The state’s audit of the city’s financial condition confirmed what I think many of us already knew,” council Vice President John Bendo said. “While the public was being sold a bill of goods about a ‘Long Beach turnaround,’ we were, in fact, being sold down the river. Questionable financial practices were utilized to mask the city’s finances and advance political careers, leaving the rest of us behind to clean up a fiscal train wreck. The audit makes clear that the incoming City Council, working proactively with staff, has a lot of work to do to turn around the city’s finances.”

Schnirman, who had maintained that the city was still in the midst of a financial recovery, declined to comment. According to a memo obtained by the Herald that he wrote to the council prior to his departure, Schnirman outlined options to significantly reduce costs and increase revenues, and said, “Long Beach will have to continue to prune the structure of its government.”

“Like many other municipalities across the country, the city continues to face significant increases in fixed expenditures that easily outpace revenues,” Schnirman wrote. “City leaders will have to face the fact that the further we get from [Hurricane] Sandy, the lesser the grant funds that we can expect and spend. The fiscal recovery continues as our physical recovery winds down. Operational decisions must reflect that.”

The audit said that although the council has overall responsibility for the city’s operations, it has not taken steps to assure that it has timely and accurate financial information to monitor the city’s finances and completely failed to act on the 2019-20 budget. In response to the report, the council noted that it had hired a financial consultant in April to address the city’s finances and develop a multiyear plan.

Councilman-elect Mike Delury said he intended to implement recommendations made by both the comptroller’s office and the state’s Financial Restructuring Board for Local Governments, which found that separation payouts are a major driver of the city’s fiscal stress, and noted its reliance on borrowing and the use of its fund balance to cover large separation costs.

That report, released in June, concluded that although the city made a “drastic” turnaround to a $9.1 million surplus by 2014, it was attributable mostly to the issuance of debt to cover separation payouts and lower-than-expected employee retirements. Four consecutive budgets, the Financial Restructuring Board said, included overestimated revenues and underestimated expenditures, and surpluses “were generated by one-time actions and only temporarily masked Long Beach’s structural budget imbalance.”

“He was financing deficits through borrowing,” Delury said of Schnirman. “I find it hard to believe that the government finance officials report one way, and that the prior administration was reporting something at odds with that. This is pretty much both sides saying that Schnirman’s management was not good.”