The city of Lockport will run out of cash to pay for operations in the very near future unless it secures new financing or drastically cuts expenditures, according to an audit released today by New York State Comptroller Thomas P. DiNapoli. The city’s financial troubles stem from poor record keeping and a reliance on fund balance to finance operations.

“The city of Lockport’s accounting records are in such poor condition that city officials were in the dark about the true severity of their fiscal problems,” DiNapoli said. “Now, Lockport has to make some difficult choices to address its financial woes. City officials need to get a handle on the city’s finances immediately and create a multiyear financial plan with budgets that only spend what the city takes in.”

A cash-flow analysis prepared by DiNapoli’s auditors found not only that Lockport will soon run out of cash, but that the city’s cash-flow deficiency will grow to nearly $4.6 million by Dec. 31.

Cash shortfalls occur when bills must be paid before revenue is received to pay them. Cash shortfalls also happen when expenditures consistently exceed revenue in a fiscal year, and officials use available fund balance to finance the difference until it is depleted, which was the case in Lockport.

Auditors found the city’s treasurer failed to maintain accurate accounting records or prepare an adequate cash-flow analysis. The city’s audited financial statements for the fiscal year ending Dec. 31, 2012 included account balances that were materially misstated, leaving the city council and the mayor’s office without reliable financial information that would have alerted them to the impending financial crisis.

The books for the 2013 fiscal year were not closed as of June 2014. However, the general ledger cash balances were unreliable and were not reconciled to cash in the bank. Further, the external audit of the city’s 2013 financial statements is months from completion.

In October 2013, the city issued a $2.7 million revenue anticipation note (RAN) for cash-flow purposes. In early 2014, the treasurer’s office set aside $2.7 million to repay the RAN when it matures in October 2014. That money cannot be used to fund current operations, significantly increasing Lockport’s cash-flow problem.

The state Legislature has passed a bill that would authorize the city to issue deficit financing to address the accumulated deficits from previous fiscal years. The bill had not yet been submitted to the Governor for his consideration. While this would help address the city’s immediate fiscal problems, further action will be needed to address the underlying causes of the city’s poor financial condition and its unreliable financial records.

DiNapoli recommended the city treasurer and council:

• Ensure that the city’s accounting records are complete, accurate and maintained in a timely manner so that the council and city officials can properly assess the magnitude of the city’s fiscal problems and subsequently monitor financial activity;
• Prepare adequate cash-flow analyses and provide them to the council for review;
• Develop a multiyear fiscal plan that builds a cash balance sufficient to eliminate the need for significant short-term cash flow borrowing; and
• Adopt structurally balanced budgets that rely on recurring revenues to fund recurring expenditures.

City officials agreed with the audit and have begun taking steps to correct the problems. For a copy of the report visit: http://www.osc.state.ny.us/localgov/audits/cities/2014/lockport.pdf