From: Schroeder, Mark J. F.

Sent: Friday, January 03, 2014 3:40 PM
To: ‘Carl Paladino’
Cc: Mccarthy, Jason M; Nevergold, Barbara A; Harris-Tigg, Theresa A; Johnson, Florence; Licata, John B; Belton-Cottman, Sharon; Kapsiak, Mary R; Paladino, Carl P; Sampson, James; Brown, Pamela C; ‘jeanette.mongold@bfsa.state.ny.us’
Subject: RE: Insolvency of the Buffalo Public Schools

Thank you for your email regarding the finances of the Buffalo Public Schools.  Please feel free to send the following response to your email distribution list. 

My office is dedicated to protecting taxpayers and their investment in the city’s school district.  In 2012, I assigned the Special Assistant to the Comptroller, who is a Certified Public Accountant, the duty of examining the finances of the school district.  During this ongoing task, she has asked critical questions and offered recommendations to the district, especially in regards to the spending of grant funds and internal controls.  I have also aggressively refinanced the school district’s debt during my first two years in office, resulting in a savings of more than $60 million in interest costs. 

The Comptroller’s office shares many of your concerns about the school district’s finances, particularly the use of reserves to cover operating expenses.  I have repeatedly warned against the City of Buffalo’s use of unrestricted reserves, known as unassigned fund balance by the Governmental Accounting Standards Board (GASB), in each of my annual responses to the Mayor’s recommended budgets.  The State Comptroller’s Office, as well as all three major credit rating agencies – Moody’s, Standard & Poor’s, and Fitch – have also cautioned against the use of reserves to balance budgets.  Reliance on reserves and/or one-time revenues can perpetuate structurally imbalanced budgeting, potentially causing revenue shortfalls and credit rating downgrades in future years. 

Another factor that could potentially have a negative impact on credit ratings is the school district’s decision to opt into “pension smoothing” for its members of the New York State and Local Employees’ Retirement System.  While reducing the current pension contributions, this option will increase the district’s pension payments in future years and result in unnecessary interest costs. 

Since the school district’s creditworthiness is factored into the City of Buffalo’s credit ratings, these practices could have a negative impact on the city’s credit rating. 

Both the use of reserves and the opting in of “pension smoothing” occurred as a result of the adoption of the school district’s budget.  In order to eliminate these practices, the Board of Education would need to do so when adopting next year’s budget.  I am happy to join you in encouraging your colleagues on the Board of Education to adopt a more fiscally responsible budget. 

As you are aware, my office includes a Division of Audit, with a goal of advancing open and accountable government through accurate, independent, and objective audits that seek to improve the efficiency and effectiveness of city government.  The City Charter gives the Comptroller the power to audit any city department or agency, including the school district.  Because the Division of Audit has limited resources, our audit plan calls for selecting audits strategically in order to achieve the most positive fiscal impact for taxpayers.  This is done primarily by choosing audits that either maximize revenues, limit expenditures, or both.  An example of this is the audit of the Erie Basin Marina, which identified $343,245 (and counting) in revenue that is owed to the city by the marina operator. 

If my office, as you suggest, were to pursue an audit of the disbursement of grants by the school district, we would take a targeted approach in order to maximize our limited resources.  Rather than looking at all grants, we would instead select a grant or grants where there is the most potential for exposing waste, fraud or, abuse.  Therefore, if you could provide more information on which specific grants you are most concerned about, as well what types of improprieties or illegalities you think may be associated with these grants, it would assist us in determining whether to pursue an audit. 

I can also provide you more information on the audits of the district’s state and federal grants conducted by Freed Maxick, CPAs, as well as the aforementioned suggestions from the Special Assistant to the Comptroller on grants and internal controls. 

Thank you for your advocacy on behalf or taxpayers and students.  If you would like to discuss these matters in greater detail, or would like to meet with me and my staff regarding the district’s finances, please feel free to contact me.  

Mark J. F. Schroeder, Comptroller

Department of Audit and Control

65 Niagara Square, Room 1225

Buffalo, NY 14202