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NIAGARA FALLS – The dispute over casino revenue between the state and the Seneca Nation of Indians has hurt the city’s finances, but the city government made the situation worse.

That’s according to an audit by the State Comptroller’s Office released Tuesday, which found the already-cash-strapped city being told to fix how it budgets.

“While the city has been significantly affected by the casino revenue impasse, its financial condition has worsened significantly due to its budgeting practices,” the Comptroller’s Office wrote in the audit.

Before the final audit was released, Mayor Paul A. Dyster sent written comments to the Comptroller’s Office about its report, calling the city’s situation “virtually unprecedented in the history of New York State” and one in which the city “has been forced to choose among largely bad options.”

“Given the state’s degree of involvement and responsibility in this matter,” Dyster wrote, “we find it somewhat ironic that an agency of the state of New York would now find itself in a position to critique our attempts to deal with a crisis in which the state itself has been a central actor.”

The Seneca Nation stopped paying the state a portion of the revenue from the slot machines in its casinos because it believes its exclusive gambling agreement with the state is being violated by the operation of slot machines at racetrack casinos.

In total, the Seneca Nation has withheld about $600 million in payments to the state, with the city believing it’s owed about $60 million.

The city hasn’t received its share of slot machine revenues since spring 2010.

Last month, Moody’s downgraded the city’s bond rating for the second time in five months because of the financial situation.

According to the audit, the city has had a pattern of “structural budget deficits,” where the city wasn’t regularly bringing in enough money to pay its recurring bills.

By using reserves and surplus money from capital projects – “one-shots,” as the audit calls them – the city has gone through about $21.6 million from 2009 through 2012.

The State Comptroller’s Office also said in the audit:

• City leaders must develop “realistic” budgets.

• The city should have removed expected revenues from its budget after the dispute over casino revenue continued to drag on.

• The city needs to again prepare multi-year financial plans, which it stopped doing once the state dropped that requirement for municipalities receiving a form of state aid.

City officials also should not expect everything to be fine, the audit said, if and when the casino revenue shows up.

“Even with a resolution of the casino-revenue impasse that would positively impact the city, the Council and mayor will still need to take action to address the structural budget deficits affecting the city,” the audit stated.

In a written statement, State Comptroller Thomas P. DiNapoli said the city has “nearly exhausted” its resources trying to avert a crisis.

“While the dispute over gaming revenue is significant, the city’s budget challenges also stem from a number of socioeconomic factors, including population loss and a high unemployment rate,” DiNapoli said. “The mayor and the City Council are actively trying to manage their considerable hurdles, but getting on firmer financial footing will require a resolution of casino gaming issues and likely even greater assistance from the state.”

Dyster said the city faces an incremental, multiyear process of reducing its long-term expenses.

To solve the underlying deficit problems, the city needs multiple years of austerity with the least amount of impact to services, employment and taxes, the mayor said.

The comptroller’s audit also looked at the city’s information technology systems.

In its conclusions, it found that the city has not implemented adequate controls over users’ access to its financial system. The audit also found there were no adequate procedures for data backup and storage, nor was there a formal disaster recovery plan that would minimize loss of equipment or data.

The audit also found that the city may have between $1 million and $1.4 million in funds held in accounts for completed capital projects that should be returned to the city’s general fund.

View the audit and the mayor’s response on BuffaloNews.com. email: abesecker@buffnews.com