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Mayor Byron W. Brown has kept his promise to freeze property taxes, but has used $40 million in leftover surplus during the last three years, leaving just $12.2 million in unrestricted funds.

As the city prepares to unveil a budget on May 1, it has less available in unrestricted funds than the average amount used to close budget gaps in the last three years.

Brown says his administration has accomplished financially all that it has set out to do, including getting out from under a hard control board, convincing the board to lift the wage freeze, cutting property taxes and establishing a rainy day fund, which contains $36 million, or enough to cover what the city spends in a month. But dwindling unrestricted reserves could jeopardize the city’s hard-earned credit ratings, which are at an all-time high and have saved taxpayers $22 million in 2012 through refinancing old debt.

“That is concerning,” Comptroller Mark J.F. Schroeder said of the city’s use of fund balances to bridge budget gaps. “During this year, they’re going to have to figure out a way to preserve some of this fund balance so it’s not used entirely.”

Buffalo boasts ratings in the “A” category from the three credit agencies, which would stir envy in other cities. The agencies cite the city’s much-improved financial condition and an increase in reserve funds, which top $100 million, though much of that is set aside for specific purposes.

The city’s rainy day fund, started in 2008, has helped give the city a buffer in the case of financial emergencies. But the city’s continued use of onetime infusions of cash from surplus accumulated in other years for general expenses could jeopardize the rating agencies’ good opinions, which are essential if the city is going to continue to borrow at lower interest rates.

Brown’s promise to freeze taxes has forced the city to look for funds elsewhere, such as in leftover surpluses, and the ratings agencies have noticed.

“While the taxing freeze has benefited Buffalo’s constitutional taxing margin, which is a credit positive, in our opinion, the ongoing use of reserves for recurring expenditures could pose significant challenges to future budgets,” read an August analysis from Standard & Poor’s.

Brown will seek a third term this year, and he has one year left on his pledge not to raise property taxes. Since he took office in 2006, he has cut residential property taxes by 14 percent and commercial property taxes by 23 percent.

“We wanted to be in a position where we were very competitive in being able to bring in new investment and at the same time say to people who are already here, Buffalo is a low-tax environment and we’re going to provide you with predictability,” he said.

While Brown didn’t get into specifics on the budget now in development, he said the city would like to maintain some level of fund balance and that his tax freeze will continue as planned.

Given that, there are questions about where the city will go for revenue as costs increase and revenues are sluggish.

The city’s major source of revenue is state aid, which accounted for 43 percent of revenues in the 2012-13 budget. Property taxes composed 26 percent of revenues, sales tax 15 percent, and fines, fees and other revenue 16 percent.

While the city saw $1.4 million more in sales tax revenue in the fiscal year that ended June 30 than in the year before, total revenues fell by approximately $635,000. The city’s two biggest revenue sources are expected to be stagnant in 2013-14, as the property tax freeze remains in effect and the state deals with financial fallout from Hurricane Sandy.

“It’s a challenge, but it’s been a challenge,” Brown said. “Everything we’ve done has been challenging. Fiscally, we’ve been very successful.”

The city’s four-year financial plan, released May 8, predicted that the city would use $3.9 million in unrestricted fund balance to balance the 2013-14 budget, which now is being prepared.

That’s far less than the city has used during the past three budget years, but would diminish the $12.2 million currently available in unrestricted fund balance.

In 2010-11, the city used $12.8 million in unassigned fund balance; in 2011-12, it used $16.3 million; and the 2012-13 budget calls for the city to use $11.5 million.

Taking another $3.9 million out of that fund balance will leave $8.3 million – less than what was used in each of the past three budget years.

According to audited financial statements for the fiscal year that ended June 30, which were recently released by the city comptroller, the city has a healthy $113.6 million in reserves, but most of that is committed for specific purposes, including the $11.5 million that will be spent to balance the current budget.

A rainy day fund of $36 million, included in the $113.6 million reserve fund, is for a natural disaster or a financial emergency.

Schroeder said he is urging the Common Council to devise specific terms spelling out when the city can and cannot use the rainy day fund.

Brown said he hopes the lower property tax rates are sustainable, and won’t require an increase to meet rising expenses, as investment in the city continues.

While the city has seen some significant economic development projects, new construction in the city has added just $160,000 in new property tax revenues, a figure that will grow to $275,000 on those properties once tax abatements run out.

In coordination with the freeze, the city also has not reassessed properties in three years, meaning that generally, property tax bills in the city haven’t increased.

The city’s residential property tax rate has declined from $20.95 per $1,000 of assessed valuation in 2005-06 to $17.95 in 2012-13, and the commercial rate has gone from $37.41 to $28.96 in the same period.

The city now boasts one of the lowest property tax rates in Erie County.

When school taxes are included, the city is nearly in the bottom quarter of taxing jurisdictions in the county for property tax bills, according to a comparison analysis from Erie County Real Property Tax Services.

In addition to the use of fund balance, Schroeder also is concerned about the city’s practice of using parking revenues to plug holes in the money-losing solid waste fund, which has accumulated a $20 million deficit in the last seven years.

“You’re sweeping and taking money from one place to another,” said Schroeder, who has assigned a member of his staff to work with the administration on it. “It’s not a good practice. Strategically it may work for you short-term, but long-term, fix the problem.”

Brown said the parking fund maintains $5 million available for capital improvements and that the city hopes an increase in recycling rates will bring the solid waste fund into balance.

email: jterreri@buffnews.com