THOMAS P.

DiNAPOLI COMPTROLLER STATE OF NEW YORK

STEVEN J. HANCOX DEPUTY COMPTROLLER DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY Tel: (518) 474-4037 Fax: (518) 486-6479

OFFICE OF THE STATE COMPTROLLER

110 STATE STREET ALBANY, NEW YORK 12236

October 31, 2008

Honorable Steven Bellone, Supervisor Members of the Town Board Town of Babylon 200 East Sunrise Highway Lindenhurst, New York 11757-2598 Report Number: B7-8-22 Dear Supervisor Bellone and Members of the Town Board: Chapter 448 of the Laws of 1999 authorized the Town of Babylon (Town) to issue debt up to a maximum of $9.8 million to finance various fund deficits at December 31, 1998. This Law sets the period of probable usefulness for this financing at ten years. In accordance with this legislation, the Town issued general obligation serial bonds totaling $9.8 million in 1999. Local Finance Law requires the Towns chief fiscal officer to submit the Towns tentative budget to the State Comptroller. The State Comptroller must examine the tentative budget and make recommendations for any changes that are needed to bring the proposed budget into balance. Such recommendations are made after the examination into the estimates of revenues and expenditures of the Town. The Town Board, no later than five days prior to the adoption of the budget, shall review all recommendations and may make adjustments to its proposed budget consistent with those recommendations contained in this report. All recommendations that the Board rejects shall be explained in writing to our Office. Our Office has recently completed an audit of the Town budget for the 2009 fiscal year. The objective of the audit was to provide an independent evaluation of the tentative budget. Our audit addressed the following questions related to the Town budget for the 2009 fiscal year: Are the significant revenue and expenditure projections in the Town of Babylons tentative/proposed budget reasonable?

Did the Town of Babylon take appropriate action to implement or resolve recommendations contained in the budget review audit report issued in November 2007?

We conducted this performance audit in accordance with generally accepted government auditing standards (GAGAS), with the exception of reporting views of responsible officials. Officials views were not solicited for this report due to the necessity of providing the Town with this time-sensitive information. However, the results of this audit have been discussed with Town officials and their comments have been considered in preparing this report. GAGAS requires that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions regarding the estimates in the tentative budget. To accomplish our objectives in this audit, we requested your tentative budget along with other pertinent information. We analyzed the composition of revenues and expenditures in order to determine if the revenue and expenditure estimates are reasonable. We do not offer comments on public policy decisions, such as the type and level of services to be provided. The tentative budget package submitted for audit for the fiscal year ended December 31, 2009 consisted of the following: Cover Letter 2009 Tentative Budget Supplementary Information

The tentative budget submitted to our Office is summarized as follows:

FUND APPROPRIATIONS ESTIMATED REVENUES APPROPRIATED FUND BALANCE REAL PROPERTY TAXES

General Highway Part-Town Special Districts East Farmingdale Water District Special Lighting District Garbage Improvement District Commercial Garbage District

$45,480,513 $19,120,977 $6,401,369 $15,175,641 $1,625,400

$18,352,481 $1,225,000 $4,505,000 $139,128 $1, 625,400

$2,002,800 -0$1,187,858 -0-0-

$25,125,232 $17,895,978 $708,511 $15,036,513 -0-

$2,324,320 $49,483,039

$170,000 $9,596,682

-0$4,763,104

$2,154,320 $35,123,252

$29,540,203

$22,747,833

-0-

$6,792,370

The observations and recommendations resulting from our audit are, to a great extent, influenced by the quality and quantity of materials submitted, and the time between submission and budget adoption. The Towns proposed budget was submitted without historical or year-to-date information

to reflect actual revenues or expenditures, and without a budget message from the Supervisor to indicate spending initiatives. Furthermore, due to the limited time available to perform our review, we focused our attention on the general fund, highway fund, and two garbage funds since these funds accounted for the highest appropriations in the Towns proposed budget.

Based on the results of our audit, except as noted below, we found the significant revenue and expenditure projections in the proposed budget to be reasonable. Our audit disclosed the following findings that should be reviewed by the Town Board for appropriate action. Also, although Town officials did make some revisions to the 2008 budget based upon our recommendations, we found that Town officials generally had not implemented the recommendations we made in our prior budget review, issued in November 2007. Good management practices require that Town officials take prompt action concerning our recommendations. We believe that prompt action by Town officials will help improve the Towns financial condition. Financial Condition Town Law allows the Town to retain a reasonable amount of unappropriated unreserved fund balance for each fund that is consistent with prudent budgeting practices and is necessary to ensure the orderly operation of the government and the continued provision of services. While the maintenance of a reasonable fund balance can represent a measure of a municipalitys financial health and a cushion against unexpected occurrences, the portion of fund balance that is not reserved for a specific purpose should be considered as a financing source to support operations in the subsequent year. Alternatively, local governments can set aside portions of unreserved fund balances to establish reserves as authorized by law. Therefore, governing boards should establish thresholds for a reasonable amount of fund balance for each fund. Any fund balance in excess of this threshold should be considered as a funding source when preparing the preliminary budget for the ensuing fiscal year. In 2004, The Town adopted a written policy indicating it would maintain a fund balance of 20 to 25 percent of the next years budget. The Towns general fund, garbage improvement district fund and commercial garbage district fund all show dramatic improvement in their financial position from the 2002 to 2007 fiscal years. As noted in our budget review letter issued November 2007, these three funds now have fund balances in excess of the Boards policy. General Fund The fund balance increased from $2.2 million at December 31, 2002 to $16.3 million at December 31, 2007. This represented 36 percent of the 2008 adopted budget appropriations of $45,318,278. The Town has not made a projection of its fund balance on December 31, 2008, thereby limiting its ability to appropriately reduce the unreserved fund balance to the 20 to 25 percent level required by the Towns policy. Garbage Improvement District Fund The fund balance increased from $117,264 at December 31, 2002 to $29.4 million at December 31, 2007. Based on historical trends, we project that this funds unreserved fund balance will reach approximately $30.3 million by December 31, 2008, which would represent 61 percent of the funds 2009 tentative budget appropriations. As shown below, the revenue from fees has been consistently under-estimated since 2005:

Garbage Improvement District Fund Revenue Fiscal Year Budget Actual Variance 2005 $6,289,095 $ 7,107,815 $ 818,720 2006 $5,812,973 $ 8,619,767 $2,806,794 2007 $6,449,293 $ 9,052,358 $2,603,065 1 2008 $6,709,147 $10,155,865 $3,446,718
1

Projected based on the assumption that 50 percent of fees had been collected at September 30, 2008. (The average collected at September 30 of 2006 and 2007 was 45 percent.)

The Towns consistent under-budgeting of fund revenues and overstating of budgeted expenditures (by an average of $3.1 million from 2001 through 2007) is the cause of the funds operating surpluses. The result of these practices is that, although the 2008 adopted budget and the 2009 tentative budget include an appropriation of fund balance, this amount is not actually being returned to the taxpayers. Furthermore, by underestimating revenues and overestimating expenditures, the Town is overstating its need for garbage fees. Commercial Garbage District Fund The balance in this fund increased from a deficit of $48,410 at December 31, 2002 to a fund surplus of $8.6 million at December 31, 2007. We project a fund balance of $8.7 million by the end of 2008, which represents approximately 29 percent of the tentative 2009 appropriations.

Town officials have not identified specific needs for accumulating fund balance in the General Fund, nor have they projected what the fund balance will be at December 31, 2008. Similarly, the Town has not identified specific needs for accumulating fund balance in the Garbage Improvement District Fund and the Commercial Garbage District Fund. The Town Comptroller told us that the Towns plan for reducing these fund balances to a reasonable level is to continue to appropriate more fund balance each year to reduce taxes and fees. The Board should reduce the amount of unreserved fund balance in all these funds to within 20 to 25 percent of the 2009 budgeted appropriations, as required by its policy, by using the fund balance to pay one-time costs, reducing debt, establishing legal reserves for known future costs or by reducing the real property tax levy in the ensuing years budget. Appropriations We identified certain appropriations which we feel are not adequate, and in some instances are excessive in the tentative 2009 budget. Accordingly, we suggest the following observations be considered during the budget adoption process. Professional Fees, Garbage Improvement District In the last three years, the Town overestimated the appropriation for professional fees in the Garbage Improvement District fund budget. During the 2007 fiscal year, the Town expended $43,388 while the appropriated amount was $1,000,000. Consequently, this appropriation was overestimated by $956,612.

Based on our recommendation, the Town reduced this appropriation to $200,000 in its 2008 budget. However, the amount expended for professional fees through September 2008 totaled only $41,435. The trend over the last three years indicates there will not be significant additional charges against this appropriation through the end of the 2008 year. Despite this expenditure history, the Town is again appropriating $200,000 for professional fees in the 2009 budget. We recommend that the Town Board review the amount appropriated in the 2009 budget and determine if this level of funding is necessary. Lifeguard Costs In prior years, the Town underestimated the appropriation for lifeguards wages in the General Fund adopted budget. Our review of the 2009 tentative budget disclosed that the Town has not made adequate provision for any contractual increases in wages for the lifeguards. The following chart shows appropriations, expenditures, and budget variances for lifeguards in the general fund: Fiscal Year 2004 2005 2006 2007 2008 2009
1
2

Budget $1,225,000 $1,237,250 $1,255,809 $1,255,809 $1,255,809 $1,255,809

Actual $1,369,598 $1,347,599 $1,365,616 $1,465,875 $1,373,1361

2

Variance (Negative) ($144,598) ($110,349) ($109,807) ($210,066) ($117,327)

Actual expenditures through September 30,2008 We have not projected the 2009 expenditure, since the Town is currently negotiating the lifeguards contract.

As shown above, the Town did not implement our recommendation that they increase the amount appropriated in 2008. Consequently, the Town over-expended this appropriation by $117,327 by the end of September 2008. In the 2009 tentative budget, the Town has again appropriated $1,255,809 for this expense, even though that appropriation amount has been consistently over-expended. The union contract between the Town and the Towns lifeguards expired July 31, 2008, and is currently under negotiation. This tentative budget does not include a provision for a possible increase in wages in the new contract. Based on historical trends, the amount appropriated for 2009 will likely not be sufficient, regardless of the outcome of any agreement reached with the lifeguards. Once again, we recommend that Town officials amend the budget to increase the appropriation for lifeguards personal service costs. Long Island Green Homes Program Long Island Green Homes is a new program that the Town will be adding in 2009. The program enables residents to make energy efficient improvements to their homes without assuming new debt. These improvements are intended to help combat global warming by reducing carbon emissions and reducing energy costs for homeowners. The Town included this program under its Garbage Improvement District fund after revising the definition of solid waste to include carbon. As this program is implemented, the Town will incur up-front expenses associated with the home improvements. Subsequent to incurring the costs for improvements, the Town will then bill the participating homeowners in order to recoup the costs. These expenses will attach to the home 5

so that, should the home be sold, the new owners will be responsible for repaying any remaining cost. The 2009 tentative budget includes both an estimated revenue and an appropriation of $1 million related to this program. The Town Comptroller told us that these budget figures were not based on contractor estimates or any other supporting documentation, and that the Town does not have an estimate of the number of homeowners interested in participating in the program. Furthermore, the Town has yet to develop a payment plan detailing the time period over which homeowners will reimburse the Town. Thus, it is uncertain what level of expenditures incurred in 2009 will actually be reimbursed in 2009 and what amounts may be reimbursed in later years. The timing of the reimbursements will impact the Towns recognition of revenues associated with this program. When this program becomes active and the Town establishes a payment plan for participating homeowners, Town officials should continuously monitor the programs activity and revise the budget to more accurately reflect the anticipated expenditures it will incur and the revenues it reasonably expects to recognize in 2009. Format and Content of Town Budget To be a useful tool to town management and the residents of the town, a towns budget must contain sufficient information regarding the towns annual financial plan. Additionally, sound budget practices require the inclusion of a budget summary message with the tentative budget. The purpose of this type of summary is to provide a brief, easily understandable report of the main features of the town's budget to the town board and the taxpayers. Main features include changes from the prior budget, such as appropriations for capital projects, substantial increases in specific appropriations, and appropriations for new services; the financial condition of the town; new or drastically changed revenue sources; or any other item of interest to the town board and the taxpayers. Despite the recommendation that we have made for the last five years, the Towns 2009 tentative budget document did not contain sufficient information to be a useful tool in assisting Town management to plan and monitor the financial operations of the Town, and to provide the public with sufficient information regarding the Town's annual financial plan to allow meaningful input at the budget hearing. The Town's tentative 2009 budget document included only estimated revenues and appropriations of the adopted 2008 budget and the preliminary estimates for the 2009 budget. It did not include any information about actual revenues and expenditures of the prior completed fiscal year and it did not include a budget message. We again recommend that the Town Board revise the budget format to conform to provisions of Town Law and guidance prescribed by the State Comptroller. The following comparative information should be included:

Actual revenues and expenditures for the last completed fiscal year The current year's budget, showing revenue estimates and appropriations for the current year as amended to date 6

The budget officer's recommendation The preliminary budget as approved by the Town Board A budget message summarizing the main features of the proposed budget Estimated fund balances, with a breakdown of amounts appropriated, unappropriated, and reserved.

This information allows for the preliminary budget to be evaluated in light of the prior year's results of operations and the current year's budget. In addition, a budget summary message will provide a brief, easily understandable narrative of the Town's proposed budget. The Board has the responsibility to initiate corrective action. Pursuant to Section 10.10 of Local Finance Law, the Board shall review the recommendations in this report and may make adjustments to its proposed budget. The Board must explain in writing to our Office any recommendations that it has rejected. In addition, pursuant to Section 35 of General Municipal Law, the Board should prepare a plan of action that addresses the recommendations in this report and forward the plan to our Office within 90 days. We encourage the Board to make this plan available for public review in the Town Clerks office. For guidance in preparing your plan of action and filing this report, please refer to the attached documents. We request that you provide us with a copy of the adopted budget. We hope that this information is useful as you adopt a budget for the Town. If you have any questions on the scope of our work, please feel free to contact Jeffrey Leonard, Chief Examiner at (631) 952-6534. Very truly yours,

Steven J. Hancox Deputy Comptroller

cc:

Victoria Marotta, Town Comptroller Carol A. Quirk, Town Clerk Hon. Owen H. Johnson, Chairman, Senate Finance Committee Hon. Herman D. Farrell, Jr., Chairman, Assembly Ways and Means Committee Hon. Philip Boyle, Assemblyman Hon. Robert K. Sweeney, Assemblyman Hon. Charles J. Fuschillo, Jr., State Senator Laura L. Anglin, Director, Division of the Budget Jeffrey Leonard, LGSA Hauppauge Regional Office Chief Examiner