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Introduction Mayor Mike Spano took office on January 1, 2012. He commenced an initial review of the operations and finances of the City on that date. Shortly thereafter the Mayor came to two preliminary conclusions. First, there was an unacceptable level of uncertainty about the City's actual financial situation. Second, the City's historic use of budget gimmicks had created a structural gap between recurring expenditures and recurring revenues. This, in turn, would lead to annual budget gaps so large that the City could not continue to function. In order to establish the truth behind these concerns, the Mayor convened a Commission of Inquiry into the Finances of the City of Yonkers. He asked former Lieutenant Governor Richard Ravitch and former Assemblyman Richard Brodsky to lead the Commission. The Mayor asked the Commission to determine and make public the current facts of Citys finances; to understand the future consequences of those realities, and to examine such parts of the City's structures and operations as may need reform.1 The Commission was directed to complete its work no later than the end of September 2012. Mindful of the inexorable deadlines of budgets and the fact that the Mayor must present a balanced Executive Budget to the City Council on April 15, 2012 we began by focusing on recent budget history revenues and spending so that we might be able to provide a longerterm context and analysis to him, as he makes these immediate decisions. To that end, we focused on presenting him with accurate estimates of the FY2013 budget gap, and the gaps for the three years thereafter. Methodology Our initial efforts focused on existing budgetary and financial documents. We have examined the current years budget data, including: revenue collections, cash-flow schedules and forecasts, the tax assessment roll, a range of other operating documents and a number of historical documents. In addition, the Department of Finance has provided us with several special analyses of the property tax assessment roll, the status of delinquencies, and PILOTs. We met with the leadership and staff of the Yonkers Parking Authority, the Yonkers Office of

1 For a full description of the Mayor's requests see Appendix A.

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Economic Development2, the Yonkers Industrial Development Agency,3 the City Auditor, various City Commissioners, the City Assessor and the Superintendent and staff of the School District. We have been aided by useful discussions with a number of people whose historical and institutional knowledge of the Citys finances including past actions and the reasoning underlying them has provided valuable insight. Such discussions are, of course, preliminary; more will take place as this Commission advances. Our initial findings are preliminary and subject to adjustment. We make them today in order to inform the Mayor's decisions on his Proposed Budget. The caveats that explain the Findings are set forth below. We will continue to refine the numbers and the limitations in the predictions and Findings as we go forward. We note the need to distinguish between annual budget gaps and structural budget gaps. This distinction is at the heart of the upcoming financial crisis and explains the public confusion about Yonkers' annual budget process. By structural gap we mean the difference between annual recurring expenditures and annual recurring revenues. In every budget year we examined, the City chose to use significant nonrecurring revenues to bridge a gap in the annual budget. These are commonly called oneshots. They include spin-ups of State aid (payment of next years state aid in the current City fiscal year), use of Fund Balances (past savings), and borrowing for operating expenses (pension amortization, tax certiorari borrowing, and others). By annual budget gap we mean the difference between projected expenditures and projected revenues in the upcoming fiscal year what each Mayor confronts in the April budget proposal and the City Council confronts in its final adopted budget. Borrowing for pension costs or certioraris, spin-ups and other gimmicks have been proposed and adopted as revenues without controversy and have masked the true size of the City's debt and financial crisis. Other deficiencies have become the norm as well. There are no realistic capital budget projections. Although the School Board has adopted a $1.7 billion capital program, its four year plan keeps debt service flat at $20 million. The City does not have a capital plan at all. The City's budget documents have always assumed no increase in labor costs as a result of labor agreements. Although all municipal labor agreements have expired, it is unlikely that such costs will continue with no increase into the foreseeable future due to the risks of arbitration. These and many other deficiencies mask the true extent of the upcoming budget crisis. Because of this even our Findings below are likely to be substantially optimistic. The people of the city have experienced this problem in annual June battles between the Mayor, the Council, the School District, the state and federal governments and organizations within the City with budgetary interests. Annual budget gaps of relatively small amounts became the focus of public conflicts, and, in the end some sort of arrangement has been patched together. This is not a sustainable or acceptable way to manage the City's finances. We understand that Mayor
2 The OED also controls and operates the brownfields program, CDBG program and others. 3 The Yonkers IDA also controls and operates the local development corporations.

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Spano intends to change the process and the culture to make the City's budgeting process more honest and truthful. Findings Finding 1: The Budget Gap For 2013 Is $89.3 Million. .

By April 16, Mayor Spano must provide to the City Council a Proposed Budget for municipal and school purposes which contains his recommendations for an appropriate level of services and revenues sufficient to pay for them. As of today, assuming: the level of services in 2013 will be the same as provided in 2012, no increase in local taxes, no additional labor costs resulting from new labor agreements, and no borrowing for operational purposes (historically for certiorari judgments and pension costs) the Mayor and the City face a 2013 gap between expenditures and revenues of $89.3 million. Finding 2: The City's Annual Budget Gap Will Be $102 Million in 2014, $150 Million in 2015, and $210 Million in 2016, for a Total of $462 Million. The assumptions here are the same as those contained in Finding 1, with the following caveats. First, the property tax levy remains constant (the tax rate change is unknown) and second, the financing costs of capital expenditures remain flat for both the City and the School Board.4 A full list of these caveats appears below.5 We note again that while this represents our best estimate at this stage in our work, it is likely that these gaps will be substantially larger. Finding 3: The City Does Not Have a Four-Year Financial Plan Or a Multi-Year Capital Plan And Should Immediately Create Them. For the City to confront its fiscal realities, it must immediately create a Four Year Financial Plan containing accurate operating and capital budget projections for both municipal and school budgets. The lack of such plan substantially limits the Mayor's and Council's ability to make sensible short-term decisions on the 2013 budget. The Mayor should immediately direct that such plan be written and publicly presented as part of his 2013 budget efforts.6

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The unfunded capital needs of the school system include over $500 million to fix existing health and safety problems. See Appendix B. The Board of Education has a multi-year Financial Plan.

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Finding 4. Since 2004, The City's Accumulated Use Of One-Shot Budget Gimmicks Totals Over $500 Million. The extensive use of non-recurring, one-time revenues includes items such as the use of Fund Balances essentially raiding the piggy-bank; relying on speed-ups in State aid, or one-timestate special State payments, such as settlement of the Yonkers Public School desegregation case in 2002; and, the bonding of tax certiorari judgments.

ONE SHOT REVENUES IN YONKERS BUDGETS SINCE 2004 $ Millions Fund Balance State Aid Spin-ups EIP (State grant from Court settlement) Pension amortization/borrowing Economic Development/Ridge Hill, etc. Bonding tax certioraris Refinancing Library PILOTs (related to Yonkers Raceway) FY2012 TOTAL 131.3 82.2 150 62.6 20 65 20 10.6 541.7

Sources: Calculations based on Yonkers CAFRs & budget documents, various unofficial financial documents, Including handouts from financial briefing to the City Council (March 2012) & PILOT agreements.

Remaining Questions/Issues for Inquiry Moving forward, our analysis indicates that there are at least six long-term structural issues that the Mayor and the City Council must address in order to bring greater order and sustainability to Yonkers finances.

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Revenue: Erosion of the Property Tax Base Yonkers property tax base is about two-thirds residential and one-third commercial. The Property Tax has a number of problems.7 There has been a steady erosion of the base, which has been offset by increases in the rate. Exempt property is now 37% of the roll. Challenges to the assessment roll, which has not been updated since 1954, have grown enormously and the City loses consistently. Assessment issues cannot be ignored over the longer term, as the states equalization process brings adjustments. The City relied on a long standing practice of bonding property tax certiorari payments, which requires the cost of paying interest money that could be spent to improve the administration of the assessment system. The growth in certiorari payments stems in part from the outdated assessment roll and in part from the processes which take a very long time and are in the hands of non-professionals (unlike other parts of Westchester County). PILOT payments and growing delinquencies in them also are an issue of concern. All of these issues can be addressed seriously and professionally, as there are models of bestpractices on which to draw. There needs to be a commitment to do so. Spending: Relationship between the City and the Board of Education The budget of the Board of Education is now larger than that of the City, which provides its major source of revenue. In addition, as the Citys fund balance has declined from more than $21 million in 2004 to about $8 million, today, the fund balance of the Board of Education has grown from $2 million to more than $32 million over the same period. Issues of state aid, urban stress and property tax support, from an independent school district, have marked the history of Yonkers school spending and services for years. Today, there are a number of issues of State policy: aid, constraints, Maintenance of Effort requirement, as well as issues of local resources and spending which the City and Board need to discuss seriously and in a long term context. Spending: Labor Relations Sound long-term budgeting requires the ability to estimate accurately the costs of providing essential services to the Citys residents. The City is operating under labor contracts that expired before the middle of 2009. Since the cost of the workforce is the primary cost of City services, not having those costs in place presents a huge risk for future financial management. In addition, it prevents efficient City management. Managers need a long-range prospective to plan more efficient service delivery, introduce new technology, and upgrade the skills of the work force. Operating with long-outdated labor agreements is a real handicap to quality City services. Spending: Capital Plan, Needs & Budget Yonkers has allowed its system of capital planning and budgeting to lapse. As a result, we are not able at this point to determine the deferred maintenance, new capital needs and ongoing borrowing requirements. This behavior cannot be continued into the future. It is not possible to create a realistic multi-year financial plan without it being grounded in an accurate, capital plan and budget. Debt service costs expected in the out-years of the multi-year financial plan stem directly from the capital plan and budget. Without it, the city cannot proceed on a sustainable path.

7 Under the State Real Property Law the City is responsible for the preparation of the assessment roll; the State
establishes Equalization Rates for all localities to impose a degree of fairness across the State. For a general description of the system and a summary of the tax roll and the tax levy, see ibid, pp. 36-42.

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Management: Budget Systems, Controls & Staffing The financial and control functions of the government of Yonkers are seriously understaffed and underfunded. The serious work of bringing ongoing balance to the Citys budget over the next few years cannot be done with the present systems and resources. Our preliminary work indicates that there are critical staff shortages preventing the monitoring of agency spending, headcount and operation performance. There is no current assurance that the management and budget staff know how well or efficiently money is being used. Further, institutional memory is essential to budgeting and policy making. Yonkers is not able to maintain historical data in a useful way to be helpful to analyze policy proposals or current actions. Future improvements in the delivery of City services will require that the City develop and improve certain areas of expertise: financing, labor, revenue forecasting, federal/state relations and agency operations. This will require development of junior staff expertise, so that more senior staff can devote time to less routine functions and are able to focus on more difficult problem areas. Related Entities The role and effectiveness of related agencies, such as the Yonkers Industrial Development Agency and the Yonkers Parking Authority must be reviewed and reformed.

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APPENDIX A The Mayor provided us with a wide ranging scope that covers all budget matters and others: Identify and examine revenues from any and all sources, expenditures, debt status and policy, short-term and long-term liabilities, for all City Departments, agencies and offices, boards and commissions and all entities which operate in conjunction with and/or are supported by the City government, including LDCs and City-based public authorities. Examination of systems of control and transparency. Examination of labor-related obligations and their impacts on annual budgets, with particular emphasis on overtime as a percentage of overall labor obligations and costs. Examination of tax policy, including: PILOTs, delinquencies and collections. Examination of lending, grant and other financial policies and practices in connection with economic development and other activities. Examination of the assessment process, as well as the financing and impacts of tax certioraris.

Out-Year Assumptions Revenues: Tax Levy remains the same. Tax rates increase due to projected loss of Assessed Values. Sales Tax increase by 1.5% each Year over FY2012 projection. Add additional 1 Million in FY2013 for Ridge Hill and additional $ 1 million for FY2014, $500,000 FY2015. Mortgage Tax and Real estate Transfer Tax held at Current Projection for FY 2012. 5% Reductions. Income tax surcharge for FY2013 is based on current projection adjusted for full year at 15%. In FY2014 and 2015 growth rate 1.0%. State aid remains constant. PVB was adjusted by $6.4 million to reflect loss of Cross County Shopping Center, Raceway, Collins I &II additional PILOT revenue. Water Rates increase by 10% each year. Amortization of Pension credits is reflected as a revenue in FY2012 ($10.8 Million), FY 2013 ($8.7 million), FY 2014 ($6.3 million), and FY2015 ($4 million) Sewer Rates must increase by 5% in FY2013 through 2015. Real Estate Transfer Tax is cut 5%, leading trend. Reduction in Misc. Revenues due to One-shot of Walnut & Post sale.

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Expenditures City personnel expenditures grow at 1%, for steps, no salary increases. Additional $1 million in OT, police & fire. Other City operating costs increase 2%. DPW contractual items increase at 5%, Water Purchase, Utilities. Health Insurance grows at 13.3% each year based on current FY2012 increase. Retirement increase based on latest available rates for FY 2012. 16%. BOE projected operating expenditure growth rate is based estimates. Information provided FY2012 by BOE.

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