The audit, which was completed by the firm Ernst & Young, contains 29 comments about areas in need of adjustment. While many are technical, several of the comments point to major problems in how the budget was created and how the city keeps its books.
The glaring issues raised in the audit include the fact that the city overspent last year's budget by $6.7 million; that the budget contains a large structural deficit; that several expenses were charged to the wrong years; and that there were expenditures that were never approved by the City Council.
Still relevant
Why is the audit for the 2003-2004 relevant now, since we are almost done with 2004-2005? Because the mayor and his finance team are now beginning to assemble the 2005-2006 budget, and this recently released audit can serve as a road map, showing where they have gone astray in the past.
City Business Administrator Richard England said many lessons have been learned.
"In my opinion, the two most important issues to come from the audit were the clear statement that the city has a structural deficit that should be addressed, and that the city should not overexpend the budgeted amounts within the approved budget," England said Thursday.
The overspending issue
One major problem that has plagued Hoboken's budgetary process over the past decade has been gross underbudgeting. The city can act as if it's not going to spend so much money, in order to keep taxes down, but then it overspends and has to make up the amount the following year - forcing it to find new revenue sources.
It is actually against state law to overspend a municipal budget.
The critics of the mayor said that 2003-2004 budget wasn't even close to being an accurate representation of how much the city would spend. They said they knew from the minute it was introduced that 2003-2004 was underbudgeted.
Even though Roberts later conceded that his financial staff had underbudgeted, the new audit gives a number for exactly how much the city overspent. According to the audit, the city had $6.7 million in overexpenditures that year.
There have been overexpenditures for the last few years, but that year was the largest of the past few. The amount had to be made up in this past year's budget. The city has said, in the past, that the overexpenditures would not reoccur the following years, but so far, they have returned.
A large structural deficit
Another issue brought up in the audit was the city's structural deficit. A structural deficit is a recurring budget gap that reopens every year until a steady revenue source can fill it. Hoboken's budgets have had such deficits since two major waterfront development/revenue deals went down in the early 1990s.
"The city's finances are structurally out of balance," reads the 2003-2004 audit. Last year, the city was running about an $18 million structural deficit, which is almost as large as the city's entire municipal tax levy. This means that the city must sell of its property or find creative deals to fill the gap each year.
"For several years, the city has relied on one-time revenue sources to balance its annual budget," said the audit. "In addition, the city has not had a municipal tax increase in the past 10 years. The practice of relying on one-time revenue sources over an extended period is poor business practices and will only lead to a significant tax increase when a municipality can no longer generate such non-recurring revenue sources."
The audit suggests that to eliminate the structural deficit, the city should consider either reducing its operational costs, increasing taxes, or a combination of both.
England said that a major goal in the upcoming budget will narrow the deficit.
"The city is developing a plan, which through cost reductions, increased local, state and federal funding, and - where unavoidable - increased taxation, will eliminate this deficit as soon as possible," England said.
Other issues
In the 2003-2004 fiscal year, a local developer paid to have new lights installed at the Little League field. The developer paid directly for the work. Still, the City Council should have approved the $161,313 project. The audit said that this was "in violation of the state's Local Public Contracts Law." It added that the City Council should, in the future, approve all expenditures.
Also, another problem the audit found was that the city commonly changed current year expenses to the next year, which is a big budgetary no-no.
"The city must ensure that all items are properly encumbered and charged in the proper fiscal year prior to the actual purchase of goods and services," recommenced the audit.
Too many hats
Many of the other comments in audit are relatively minor bookkeeping matters that might be simply resolved if the finance staff was not so overburdened, said the audit. According to the audit, for the past three years, the city has operated it finance department without the benefit of a full-time Chief Municipal Finance Officer (CFMO).
Currently, the city's tax collector Louis Picardo is serving as the CFMO in addition to performing his duties as tax collector. While Picardo is a certified CMFO, the audit suggests that holding both positions is too much work for a single person.
Compounding the problem is the fact that the city's business administrator, Richard England, is also the city's purchaser.
"The City of Hoboken is a medium-sized municipality with complex operations," reads the audit. "As such, the duties of the CMFO should not be spilt between the finance office and the tax collector's office. We suggest that the city hire a full-time CMFO who will devote all of his/her attention to performing the duties of such office."
England said that there are no plans in place to hire additional personnel to relieve the double duty of the CMFO and business administrator.
"With regard to the CMFO, there is currently litigation going on that might result in the previous CFO being returned to his duties," England said.
England is referring to George DeStefano, who initially was suspended for allegedly mishandling the budget in September of 2002. But DeStefano was recently was cleared of nearly all on the charges, and could soon return to his job.
England added that there are definite economic savings by having the purchasing and business administrator jobs performed for one salary. "However, if the two jobs fall beneath the expected performance levels this could change," he said.
Looking at the future
The city's next budget is due in August, although municipal budgets are typically late. "The administration is drafting a preliminary budget which will be reviewed by the mayor and council prior to being introduced," England said. He said he would like to introduce the budget in August, with a possible adoption in September.
But even he admits that this might be delayed because the city in now in the process of renegotiating collective bargaining contracts with all six of the city's unions. Until this is complete, it will be nearly impossible to create an accurate budget.
During Roberts' mayoral campaign, he pledged that he will cap increases in spending at 2 percent. Escalating budgets have been a problem during Roberts' stewardship. In his four years in office, the city budget has increased by $18 million.
England said that their goal is to cap spending increase at 2 percent, but it is going to be difficult. "The objective of a 2 percent cap on spending in an aggressive one at any time given the unknowns of health care costs and solid waste collection costs," he said. "Negotiating labor costs only adds that much more difficulty."
He added that the city is exploring several areas where it might save money, including staff reduction, out-sourcing of services, and reduction of services.
As for a possible tax increase, England said that he would rather not do so, but that it might be inevitable.
"Tax increases are never a popular topic with the populace or elected officials," he said. "However, it the structural deficit is ever to be corrected, this possibility must be considered."
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