NIAGARA FALLS, NY – A draft of an audit being prepared by the Office of the New York State Comptroller calls into question the budget and spending policies of the City of Niagara Falls and warns of potentially dire financial circumstances for the Cataract City unless officials there “take immediate steps” to get their financial house in order.

The draft report notes the administration of Mayor Paul Dyster's pattern of using casino revenues — which have steadily decreased in recent years — to balance the city’s budget, despite warnings against using so much of the casino revenues to do so.

According to the report, the city has a general fund of $93 million, supported primarily by $33 million in property taxes, $21 million in sales tax, and $11 million in casino revenue.

But the audit notes that a current dispute between the State of New York and the Seneca Nation of Indians has resulted in disruption of incoming casino revenue under a sharing agreement worked out between the state and the Seneca Nation.

The Senecas claim that the state, in extending its casino compact until the year 2023, failed to include an extension of the revenue sharing agreement which expired with the original pact.

Thus, it is the Seneca’s position that it owes the state no further payments.

The Cuomo administration disagrees with the Seneca’s position, and talks to resolve the matter have thus far been unfruitful.

This leaves host cities who are entitled to a cut of the state’s share of revenue, particularly Niagara Falls, in a financial lurch.

MORE: 2 On Your Side's Erica Brecher provides additional coverage on what Niagara Falls plans to do to fix its financial situation.

Looking at the Books

The State Comptroller’s audit addressed the question of “Do the Mayor and City Council ensure budgets are realistic and balanced?” and examined the city’s financial condition from 1/1/15 to 6/30/17.

The audit also questions whether the city took corrective action from a prior audit of 2013 and evaluated operating results from 2013 and 2014

The draft audit notes that the city’s goal had been to maintain an unrestricted fund balance (sometimes referred to as a reserve fund) of 5 percent of its total general fund budget.

The prior audit also recommended the mayor and city council develop “realistic budgets”, without relying so much on casino revenues to balance them, and adopt a multi-year financial plan.

However, the draft audit notes that, “The city did not maintain a multiyear financial plan and has continued to rely on unreliable revenues and one time funding sources.”

In addition, it notes that “from 2014 thru 2017 city officials balanced the budget primarily by using casino revenue” dipping into them to the tune of $9 million dollars annually on average, while also using reserve funds to close the gap.

The draft audit warns that by the end of 2017, the city will deplete its reserve fund balance.

Further, it cautions that unless changes are made, the loss of the reserve funds combined with the loss of casino revenue could result in a general fund gap, or deficit, of $12 million within a year.

“If the current Seneca dispute is not resolved positively for city it will have to make difficult choices to achieve some combination of reduced expenses and increased revenue,” the draft report says.

Pathway to a financial crisis

According to the draft audit, during fiscal years 2014 through 2017 city general fund expenditures averaged $94 million annually. During the same time, recurring revenues averaged $79 million leaving a $15 million annual gap.

The gap was filled with casino revenue and fund balance reserves.

In addition, since 2013, the amount of casino money the city had has decreased from $43.9 million to $25.4 million as of May 31 2017.

Transfers from casino funds to close city budget gaps are listed as follows:

$6.6 million in 2014, $7.5 million in 2015, $12.3 million in 2016, and $11.1 million in 2017.

During this same time period, the draft audit claims the city depleted its unrestricted — or reserve fund balance — by 86 percent, and estimates that the reserve fund not only be wiped out by the end of 2017, but will in fact reflect a deficit of $2.6 million.

The draft audit also makes note of a prior dispute between the state and the Seneca Nation that held up payments for several years.

“Given the prior impasse with the nation, the city should have reduced the amount of casino revenue used routinely for appropriations instead of increasing its reliance on it to balance the budget” state auditors concluded, further noting the city will lose its ability to even attempt to balance its budget with casino revenue if the current dispute is not resolved.

The draft audit also notes that while “the amount of casino revenue the city received declined from $14.2 million in 2013 to $12.1 million in 2016 (-13%). However, the city has used increasing amounts of casino revenue to finance general fund operations rather than developing other recurring revenue sources.

Alarm Bell Sounded

According to the draft audit, the city had roughly $25.4 million in casino revenue available on May 31st of this year, but used $11.1 million to plug its latest budget gap. With another $2 million needed to cover expenses for labor contracts, which had not been budgeted, the auditors estimate “that by 12/31/17 city will have $11 million casino cash left.

The draft audit notes that “Due to the current impasse with nation it is uncertain whether city will receive any future casino revenue. Therefore it is imperative that the city officials take immediate action to address the city’s fiscal problems.”

City officials say they will use casino cash for next year’s budget. But if they do it at the rate they’ve been, according to the draft audit, they will deplete remaining casino revenue by end of 2018 fiscal year.

According to the draft audit, “City officials have not developed a plan to transition away from using casino revenue to balance the budget. In fact, instead of cutting back city officials increased the amount of casino revenue to balance the budget in recent years.”