oversight

Analysis of Operating Expenses in New York City's Fiscal Year 1978 Capital Budget

Published by the Government Accountability Office on 1977-11-15.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                           K?2w -        qs4
                          D)OCUlENlT   RESULME      op          77
04052 - [ 3194435

Analysis of Operating Expenses in New ork City's Fiscal Year
1978 Capital Budget. GGD-78-13; B-185522. ovember 15, 1977.
Released December 15, 1977. 9 pp.   2 appendices (14 pp.).

Report o Rep.   illian S.o oorhead, Chairman, House Committee on
Banking, Finance and Urban Affairs: Economic Stabilization
Subcommittee; by Blmer B. StadtS, Coptroller General.

Issue Area: antergovernmental Policies and iscal Relations:
     iscal Problems and Potertial Solutions (407).
Contact: General Government iv.
Budqet Function: Revenue Sharing and General Purpose Piscal
    Assistance: Other General Purpose Fiscal Assistance 352).
Organization Concerned: New York, NY; Dpartmert of the
    Treasury.
Congressional Relnvance: House Committee on Banking, Finance and
    Urban Affairs: Economic Stabilization Subcommittee.
             The operating expenses contained in New ork City's
fiscal    year  1978 capital budget are understated, but only by a
relatively     small amount. This anount was determined using a
strict    interpretation   of the criteria, which are mcre strict
than    many  municipalities  amght currently be following. However,,
in   view  of  the current  fiscal problems of the city and its need
to restore     investor confidence,  it is in the city's best
interest to apply strict criteria in determining whether budget
items are valid capital outlays or operating expenses.
F-ndings/Conclusions: New York State law requires New York City
to eliminate operating expenses from its capital budget over a
10-year period. Using criteria established by the State
Comptroller, the city classified $643 illice,       of its $1.031
billion in planned capital outlays as operating in nature.
Application of a strict interpretation of the State's criteria
identified an additional $18.9 million which should have been
classified as operating expenses. For an additional $8.3 million
in planned expenditures, city officials did not have sufficient
documentation to permit determination as to whether the items
 were valid capital charges. City officials agreed that $5.5
million in expenditures should be classified as operating, but
disagreed with the deterainations on the remaining $13.4
 milion. Representatives of both the State and City
Comptrollers' offices agreed with the determinations in all
cases. (Author/SC)
                   i.           --   fcTED
                                      ot - be r   L:--; e? prer-
                                                              4    e prl
                   Acceunt ng Office except on t  e      &.iU 6pefl appevAl
                   by re Office of CongressiooM4 A*iti




B.D
  0          REPORT OF THE
         . aiCOMPTROLLER GENERAL
  .ou,       OF THE UNITED STATES



           Analysis Of Operating Expenses In
           New York City's Fiscal Year 1978
           Capital Budget
           State law requires New York City to elimi-
           nate operating expenses from its c;apital bud-
           get over a 10-year period. Using criteria es-
           tablished by the State Comptroller, the City
           classified $643 million of its $1.031 billion
           in planned capital outlayb as operating in
           nature. GAO applied a strict interpretation
           of the State's criteria and identified an
           additional $18.9 million. In view of the
           City's current fiscal problems and its need to
           restore investor confidence, GAO believes it
           is in the City's best interest to apply strict
           criteria and recognize this amount as operat-
           ing in nature.




           GGD-7813                                         NOVEMBER 15, 1977
                COMPTROLLER GENERAL OF THE UNITED STATES
                           WAEHINTON, D.C.   2043




B-185522



The onorable William S. Moorhead
Chairman, Subcommittee on Economic
  Stabilization
Committee on Banking, Finance and
  Urban Affairs
House of Representatives

Dear Mr. Chairman:

      In your letter of May 11, 1977, you requested that we
supplement with additional information the briefing we gave
your Subcommittee on April 29, 1977, on New York City's
financial situation. Specifically, you requested that we
furnish data on (i) operating expenses in the capital budget,
(2) the City operating budget increases above the amounts
anticipated in the 3-year financial plan, and (3) illegal
aliens in New York City as they affect the City's population
base.

     We have already responded on the matters of illegal
aliena and operating budget increases. This report
addresses the issue of operating expenses in the capital
budget.

     You stated that the Subcommittee would like to know
how much of the Mayor's proposed fiscal year 1978 budget
represents operating expenses, why the proposed executive
budget indicated an increase in the amount of operating
expenses in the capital budget over the amount previously
reported, and whether the City is adheriag to the
State-legislated mandate to eliminate operating expenses
from the capital budget.

     Your questions address some basic issues of municipal
financial practice for which no hard and fast rules exist
and on which opinions differ significantly.

     A conservative approach to public finance dictates that
all current expenses, as well as a normal level of recur-
ring capital outlays, should be included in a municipality's
operating budget and funded with current revenues. The
B-185522


capital budget, which is fnded with borrowings, should
likewise, uder a onservative approach, be restricted to
paying for the construction of major permanent facilities
having   relatively long life.

     Applying th.s approach in practice, however, is some-
times difficult. What constitutes a normal level of recur-
ring capital outlays, which should be in the operating
budget, is judgmental. When a local official is f'ced with
making this determination, he may well lean toward funding
all capital outlays through borrowing, thus freeing crrent
revenues for other purposes. In the extreme situation, he
may even classify certain operating expenses as capital
and borrow to pay for tem.

     This was the case in New York City in the years
preceding the fiscal crisis of 1975.  For over a decade,
the City, with the approval of the State, had borrowed
money through its capital budget to pay for certain opera-
ting expenses wnich should have been paid for with current
revenues. This is one of the much publicized "gimmicks"
the City used to balance it3 operating budget.

     After public disclosure of this "gimmick," the New
York State legislature concluded that the funding of
operating expenses through the ca.ital budget wias an un-
desirable practice and directed that it be eliminated in
accordance with criteria to be laid down by the State
Comptroller. The Comptroller issued Accounting Systems
Directive Number 4, "Budgeting, Accounting and Financing
of Capital Outlays and Expense Programs Eligible for
Borrowing Under Law," in early 1976 and subsequently
revised and liberalized it sonmewhat in February 19;7.   (See
app. I.) It provides that in addition to "brick. and mortar"
projects, the City may capitalize equipment having a unit
cost of $15,000 or more and minimum useful life of 5 years.
We applied the criteria established by the Directive in
responding to your questions.

HOW MUCH OF TBH MAYOR'S PROPOSED
FISCAL YEAR 178 CAPIT7L BUDGET
REPRESENTS OPERATING EXPENSES?

      The fiscal year 1978 capital    -at proposed total
appropriations of $1.36 billion, of      h $865 million
represented City funds and the bala;      presented Federal,
State, and private grants. Since ti..      propriations
represent, in part, what some City ci:ic.als cal a "wish
list," that is, projects in the early stages of planning

                             2
B-185522



which might later be canceled, it is not the best represen-
tation of what the City will spend. A better representation
of planned capital improvements is the "cash flow report,"
which is a forecast of those projects on which funds will
actually be spent during the year.  For the purposes of our
tests, we focused on the cash flow forecast.

     The forecast shows a total planned outlay of $1.445
billion, which is somewhat higher than the budget because
it includes some planned outlays on projects authorized in
prior years for which expenditures will be made in fiscal
year 1978. Of the $1.445 billion, $1.031 billion represents
the amount to be financed by the City and includes $608
million in operating expenses which, according to the Direc-
tive criteria, should hiave been included in the operating
budget.  Subsequent to the budget's publication, the City
reclassified another $35 million as operating expenses based
upon analyses conducted by the State and City Comptrollers.
Thus, a total of $643 million or bout 62 percent of the
total outlays of $1.031 billion was identified as operating
expenses, leaving 38 percent or $388 million which repre-
sented capital outlays. This can be summarized as follows.

                                            (millions)
     Operating expenses in executive
       capital budget                       $   608
    Addition agreed to by City                   35
           Total operating expenses
             recognized by City                 643
     Total capital projects--per City           388
           Total planned expenditures for
             1978 capital budget--City
             funds                          $1,031
     We reviewed 116 of the 434 projects which were considered
valid capital by the City. These projects accounted for over
60 percent of the $388 million of valid capital projects. In
conducting these tests, we applied a strict interpretation of
the principles of the Directive because past interpretations
of capitalization criteria contributed to the City's fiscal
difficulties.



                              3
B-1855.2


     Applying this strict interpretation and a conservative
approach to public financing decisions, we identified
million which we believe should be recognized          $18.9
                                              as operating
expenses.  For an additional $8.3 million in planned expendi-
tures, City officials did not have sufficient
                                              documentation
to permit us o determine whether those items
                                              were
capital charges. The amount of operating expenses valid
capital budget, therefore, is at least $662 million in the
than the $643 million recognized by the City.        rather

     City officials agreed that $5.5 million in expenditures
should b classified as operating, but  they disagreed with
our determinations on the remaining $13.4 million.
sentatives of both the State and City Comptrollers' Repre-
                                                    offices
agreed with our determinations in all cases.

     Most of the City's disagreement centered around
following issues:                                    the

    -- The City feels that resurfacing of streets
                                                   is a
       valid capital project, since it extends their
       useful life. We feel, however, that resurfacing
       merely restores streets to their original con-
       dition, and, in any event, should be expensed
       since it is a normal recurring maintenance
       expense of the City. Of the $13.4 million dis-
       puted by the City, $7.2 million is attributable
       to this disagreement.

    -- The City maintains that it can legally borrow
       for installment payments on equipment purchases.
       Whether it is legal or not, we feel the install-
       ment payments themselves represent borrowing
                                                     by
       spreading the equipment cost over a number of
       years. While the equipment is clearly a capital
       asset, a onservative approach to public finance
       would dictate that the installment payments be
       funded thrcugh current revenues rather than by
       capital fund borrowings which result in principal
       and interest payments that must eventually be
       funded out of current revenues. Approximately
      $3.3 million is attributable to this disagreement.

    -- The City contends that the Directive did not
       become effective until July 1, 1977, and there-
       fore does not apply to any commitments prior
       to that date even if money will be spent in
       fisc4' year 1978.  In our opinion, the Directive
       must be applied etroactively since State


                            4
 B-185522


        legislation requires that it be used as criteria
        in examining the capital budget for fiscal year 1976,
        the base year in the 10-year phase-out of operating
        expenses. Representatives of the State Comptroller's
        office also maintain that the Directive is retroac-
        tive to fiscal year 1976. Almost $2.5 million is
        attributable to this disagreement.

     A listing of all the projects in question is attached as
appendix II. That listing briefly describes our reasons
classifying the projects as we did, as well as the reasonsfor
why City officials disagreed with our conclusions.

     In addition to testing the 116 projects, we also looked
at another aspect of the City's fiscal year 1978 capital
budget. In prior years, the City had charged salaries
                                                        of
certain Ci'ty employees to the capital budget without
                                                      document-
ing the validity of these charges. For fiscal year 1978
                                                           the
City has developed a new system which, for the first
                                                      time,
systematically records and accumulates these time charges.
The Directive recognizes the validity of charging these
in-house labor costs to the capital budget. It requires,
however, that they be allowed only up to the amount which
would be incurred if the same work were contracted out
                                                        to
independent architects and engineers.

     We examined this system and concluded that it should
be adequate to insure that charges for in-house labor
                                                       will
not be excessive. Detailed time records will be required
for each employee whose time is charged to the capital
budget.  Furthermore, the City, in determining the maximum
amount of in-house labor it can charge, will use the same
fee schedule it applies when computing fees payable to
independent architects and engineers. Therefore, assuming
the projects on which City employees work are valid capital
projects, the system should operate to insure that excess
charges to the capital budget do not occur.

WHY DOES THE PROPOSED EXECUTIVE BUDGET
INDICATE AN INCREASE IN THE AMOUNTOF
OPERATING EXPENSES OVER THE AMOUNT PREVIOUSLY
REPORTED?

     The 3-year financial plan estimated that the
spend $515 million on operating expenses supported City would
                                                    by capital
Dorrowings in the third year--fiscal year 1978.
                                                  However,
the time that plan was prepared, the criteria for making at
                                                           a
capital/expense determination were uncertain. The New
                                                        York
State Comptroller had prepared the Directive, but City
                                                        of-
ficials objected to those criteria.
                             5
 B-185522


      One section was particularly controversial.
 original version dated February 1976,                In its
                                         the Directive
 provided t'out. in addition to "bricks
                                         and mortar" projects,
 certain maj3r equipment purchases could
                                           be considered as
 capital projects if the unit cost was
 the useful economic life was at least   $75,000  or more and
                                         7 years.   That provi-
 sion meant, for example, items such
                                      as  garbage  trucks would
 have to be recognized as operating expenses
 cost less than $75,000.                       because  they

      City officials, including the Mayor and
 Mayor for Finance, pressed for a change        his Deputy
 proposing more liberal criteria that      in the  Directive,
                                       would allow it to
 borrow for equipment costing $3,000
                                      or more and which had
 a useful economic life of at least 3
                                       years, In order to
 end the controversy and uncertainty,
 Directive by lowering the limits for the State revised the
                                       equipment to a minimum
 unit cost of $15,000 and a minimum useful
                                             life
 By this revision, certain equipment purchases of 5 years.
 have been financed through current               which would
                                     revenues
 original Directive could now be financed      under  the
                                            through borrowings.
     The City deferred any new analysis of
budget until agreement was reached          its capital
                                   on the Directive.    With
a compromise finally achieved, the City
the budget as required by State law.     began  to analyze
analysis were disclosed in the Mayor's The results o this
                                        1978 Executive
Budget which showed that $603 million
                                       of operating
expenses would be funded by capital fund
that year, in lieu of the $515 million    borrowings in
                                        previously projected
in the financial plan.
     Both of the estimates, $515 million and
were based on the same basic universe         $608 million,
                                       of items. The change
represents a reclassification of items,
capital and vice versa in accordance     from operating to
                                      with the revised
criteria, rather than the addition
                                   of new items.
     The major items accounting for the net
$515 million to $608 million follow.        increase from

City subsidy to Transit Authority
reclassified as an operating expense--
 71 million
     The New York City Transit Authority,
                                          an independent
agency operating the subways and some
City, receives funds from the City    bus routes in the
                                   through various subsidy
mechanisms.  Beginning in 1975, the City used its
                                                  capital

                             6
 B-185522


budget to provide an annual subsidy to the Transit Authority.
The subsidy is used for maintaining the City's subways and
is thus a City operating expense. Therefore, the $71 million
projected to be spent in fiscal year 1978 was reclassified
as an operating expense.

Judgments and claims reclassified
as an operating expense--77 million

     The City has traditionally borrowed to pay for unfore-
seen judgments or claims. Many of the prior claims suffered
by the City have not been of a capital nature.  Instead, they
consisted of such operating expenses as salary and wage
adjustments, compensation for personal injuries to citizens,
and tuition costs for handicapped children, all of which do
not meet the new Directive criteria for capital projects.
As a result, the $77 million estimate for judgments and
claims in fiscal year 1978 was reclassified as an operating
expense.

Various purchases reclassified
as an operating expense--Sio million

     The new Directive criteria prohibit the City from bor-
rowing for machinery and equipment purchases if the unit cost
is below $15,000 or the estimated useful life is less than 5
years. This is a stricter definition than the criteria the
City used in preparing its original estimate. Therefore,
                                                          the
City had to reclassify $10 million in purchases of items
such as light trucks which did not meet the new criteria.

In-house labor reclassified
as cpital--$72 million    -
     The new Directive considers City personnel and related
costs "directly applicable to specific capital projects" as
valid capital ccsts. This includes engineering and architec-
tural costs for design and supervision of construction. With
this provision in mind, the City determined that the $515
million in operating-expenses projected in the financial plan
included $72 million of such valid capital charges. The City
therefore reduced the operating expenses in the capital budget
by this amount.

                    *    *        *   *   *


     In summary, then, the City adjusted its financial plan
projection of operating expenses funded by 1978 capital
spending as follows.


                              7
B-185522


                                                 (millions)
Fiscal year 1978 operating expenses
  supported by long-term borrowings
  per financial plan                                $515
     Plus:

           Transit Authority subsidy       $71
           Judgments and claims             77
           Various equipment purchases      10
           Other increaser                  7        165
     Less:

           Personnel and other costs
             directly related to capital
             projects                                 72
Fiscal year 1978 operating expenses
  supported by long-term borrowings
  per fiscal year 1978 Executive
  Budget                                            $608
IS THE CITY ADHERING TO THE STATE-LEGISLATED
MANDATE TO ELIMINATE OPERATING EXPENSES FROM
THE CAPITAL BUDGET?

     Under the mandated phase-out the City was required to
gradually reduce borrowings for operating expenses over a
10-year period. In each fiscal year beginning with 1977,
the City would have to reduce by 10 percent the amount of
operating expenses funded in the fiscal year 1976 budget.
When the compromise on the Directive was reached, the City
reevaluated its fiscal year 1976 capital budget using the
new criteria. It determined that $861 million of operating
expenses was included in the original budget for 1976.
A 10-percent reduction for each of the subsequent 2 years
would leave the City with $688 million as the fiscal year
1973 ceiling for operating expenses funded by capital
fund borrowings. The $608-million estimate in the City's
fiscal year 1978 executive budget is within this ceiling.
Even with the $35 million adjustment added and the $18.9
million we identified, the resulting $662 million is below
the limit.


                              8
B-185522

                    *    *       *   *   *


     In summary, our analysis indicates that tha operating
expenses contained in the City's fiscal year 1978 capital
budget are understated, but only by a relatively sall
amount. Furthermore, this amount was determined sing a
strict interpretation of the criteria, more strict than
many municipalities might currently be following. Neverthe-
less, in view of te current fiscal problems of the City and
its need to re'store investor confidence, it is in the City's
best interest to apply strict criteria in determining whether
budget items are valid capital outlays or operating expenses.

     We trust this analysis of the operating expenses funded
through the capital budget is responsive to your Subcom-
mittee's needs. If you have any questions or wish to discuss
the information provided, we would be happy to meet with you
at your convenience.

     As arranged with your office, unless you publicly
announce its contents earlier, we plan no further distri-
bution of this report until 30 days from the date f this
report. At that time we will send copies to interested
parties and make copies available to others upon request.
                             Syyou              /a

                             Comptroller General
                             of the United States




                             9
APPENDIX I                   COPY                     APPENDIX I

                       STATE OF NEW YORK
                DEPARTMENT OF AUDIT AND CONTROL
                DIVISION OF AUDITS AND ACCOUNTS

       ACCOUNTING SYSTEMS DIRECTIVES FOR NEW YORK CITY

               Accounting Systems Directive No. 4

   Budgeting, Accounting and Financing of Capital Outlays
   and Expense Prograls Eligible for Borrowing Under Law

Introduction

     The capital budget may be financed through borrowings,

current revenues, or a combination of the two.      From the
viewpoint of conservative public finance, ideally all govern-

mental programs of an expense nature and a general or normal

annual level of capital expenditures should be financed from

current revenues.   It is rcognized, however, that public

finance requires a balanced financing approach and that de-

pending upon circumstances, borrowings may be used to finance

all projects that can be clearly defined as capital in nature.

     This directive is designed to provide a more conserva-

tive approach to financing capital construction than has been

previously followed by New York City.   It defines those
particular elements of capital construction that may be fi-

nanced through borrowing, as distinguished from those which

should be financed through current revenues.      It is also

designed to establish practices and procedures to account

for all capital outlays of the City that will conform to

generally accepted accounting principles and widely followed

budgetary practices, at the same time being compatible with


                             10
APPENDIX I                  - COPY                  APPENDIX I

the phase-out financing program authorized in the MAC legis-

lation.   This directive is intended, however, to cover only

capital outlays to be budgeted and accounted for in the
City's capital projects fund ana general fund.
Capital Outlays Defined
      Capital outlays are defined as those expenditures which
result in the acquisition of, replacement, or additions to
fixed assets.   Broadly speaking, these will consist of:
      1. Capital expenditures which meet the definition of
a   capital project," as hereinafter defined; and

     2. Capital expenditures other than those meeting the
definition of a "capital project," consisting of machinery
and equipment, including autos and trucks, furniture, office
equipment and related items.
Capital Projects Defined
     Capital projects are defined as "those capital outlays
other than special assessment and enteri rise fund projects,
which involve the construction of major, permanent facili-
ties having a relatively long life.   These projects do not
include fixed assets with a comparatively limited life, such
as various types of machinery and office equipment.   The
latter are not generally appropriate objects for long-term
borrowing by state and local governments and consequently
are financed by current revenues..." 1/
l/Governmental accounting, auditing, and financial reporting,
  Page 43.

                               11
APPENDIX I                  COPY                    APPENDIX I

     The City Charter states that "the term 'capital project'

shall mean any physical public betterment or improvement or

any preliminary studies and surveys relative thereto, which

would be classified as capital expenditures under generally

accepted accounting principles for municipalities."

     In accordance with the above definition, capital project

expenditures shall include the acquisition or construction

cost of land, buildings and major improvements other than

buildings.

     Capital project construction costs shall include all

direct costs for materials and labor, engineering and "first

line" architectural costs for design and supervision of con-

struction.   (Such costs shall be included whether the archi-
tectural work is performed by consultants or by "in-house"
personnel.   If "in-house" personnel are used, the related
costs should not exceed that which would be charged by con-
sultants.)
     This would permit the City to treat as project costs,
the personnel and related costs directly applicable to
specific capital projects such as the costs of site survey
and site selection.   To insure a reasonable limitation and
control over such capital project expenditures, such charges
or allocations must originate from a controlled time distri-
bution system, accounting for all time of the unit performing




                            12
 APPENDIX I                  COPY                   APPENDIX I

 these services and be reasonable in the light
                                               of that which
 would be charged by consultants.

      Costs of fixed equipment and machinery, furniture
                                                         and
office equipment may be included as part of
                                             a capital project
where such costs represent an initial outfitting
                                                  of a speci-
fic capital project.   In addition, capital outlays for cer-
tain major equipment, whether an initial or
                                             replacement ac-
quisition 7 shall be considered to meet the
                                            definition of a
capital project where the unit cost thereof
                                             is $15,000 or
more and its useful economic life is at least
                                               five years,
provided that it is other than a passenger type
                                                 automobile
or light truck.   This latter definition is applicable only-
to the extent that the resulting financial statements
                                                      of the
capital project fund will be fairly stated
                                           in conformity with
generally accepted accounting principles.

Budgeting and Accounting for Capital Outlays

     Basic Principles

     Generally accepted accounting principles should
                                                     be fol-
lowed for the purpose of determining the appropriate
                                                     fund
in which to account for the two types of capital
                                                 outlay, as
previously defined. The budgeting practice
                                            should be based
on and follow the accounting principles applicable
                                                   thereto.
     Capital Projects Fund

     A capital budget is a plan of proposed capital
                                                    projects
and the mears of financing them.  Upon adoption it shall cover



                             13
APPENDIX I                   COPY                      APPENDIX I

 such period of time as is required to complete all capital

projects included therein.

     Those capital outlays which meet the definition of a

 "capital project" should be budgeted and accounted for in
                                                           a
capital projects fund.   As previously stated, such capital
expenditures would include t-     acquisition or construction
cost of land, buildings, and major improvements other than
buildings. Machinery and relatJ equipment would be included
only when such costs represented an initial outfitting of a
capital project, or consisted of major equipment with a uni'
cost of $15,000 or more and a useful economic life of at
least five years, as heretofore defined.
     Generally, all projects included in the City's capital
budget for successive fiscal years can be accounted for in
a single capitil projects fund.     Within said   .und an indi-
viduai capital project account should be established for
each authorized project except for a series of related proj-
ects, which can be consolidated as a single project.       Major
projects for which a detailed classification of expenditures
is deemed desirable may be accounted for by the use of sub-
expenditure accounts, as provided for in the prescribed chart
of accounts for the Capital Projects fund.    Charges to an
individual Capital Project account are limited to those
costs that result in the addition to fixed assets through
construction and/or acquisition, as heretofore defined.


                             14
APPENDIX I                  COPY                    APPENDIX I

     General Fund

     Those capital outlays which do not meet the definition

of a "capital project" should be budgeted and accounted for

in the general fund.   Generally, these will include all

equipment (not part of the initial outfitting of a specific

capital project) required to be used by City departments and

agencies whose operations are to be accounted for in the
general fund, such as normal annual replacement purchases of
machinery, automotive equipment, furniture, office equipment,
and similar items.
     Recurring City expenditures not directly related to the
acquisition or construction of specific capital projects
should be excl,'ded from the capital budget.   Exclusions would
cover such items as recurring costs for ongoing surveys and
studies of prospective project sites, general planning and
administrative costs of departments or agencies involved in
capital project activities, processing and audit of vouchers,
budget and accounting personnel assigned to overall planning
for capital projects, general administrative overhead related
to such work, costs of supervising the work of consultant
architects, and such extraneous items as judgments and
claims.   These items and any phase-out financing authorized
by the MAC legislation should be budgeted and accounted for
in the general fund.




                             15
 APPENDIX I                   COPY                     APPENDIX I

 Financing of Capital Outlays and Expense
                                          Type Programs Under
     MAC Legislation

      Whether capital outlays (and eligible
                                             expense programs
 under the Local Finance Law) are financed
                                            by borrowing or
 from current revenues are matters of City
                                            financing policy
 and legal directives, not accounting principles
                                                  or budgetary
 practices. Regardless of the method
                                      of financing they should
 nonetheless be budgeted and accounted for
                                           in the appropriate
 fund, based on generally accepted accounting
                                              principles, as
 set forth heretofore.
        For many years the City    as financed by borrowing all of
 its true capital projects, other capital
                                          outlay items; and
 many expense type programs permitted under
                                            the Local Finance
 Law to be so financed. The MAC law now mandates
                                                  that the
.City will, on a phased basis, eliminate fron
                                              its capital
budget those expenses that are properly includiblt
                                                    only in
its expense budget. Under such legislation,
                                              expense type
programs financed by borrowing du-ing the
                                           authorized phase-
out period will nonetheless be accounted
                                          for in the general
fund.  Proceeds from sale of bonds or other long-term
                                                      debt
would be recorded in a revenue account entitled
                                                "Proceeds
from sale of bonds (or other appropriate
                                         form of long-term
debt)" in the general fund until such time
                                           as the phase-out
financing program is completed.




                                  16
APPENDIX I                   COPY                   APPENDIX I

       The fact that equipment of machinery is estimated to

last more than a specified number of years or cost more tan

a specified amount are criteria for such items being included

in the general fixed assets group of accounts but normally

not for purposes of capital projects budgeting and account-

ing.




                              17
APPENDIX II                                          APPENDIX II


                  CITY AND OUR COMMENTS ON

          OPERATING EXPENSES IN SAMPLED PROJECTS

              IN FISCAL YEAR iP18 CAPITAL BUDGET
                                             Amount that should
                                             be recognized-as an
                                              operating expense

Project HW 349:  Repaving anil resur-
  facing of streets and highways.

     -- Our comments:  Resurfacing should          $7,200,000
        be expensed since it only re-
        stores streets to their original
        condition after normal wear and
        tear, and street resurfacing is
        a normal recurring maintenance
        expense.

     -- City comments: Resurfacing
        streets extends their useful
        life by more than 5 years and
        therefore the cost should be
        included in the capital budget.


Projects WM   1 & WM 6: Water main exten-
  sions and   ordinary improvements to dis-
  tribution   system and improvements and
  additions   to pumping plants and buildings.

     -- Our comments: Projects include              1,691,000
        costs for replacements of water
        mains, hydrants, etc., broken by
        accident. These are ordinary
        recurring repairs which should
        be expensed.

     -- City comments: These items should
        be expensed in the future. How-
        ever, $778,000 of the charges
        should be allowed in the fiscal
        year 1978 Capital Budget since
        this amount was committed prior
        to what the City considers the
        effective date of the State's
        directive, Accounting Systems
        Directive Number 4 (ASD-4).

                               18
APPENDIX II                                           APPENDIX II


                                               Amount that should
                                               be recognized as an
                                                operating expense
Projects HN 191, PU 16 & TF 1:  Purchase
  of EDP equipment for various city
  departments.

     -- Our comments: When equipment is            $3,316,000
        purchased on the installment
        plan which spreads cost over 5
        years, the installment payments
        should be expensed rather than
        bonded and spread over additional
        years.

     -- City comments: Purchase of equip-
        ment on the installment basis
        is legally bondable.
Project F 109:    Fire fighting vehicles and
  equipment.

     -- Our comments: Project includes small          21,000
        trucks costing under $15,000 which
        should be expensed.

     -- City comments: These items should
        be expensed in the future. How-
        ever, the charges should be
        allowed in fiscal year 1978 since
        City officials dispute the
        effective date of ASD-4.

Project BR 8:    Reconstruction and improvement
  of bridges.
     -- Our comments: Project includes paint-        430,000
        ing and repairs which should be
        expensed as normal maintenance.

    -- City comments: These items should be
       expensed in the future. Ho ver,
       $295,000 of the charges should be
       allowed in the fiscal year 1978
       capital budget since this amount was
       committed prior to what the City
       considers the effective date of
       ASD-4.


                              19
APPENDIX II                                      APPENDIX II


                                            Amount that should
                                            be recognized as an
                                             operating expense
Projects HO 215 & PU 15: Purchases
  of ambulances and trucks.

     -- Our comments:  Projects include           $962,000
        vehicles costing less than
        $15,000. These do not meet ASD-4
        criteria and should be expensed.

     -- City comments: These items should
        be expensed in the future. How-
        ever, they should be allowed in
        fiscal year 1978 since City
        officials dispute the effective
        date of ASD-4.

Project E 643 R,K & M:   Modernization of
  schools.

     -- Our comments: Project includes             235,000
        books and supplies which should
        be expensed.

     -- City comments: These items should
        be expensed in the future. How-
        ever, the charges should be
        allowed in fiscal year 1978 since
        City officials dispute the effec-
        tive date of ASD-4.

Project HO 214: Reconstruction and modern-
  ization of various hospitals.

     -- Our comments: Project includes             311,000
        minor improvements which should
        be expensed.

     -- City comments:  These small construc-
        tion projects can be legitimately
        capitalized because they are
        improvements.




                             20
APPENDIX II                                         APPENDIX II


                                            Amount that should
                                            be recognized as an
                                             operating expense
Project E 1750:  Installation of
  intrusion alarm systems in various
  schools.

     -- Our comments: Individual school         $   120,000
        alarms do rot meet the ASD-4
        criteria because thev do not
        constitute a total integrated
        system.

     -- City comments: These alarms
        constitute valid capital
        improvements since, when
        considered as one system,
        they meet the ASD-4 criteria.

Projects F 212 & PU 16: Purchase of EDP
  equipment for various City departments.

    -- Oir comments; Projects include               490,000
       maintenance contracts on equip-
       ment. Maintenance is a normal
       recurring expense.

    ---City comments: The City agrees
       these items should be expensed.

Project PU 16:  Purchase of EDP equipment
  for various City departments.

    -- Our comments: Project includes the           95,000
       cost of renting computers and
       purchase of miscellaneous minor
       equipment. Both hould be expensed.

    -- City comments: These items should
       be expensed in the future. How-
       ever, the charges should be
       allowed in 'iscal year 1978 since
       City officials dispute the effec-
       tive date of ASD-4.




                             21
 APPENDIX II
                                                       APPENDIX II
                                               Amount that should
                                               be recognized as an
                                                operating expense
 Project T 150:    Purchase of rapid
   trar-it cars.
            comments:    Project includes         $3,970,000
        ,..ncipal repayment on Transit
        Authority bonds. This cost
         iould be expensed.
      -- City comments: The City agrees
         this item should be expensed.
Project L 101 M: Reconstruction and
  rehabilitation of various libraries.
      -- Our coiaments: Project ncludes pay-
         ments for maintenance and repairs            32,000
         which should be expensed.
     -- Cty comments: These items should
        be expensed in the future. How-
        ever, the charges should be
        allowed in fiscal year 1978
        since City officials dispute the
        effective date of ASD-4.
Project PW 284: Renovation of public
  buildings.
     -- Our comments: Project includes pay-
        ments for maintenance and repairs             34,000
        which should be expensed.
      -- City comments: These items should
         be expensed in the future. Bow-
         ever, the charges should be
         allowed in fiscal year 1978
         since City officials dispute the
         effective date of ASD-4.
Project C 75: Improvements and moderniza-
  tions, Department of Corrections.
     -- Our comments: Project includes minor
                                                     14,000
         improvements which should be expensed.
    -- City comments: Cost of improvements
       represents a legitimate capital item.
                             22
APPENDIX II                                      APPENDIX II



                                         Amounti that should
                                         be recognized as an
                                          operating expense
Project T 2:   Engineering expenses in
  connection with projects of other
  departments.

     -- Our comments: Project includes       $     16,000
        cost of testing heating oil to
        City specifications which
        should be expensed.

     -- City comments: These items
        should be expensed in the
        future. However, the charges
        should be allowed in fiscal
        year 1973 since City officials
        dispute the effective date of
        ASD-4.


          Total operating expenses          $18,937,000




(01739)
                               23