Purpose

To determine whether Battery Park City Authority discretionary spending was appropriate and necessary. Our audit covers the Authority's two fiscal years ended October 31, 2011.

Background

The Battery Park City Authority (Authority) was created in 1968 with the enactment of Title 12 of the Public Authorities Law to address "substandard, insanitary, deteriorated and deteriorating conditions" on the Lower West Side of Manhattan. The Authority was charged with the duty "to plan, create, coordinate, and maintain a balanced community of commercial, residential, retail, and park space within its designated 92-acre site." To accomplish this mission, the Authority incurs direct costs for specific program purposes, and it incurs indirect or "discretionary costs" that support overall objectives.

During our audit period, the Authority had an annual operating budget of about $57 million. We identified a total of at least $1,639,710 that was discretionary in nature for the two years ended October 2011. Each public authority should have formal policies and procedures specifying the types of discretionary costs that are appropriate and the dollar thresholds, supporting documentation, and formal approvals that are necessary to be accountable for such costs.

In November 2012, the Public Authority Budget Office (ABO) issued guidance stating that boards of directors and Authority management have an obligation to authorize the expenditure of funds only for purposes that relate to and support the mission of the Authority. The guidance also states that the fiduciary duty of the board includes adopting policies that safeguard assets and resources of the Authority and protect against the use of funds for purposes that do not advance its core purpose and objectives. The ABO added that it is particularly important for the board to develop policy on the proper use of Authority discretionary funds that clarifies for all employees what would and would not be appropriate expenditures.

Also, on October 9, 2007, the New York State Attorney General issued Opinion 2007-F4, which pertained to the Long Island Power Authority (LIPA) and stated that the legality of LIPA expenditures for charitable contributions and sponsorship depends on whether the expenditures directly relate to a power, duty, or purpose of LIPA. We maintain that this same standard would hold true for the Authority, which made charitable contributions totaling about $1 million during our audit period. 

Key Findings

• The Authority lacked written policies and procedures clarifying what constituted appropriate discretionary spending and specifying permissible dollar thresholds, necessary justifications, and required formal approvals and supporting documentation. The absence of such internal controls increases the risk that not all Authority discretionary spending is necessary and appropriate for the mission of the Authority. In fact, we questioned the appropriateness of most of the Authority discretionary spending that we sampled during the audit.
• We sampled 69 discretionary expenditures totaling $112,132, and questioned 53 totaling $100,700 because these transactions did not appear necessary, were not clearly related to the purpose of the Authority, were not properly approved, and/or were not adequately supported with documentation.
• Included in the expenditures that we took exception to were payments totaling $61,800 for charitable contributions to various not-for-profit organizations. In these instances, the Authority lacked documentation to show how it determined which organizations to select for donations, how contributing to such organization was related to or supported the Authority's mission, and why the donated amounts were appropriate. Our follow-up showed that the Authority made payments totaling $1.05 million for the audit period for charitable donations.

Key Recommendations

• Establish written policies and procedures for discretionary spending including definitions of such costs and necessary justifications, dollar thresholds, formal approvals, and supporting documentation.
• Establish a formal framework to govern contributions to outside entities, and discontinue such spending unless it can be clearly established how such spending aligns with the Authority's mission, purpose, duties, and authority.
• Develop budgeting and record-keeping practices that permit management and the board to identify, plan, and monitor discretionary spending.