October 28, 2003 The Honorable Erie County Legislature 25 Delaware Avenue Buffalo, New York 14202

Honorable Members:

In fulfillment of a promise I made last year, I am releasing my proposed 2004 budget before the election, even though there is no mandate in the Erie County Charter that the County Executive's proposed budget is to be submitted before November 10.

This is my fourth proposed budget. It reflects major re-engineering initiatives that my Administration has undertaken, and the ongoing programmatic effort required to complete those initiatives.

This budget also reflects that, at long last, we have begun the transition of Erie County Medical Center from a County department into a partner with the State University of New York medical school and with the major not-for-profit health care providers in Western New York, as a Public Benefit Corporation. This is the single largest structural change in our County government. Erie County Medical Center will still remain a public entity (it is not being "privatized"). It will remain accountable to the public and sustained in part by public subsidy - but as it completes the transition in 2004, ECMC will become more fully linked with the rest of the healthcare network of Western New York.

This budget also reflects that we have begun a historic reorganization of Social Services and related departments for the purpose of delivering better outcomes for our neediest citizens.

This budget also reflects my policy priority - which is to maintain the Erie County property tax levy at 31 percent below its level in 1999.

We have done so while maintaining reserves at a level higher than Wall Street standards. As of December 31, 2002, the total fund balance of Erie County was $150,281,000 (reserved and unreserved). We project that our fund balance at December 31, 2003 will be $130,281,000. The percentage of the general fund in unreserved fund balance - even after extraordinary increases in Medicaid, employee health costs, pensions and hospital subsidy - will still be 12.6%. This level is still far above - in fact, more than double - the 5% threshold set by the chief municipal credit rating agency, Moody's Investor Services. Erie County, through prudent fiscal management, maintains a much-higher-than-adequate unreserved fund balance. Since the first year of my Administration, when Moody's upgraded our credit rating, we have maintained the same level of credit quality by pursuing this policy of maintaining more than sufficient reserves.

What I have refused to do, however, is to over-tax in order to over-reserve. I continue to believe that tax relief is a critical component of any rational policy for economic prosperity for our region. Sadly, because of continued State downloading of costs for mandated services to County government, I cannot propose any additional relief in any County tax or fee beyond the nearly $70 million in property tax relief I established with my first budget.

Key features of this proposed budget include:

• a smaller County workforce in 2004 than when I took office in January 2000, due in part to the elimination of 111 positions (excluding the Erie County Medical Center Healthcare Network, which will become a separate entity in 2004), saving County taxpayers approximately $4.4 million in salaries and fringe benefits.
• no change in the property tax levy in 2004, which will still reflect slightly more than the 30 percent reduction I pledged to achieve when I first sought the office of County Executive.
• major investments in necessary improvements in public infrastructure, including the final phase of the Courthouse project.
• an ongoing commitment to new information technology systems that will make County government not only more efficient, but that will also enable efficiencies throughout the public sector in this region.
• an ongoing commitment to cultural funding that is maintained at 2003 levels; coordinated tourism marketing; economic development, including brownfields reclamation, planning and GIS applications development.
• provisions for the transition of Erie County Medical Center into a new free-standing Public Benefit Corporation. continuation of our investment in our regional infrastructure, including roads, bridges, culverts, parks and public spaces.

"Temporary" One-Cent Sales Tax: Essential to Pay for Mandated Costs

Fiscal distress in Buffalo city government has led some in our community to call for a "sharing" or "earmarking" of the one-percent sales tax that was put in P!ace in 1986. My Administration has continued to reach out to Buffalo's elected leaders to assist them in sustaining quality services to our Western New York region's cultural, educational, medical, legal and administrative hub.

By 2004 our efforts will result in a direct recurring $3.7 million reduction of the City Budget, by regionalization of cultural facilities, solid waste management and cell block services. This amount is equal to more than half of the annual growth in the one percent sales tax. Our first three budgets (from 2000 to 2003) had already reduced City of Buffalo expenses by almost $5.5 million in total.

But the consequences of reducing Erie County government's revenue stream from the one-percent sales tax would be drastic: for ever dollar of this revenue that is diverted to another government or to another purpose, Erie County would require an offsetting dollar either of cuts or of new revenue.

Mandated costs are the reason why. The fact is, Erie County must still utilize every single penny raised by the "extra" one-percent sales tax just to pay for the local-share costs of mandated social and health services. And unless New York State government acts to address these costs in the coming year, Erie County government will face the stark choice of either effecting drastic reductions in services, or seeking new revenue.

The Problem: Growing Costs. The Solution: Tough Budgeting.

Since 2002, we have seen explosive growth in costs Erie County must pay, but that Erie County cannot control. Notwithstanding declining interest rates, a stable population and steady if unspectacular growth in consumer spending, cost increases in the following areas have been extraordinary:

In all, by 2004, local-share Medicaid costs alone will have risen by $48 million since 2000, from $127 million to $175.3 million.

The only steadily growing revenue - the Erie County share of the total sales tax revenue (which is approximately 2 percentage points of the 8.25% sales tax collected) - has not risen enough to offset all these increased costs. In calculating the 2004 budget, we can only reasonably predict that sales tax revenues will have risen only $22 million since

2000, leaving Erie County still facing a huge problem. Simply stated, the growth in mandated costs has exceeded the growth in revenues. In order to respond to this development, the County had to:

• reduce various appropriations by $2,800,000
• redesign our employee health insurance program saving $11,625,649
• implement two major re-engineering initiatives that will save $3,900,000
• reduce the Erie County workforce by offering our employees the New York State early retirement incentive that will save $17,300,000.
• utilize all the growth in Erie County sales tax revenue.

Since 2000, these overall costs increased by $70.4 million.

By aggressively controlling spending, and by utilizing the only revenue growth available (i.e., in the sales tax), we have avoided the economically punitive course of increasing the property tax burden. By taking these steps, we have offset all but $35 million of these costs. To balance the 2004 budget, we once again will utilize $35 million in fund balance.

FY 2004: Fund Balance Is Used, But it must be replaced

As in 2003, this budget is balanced with the use of approximately $35 million of prior year fund balance. The Erie County Charter requires that we utilize $20.6 million of fund balance, pursuant to the two-year rule. An additional $14.4 million of unreserved fund balance is also being utilized.

Unlike our near neighbor Monroe County, whose proposed 2004 budget includes a 0.6 percent (six-tenths of one percent) increase in the Monroe County sales tax rate, we do not need to propose any increase in the Erie County sales tax rate in order to meet Erie County's obligations.

Once again, as the State of New York prepares its own budget for its new fiscal year, we will remind our State Legislature and our Governor that counties are in urgent need of a structural solution to the Medicaid crisis. Counties all across this State are reducing their reserves and receiving credit rating downgrades. According to the latest Moody's Investor Services report on counties, nine New York counties were downgraded; ten were given a "negative outlook"; two were placed on Watchlist for potential downgrades. "Our forecast reflects the high percentage of non-discretionary expenditures including rapidly expanding costs of the local Medicaid share, labor, health benefits and pension contributions." (Moody's, September 2003)

My Administration will avoid the need to use unreserved fund balance in 2005 by aggressively pursuing various reengineering strategies and other cost-containment initiatives.

The Toughest Challenge: Rising Healthcare Costs

Just as in 2003, every single dollar of the Erie County property tax levy - and every single dollar of Erie County's share of the total 8.25 percent sales tax - will be spent in 2004 on a combination of mandated programs and Erie County Medical Center subsidy. In fact, the 2004 total of mandated costs for which there is a local share is $362.08 million; the ECMC subsidy is $29.5 million, for a total of $391.58. Yet the total revenue from County property and sales taxes is only $386 million - creating a shortfall of over $5 million.

The largest single portion of this burden is the local-share cost of Medicaid. (The Federal government pays 50% of Medicaid; New York State pays 25%; the remaining 25% is paid by county governments.)

When it was first enacted in 1985, the "extra" one-percent sales tax was enough to cover the local-share cost of Medicaid. In 2004, there is a $50 million gap between local share Medicaid costs and revenues from the one-percent sales tax.

Measured as a share of the Erie County property tax levy, the picture is equally stark: the Erie County property tax levy will yield $128.3 million in revenue in 2004; the local-share cost of Medicaid in 2004 will exceed the property tax levy by $47 million. Just the cost of the local share of Medicaid will take every penny of the property tax, plus $47 million of the "extra" one-percent sales tax.

In fact, in 2004, mandates will cost $362.08 million. - not including the $29.5 million ECMC subsidy:

That leaves every other County service - like parks, culturals, economic development efforts, snow removal, road and maintenance, public safety, worker retraining, and more - to be funded with miscellaneous revenues, including grants and fees. Only the Library system has a dedicated revenue, which is a percentage of the Erie County property tax levy.

As in 2003, in 2004 we estimate that one out of eight Erie County residents - more than 110,000 individuals - will be eligible to receive Medicaid.

The massive expansion of the cost of Medicaid - from $127.1 million in 2000 to over $175.3 million in 2004 - is a bill that Erie County has no choice but to pay. We did not create this cost increase, but we must fund it.

Just as in 2003, Erie County will continue to press New York State officials to assist county governments in funding these growing costs in healthcare. If county governments do not receive State relief, Erie County in 2004 and beyond will have to choose between two unpalatable options of either raising new local revenue to pay for healthcare costs (which would be economically inappropriate) or reducing support for basic County services.

Erie County Medical Center: Steps on the way to creating a PBC

In 2002, my Administration proposed - and the Erie County Legislature enacted - a Home Rule request to create a Public Benefit Corporation (PBC) for the Erie County Medical Center Healthcare Network (ECMC). A public benefit corporation (PBC) is simply a legal mechanism that would permit ECMC to engage in revenue-creating ventures as an equity partner. Operating ECMC through a PBC would allow for collaborations with other healthcare systems (namely, Kaleida Health and the Catholic Health System), enhancing cost-savings and revenue increases through quality improvements. The PBC structure will also enable equity partnerships with physician practice groups and other professional corporations.

After a year of delay, in June 2003, the legislation that permits the creation of this new corporate form for ECMC was passed. My Administration is now preparing for the transition:

• Before the end of 2003, my Administration will submit a list of nominees for the 1 5-member Board of Directors for the new ECMC PBC for consideration by the Erie County Legislature and by the Governor.
• After the new Board is constituted (in late 2003 or early 2004), the new PBC will negotiate an operating agreement with Erie County. This agreement will set forth in exhaustive detail the relationship between Erie County government and the new entity. Currently, ECMC is a party to more than 500 contracts and memoranda of understanding (MOUs) with a variety of entities, including County departments, the State University of New York, many vendors, many physician practice groups and various other entities.
• Simultaneously, the valuation consultant is undertaking an analysis of the various "businesses" of ECMC to determine the most appropriate credit facility for the new entity.

The new ECMC will probably become fully independent in the hrst half of 2004. Anticipating that ECMC will need flexibility in achieving its goals, my proposed budget includes the full annual subsidy requested by the ECMC Board of Managers.

Preparation for new ventures and new collaborations - which will become possible under the new corporate form of ~ ~ ECMC - has been ongoing and serious. Our ECMC leadership, at both the CEO and Board level, has already discussed W~ a new joint planning process on Graduate Medical Education issues with both the Dean's office at the State University of : New York at Buffalo and with the staff and the board leadership of Kaleida Health. Collaborations with healthcare entities - including physician practice groups - are also being designed, with implementation pending the full formation of the new corporation.

Continuity with the current ECMC Healthcare Network will be maintained. The new ECMC will still be a public entity - with public employees that are, for legal purposes, still County employees. The annual General Fund subsidy to ECMC will still be determined through the budget process, with the advice and consent of the Erie County Legislature. The most important innovations under the new ECMC will be in the area of joint ventures with other healthcare providers that today can only be either vendors to ECMC or tenants within ECMC buildings.

According to the Board of Managers and the new ECMC Administration, which is preparing a 5-year business plan, the budgetary impact of potential business opportunities for ECMC is significant.

To demonstrate my Administration's ongoing commitment to quality healthcare, this proposed budget includes appropriations for various in~provements at both the Hospital and at the Home. Since my Administration took office in 2000, and including this budget, we will have invested over $27 million in new healthcare equipment, space renovations, information technology and HVAC replacement at the hospital, the Home and School 84. Additional capital investment issues will be addressed in 2004 as the Hospital board and administration prepare their business plan.

The Capital Budget

The proposed 2004 budget includes a total of $56.8 million in bonded capital projects, plus an additional $6.2 million in "pay as you go" capital projects.

The final phase of the (;ourthouse project is budgeted at $5 million. After isolating the debt service on the Courthouse project, Erie County' in 2004, will be issuing bonds that will result in principal and interest payments of $5.6 million annually.

However, Erie County will be retiring bonds that currently cost $6.1 million in principal and interest payments. In other words, we will be retiring more outstanding debt than we are adding. Our policy of limiting new debt service will thus remain consistent.

I believe that it is prudent to propose a capital budget that takes advantage of the current low interest-rate environnnent. There is no capital project on our schedule that is unnecessary or frivolous.

In addition to the proceeds of the tobacco securitization, Erie County had been receiving a residual payment of tobacco settlement receipts each year starting in 2001. However, because of various adverse credit rating actions imposed on the tobacco manufacturers, the residual payment will not be available in 2004 - and very possibly, the residual will not be received for many years to come. The funding of various regional, economic and development initiatives must now be from other revenue sources and not the tobacco residual as in prior years.

All told, the amount of Tobacco securitization proceeds still available to Erie Countv is $136 million.

Programmatic Highlights

The 2004 Budget anticipates that Erie County will assume responsibility for the current operating assistance provided by the City of Buffalo for Shea's Performing Arts Center, Kleinhans Music Hall and the Zoo. This will provide a direct benefit of approximately $700,000 to Buffalo City government's budget deficit and relieve the City of Buffalo of future capital improvement costs for these three major cultural tourism facilities.

Erie County will provide an additional $2 million in capital funds for the Zoo's first $25 million phase of its total ten-year $75 million redevelopment project. This $2 million is part of our $8 million commitment to this first phase, of which $2.65 million has already been provided. The $2 million in 2004 will be used for the River Otter and Sea Lion exhibit s which are expected to open in late 2004 and to begin the next major new project - the $12 million South American Rain Forest exhibit. This redevelopment project has already begun to show benefits even in its initial phases, with Zoo attendance and membership up significantly in 2003.

The Capital Budget also includes $500,000 for brownfield redevelopment and the completion of our goal of making 500 acres of shovel-ready industrial land available by 2005.

Our 2004 budget requires only $1,726,900 for operation of the East Side Transfer Station, which Erie County took over from the City of Buffalo in 2001. This facility had cost City government close to $2.5 million per year when it was operated by the City, and initially cost Erie County approximately $2 million per year. Our aggressive marketing of this facility to other municipalities and commercial users, and our new cooperative program with the City to increase recycling by residents and schools, has contributed to this significant decrease in operating costs.

I am recommending that the Erie County Cultural Resources Advisory Board's funding request be fully adopted, with a total appropriation of $5,631,423 for 49 cultural organizations, including two in the City of Buffalo that had not received ECCRAB grants previously. This is the same total ECCRAB funding as last year notwithstanding the increased pressure on Erie County discretionary spending due to Medicaid and other mandated costs.

The 2004 Budget includes funding for a host of City of Buffalo community organizations for the first time, including grants for the Allentown Association, Parkside Community Association and West Side Community Services. Funding is continued for the Buffalo Green Fund, Forever Elmwood, the Elmwood Avenue Festival of the Arts, Buffalo Karibana Festival, Hispanic Music Festival and the July 4th Delaware Park celebration sponsored by the Police Athletic League.

Funding is provided to continue the Intemational Guitar Festival. Funding will be available to Buffalo Place for a follow-up in 2004 to the resounding success of this year's Buffalo Bike Blast, with plans underway to bring to Buffalo the 2004 Harley Owners Group annual gathering in New York State.

I recommend a grant of $30,000 for the Botanical Gardens Society as the volunteers prepare to undertake direct management of this world-class facility. The Olmsted Conservancy's initiative to reengineer how the entire Olmsted Park System is operated will receive a $200,000 grant from the County. Continued funding for restoration of the Nash House in the Michigan Street historical corridor and Frank Lloyd Wright's Graycliff is also proposed.

Fiscal Year 2004 will be the second year of the five-year, $15 million Erie County Parks master plan implementation. In 2004, my Administration will be investing $2.9 million in our parks, ranging from Sprague Brook Park in Colden to the Riverwalk in Tonawanda. We recommend $1.3 million in regionalism initiatives, for such efforts as rural water-service and system consolidations with the Erie County Water Authority.

Increases in other Mandated County Costs in the Proposed FY 2004 Budget

Erie County must also pay $24 million for contributions to the employee retjrement fund - more than double the $10 million contribution that we were compelled to pay in 2003 For several years previous, Erie County d~d not have to budget for this item - that is, until the Dow Jones Industrial Average declined in value bY One-quarter.

Every year until the New York State public employee pension fund recovers the performance levels achieved in the 1990s, Erie County government will have to make provision for this contribution.

Information Technology: Investing in Efficiency

Consistent with our mission to reorganize and streamline County government so that it can be a better regional service-delivery system, this proposed budget contains an important ongoing cOmmjtment to Enterprise Resource Planning. Every department of County government is now upgrading with new software systems that promise major increases in efficiency.

Erie County is executing a strategy that will optimize the core processing funct`O'~s of county government. The obJectves are to reduce expense, facilitate coordination and collaboration among departments, provide an efficient link to businesses that transact with county government improve service levels to county clje`,ts, create user-friendliness for citizens, and to provide the infrastructure for future homeland security requirements.

We are creating a shared service model so that the County's investment can faCilitate cooperation with other . governments, agencies, authorities and school districts. This proposed budget includes further investment in Enterpr~se Resource Planning (ERP) to replace the entire core operating processes of Erie County. ERP will include finance, budget, grant management, planning, payroll, human resources, plant management, asset management and procurement. New functions will be added such as customer relationship management, a County call center, citizen and business portals to the County, and employee self-service. After an extensive competition among potential vendors, the application system selected to provide these functions is from SAP America. SAP is the leading provider of ERP systems with 18,000 customers worldwide and is the world's second-largest software company.

This proposed budget also includes a significant upgrade to the County's technical infrastructure. This is required to operate the ERP system and to alter the infrastructure from single-use to shared service. This effort commenced in 2002. Included in the scope are a single email system for the County, enterprise data storage, advanced system and data backup, commercially secure internet access, a central technical helpdesk, central management of PC's and electrical power upgrades in the data center. These improvements will increase the speed and reliability of the voice and data network, creating a community wideband public sector network and technical disaster recovery. These advanced technical functions have the ability to be extended to other government entities.

Enterprise Resource Planning (ERP) is the set of business processes that operate county government. Automating all of these processes such that they are connected will be of great benefit. The utilization of common processes will reduce costs, heighten collaboration, provide for better inter-agency communication and significantly enhance management controls. The foundation for ERP has been implemented in 2003 and includes general ledger, accounts payable, accounts receivable, labor distribution, capital projects, grants, funds management, asset accounting, budget control, purchasing, personnel administration, benefits, payroll, and time entry.

The ERP environment is being constructed such that it can be shared by other cities, towns, counties and agencies. In this way Erie County can use its scale to offer commercial grade, cost effective services to other entities as the need exists. In 2004 the ERP functions that are in operation in the county will be available for shared use.

The county will commence the second phase of ERP in 2004. This includes the Dept. of Public Works processes that span all of its operations. In scope are work orders, job costing, resource scheduling, asset management, and inventory controls. Another area of focus will be the Health Dept. and Social Services. Case management, client relationship management and an automated call center will be implemented in 2004.

As with the first phase of ERP, the functions implemented in 2004 will be available as a shared service. The county will continue to rebuild its technical infrastructure through 2004. Common, cost effective, industry standard services will be implemented for county staff use. These include email, internet access, office automation, a standard work station, application hosting, server management, help desk, and disaster recovery services. These services have been engineered such that they can be offered as a service to other government entities. The county views these services to be infrastructure, similar to bridges, roads, power and water.

State Action on Mandated Expenditures

My Administration will continue to be vigilant in monitoring both Federal and New York State budget and fiscal proposals as they develop. In the event that the expected levels of reimbursement cannot be made available to us throughout 2004, very hard choices may need to be made regarding midyear cost reductions countywide so that essential services can be maintained without interruption.

I respecffully request your approval of the proposed 2004 budget.

Sincerely,

POSTSCRIPT LEGISLATIVE CHANGES TO THE TENTATIVE 2004 BUDGET

On November 21, 2003, the Erie County Legislature adopted the Erie County Budget. Changes were made to the Tentative 2004 Budget Resolutions. There were no changes to appropriations or revenues.

On November 24, 2003, the County Executive submitted a communication to the Legislature indicating that he did not object to any of the amendments which the Legislature had made.

After submission of the County Executive's Tentative Budget to the Legislature, the County Comptroller requested that proposed budgets for the ECMC Healthcare Network be submitted since the Public Benefit Corporation was not anticipated to be effective on January 1, 2004.

Since the Legislature adopted the ECMC Healthcare Network as part of the County Budget, all proposed local source revenues from the ECMC Healthcare Network were changed to interfund revenues. Also all proposed contractual expenditures to the ECMC Healthcare Network were changed to interfund expenses.