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Feb 1, 2011 4:14 PMPublication: The East Hampton Press

As East Hampton Moves To Become Whole, Questions Emerge Over Accounting Of Deficit

Feb 1, 2011 4:14 PM

East Hampton Town’s approximately $28 million deficit could be certified by the State Comptroller’s office by mid-February—an action that will clear the way for the town to finance the remainder of the massive debt it accumulated between 2003 and 2009.

But as that landmark date draws near, questions have emerged over the town’s muddled finances from recent years, which officials and accountants are still trying to parse. Last month, one resident took issue with the way in which the deficit was split up among the town’s funds, and East Hampton Village officials have since raised similar concerns, suggesting that village residents were being asked to shoulder more than their fair share of the debt.

In a letter to the state comptroller on January 11, Zachary Cohen of Springs questioned why $10 million in debt from capital projects was assigned to the town’s General Fund in the 2009 audit of the town’s finances. Mr. Cohen contends that $10 million in debt should have been assigned to various other funds—namely, Housing, Airport, Sanitation and Community Housing—where surpluses could have paid down the deficit by a total of at least $2 million.

“If my assumptions or guesses or educated guesses turn out to be true, the deficit is a lot lower, but we have lower surpluses,” said Mr. Cohen, an investor who holds an MBA from the University of Chicago and who briefly served on the town’s Budget and Finance Advisory Committee last year.

It’s more than just a matter of shifting surpluses and shortfalls from fund to fund within the budget, according to Mr. Cohen. He said that all $10 million of that capital debt was placed in a portion of the town’s budget that is paid for by all town residents—including those living in East Hampton and Sag Harbor villages even though many of the projects did not benefit those residents. He said that debt should have been placed in another part of the budget that covers services for just the unincorporated parts of town, for which village residents are not taxed.

In a letter to East Hampton Town Supervisor Bill Wilkinson sent on Friday, January 21, East Hampton Village Mayor Paul Rickenbach outlined similar concerns over approximately $4 million in debt that may have been incorrectly assigned to the General Fund instead of the Highway Fund, which village residents do not pay into. “If this is the case,” Mr. Rickenbach wrote, “taxpayers inside villages are paying for a disproportional share of the town tax burden.”

Town Budget Officer Len Bernard said he stands by the town’s 2009 audit. He said the $10 million in debt was rightly assigned to the General Fund because that fund owes all of the other funds money due to the financial practices of the prior administration. Town officials in past years moved money from the Capital Fund to the General Fund in order to cover day-to-day expenses. In turn, he said, money from the Community Preservation Fund was put into the Capital Fund; additional CPF money was moved directly into the General Fund, as well. Once the General Fund is made whole, Mr. Bernard said, it will pay back what it owes the Capital Fund and CPF.

“We’re hoping that that’s the end game,” Mr. Bernard said. “And that’s kind of what we’ve been aiming toward, and we’ve been waiting for the accurate numbers to be on the table so we can do it accurately, and so we can do it with some finality.”

David Tellier, a partner at the accounting for Nawrocki Smith LLP, which audited the town’s 2009 finances, backed up Mr. Bernard’s explanation and added another reason why the whole deficit was assigned to the General Fund: because some of the debt comes from capital projects that went over budget. In those cases, he said, it is appropriate for the General Fund to cover the expenses that were not budgeted for in the Capital Fund.

“We’re very comfortable with the presentation of the financial statements,” Mr. Tellier said. ”We feel they’re fairly presented. There’s a lot of time and energy and dialogue that went into making those decisions.”

Mr. Cohen rejected Mr. Bernard’s explanation. The Highway, Sanitation, Airport and Housing funds, he said, had a combined surplus of $9.3 million at the end of 2009 and should have absorbed the debt projects related to them. If that were the case, he said, surpluses would have canceled out $2 million to $5 million of the total deficit.

“They’ve got it backwards,” Mr. Cohen wrote in an e-mail. “The other funds aren’t the ones that need to get paid back. They’re the ones that need to be paying for their own deficits. And, the other funds have some surplus money.”

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Everyone should remember that Mr. Cohen was asked by the other members of the Budget Advisory Comittee to resign for political reasons, and he complied. He has a political agenda. I wonder for which office he is contemplating a run?
By montaukman (98), easthampton on Feb 2, 11 5:16 PM
I'll take the opinion of the professional accounting firm over the amatuer wannabe. I would also guess the Wilkinson administration would like to see debt service expenses spread out over all the funds -- thus taking away some of the stress on the general fund, but I would assume good government dictates you abide by the independent auditors who by law must perform an arms length evaluation of the town's finances. And the professional-independent-accountant states, "we're very comfortable with ...more
By connwatcher (112), east hampton on Feb 2, 11 5:53 PM
Never thought I'd say it but I agree with conn. We should take the word of the independent accounts. But remember politics is always near by and that sometimes brings you to the place you want to be and not the place you are. There were independent accounts in the McG administration. So just remember to listen to Mr. Cohen maybe he has an insight and maybe he's really the independent one. Fact
By facts man (148), east hampton on Feb 3, 11 11:20 AM
Remember that auditors can only work with the information they are given, and they may have been working with incomplete or incorrect information. I also think there is some politics involved here: The Republicans want the deficit looming over the town to be as large as possible: for the next ten years, they can howl about the Enormous Democrats' Deficit. It would be far better to pay down as much of the deficit as possible now, particularly if there are surpluses in funds carrying their own deficits.
By P.A.B. (23), East Hampton on Feb 4, 11 10:47 AM
P.A.B. is correct, no one can know how much information may have been destroyed by the last administration.
By montaukman (98), easthampton on Feb 4, 11 9:21 PM
Good point by Montaukman -- you can only review everything still available. It sounds like this accounting firm looked at everyhting they could. I believe the pressure on the new accounting firm to do everything to the greatest detail possible was the case, especially since they were doing their work as the grand jury investigation was ongoing. I doubt they cut any corners.

And by the way PAB, it is in the best interest of the new administration to have the smallest deficits possible. ...more
By hohum123 (91), springs on Feb 5, 11 12:22 PM