The East Hampton Town Board is poised to begin the process of paying off its mounting deficit this month when it borrows an estimated $10 million, enough to cover operating expenses for the rest of this year. If the audit of the town’s spending during 2008 reveals more deficits, the town can borrow up to $5 million more.
On Friday morning, September 5, the Town Board unanimously approved a plan to issue up to $15 million in bonds for deficit financing. That’s the maximum allowed by a special state law passed by the State Legislature earlier this year to help East Hampton dig out of its fiscal hole. The bond will be paid off over 10 years, allowing the town to greatly ease the burden on taxpayers.
But the bonds cannot be sold until the full extent of the town’s financial needs are known, which will not be until after the 2008 audit is released sometime during the summer of 2009. The board’s formal approval this week will clear the way for the town to take out a short-term loan to cover expenses immediately and pay it back when the bonds are sold.
The New York State Legislature, at the prompting of Assemblyman Fred W. Thiele Jr. and State Senator Kenneth P. LaValle, adopted a special law in July to allow the town to go out to bond to cover its operating deficit. The maximum the town can borrow under the special law is $15 million, an amount asked for by the Town Board based on worst-case estimates of what the deficit could be at the close of 2008.
Known as a bond anticipation note, or BAN, the short-term loan gives the town an immediate influx of cash to cover operating expenses for the rest of 2008. Without the loan, Supervisor Bill McGintee said on Friday that the town would run out of money within a few weeks. He said he expects the town to borrow the money by the end of September but that the amount to be borrowed had not been settled on by the Town Board.
“Our auditors are telling us it’s $8.6 million and the state is telling us it’s $9.2 million so we’re looking at about $10 million just to be on the safe side,” Mr. McGintee said on Friday. “That will include the final debt service payments for the year and the anticipated financial shortfalls for 2008, including a miss in mortgage taxes. Once that is done, our future budgets will have to fund every possible scenario we can think of, so we’ll be fine until the end of [2009] and then we’ll have to make a decision about exactly how much to bond.”
Mr. McGintee said the town is now expecting to receive approximately $1 million less in mortgage taxes in 2008 than it had budgeted for. The 2008 budget anticipated $5.9 million in mortgage tax revenues, down from the $7 million it received in 2007. But a slump in real estate sales cut the town’s tax income for the first half of the year by 46 percent—slightly more than the county average but substantially less than some municipalities’ declines—and the second half does not appear to be strong enough for the town to catch up to its projections. Mr. McGintee said the town is now anticipating receiving about $4.8 million in revenues from mortgage taxes.
The anticipated BAN will be the second time this summer that the town has borrowed millions of dollars to cover daily operating expenses. In July, the board took out another short-term loan, for $4 million, against anticipated mortgage taxes—income that is now in doubt. The same week the budget office borrowed $500,000 from one of the town’s general fund accounts to cover payroll checks due from another town account—with the money to be returned to the proper account by the end of the year, according to budget director Ted Hults.
The town’s fiscal difficulties were not made public until late in 2007 because of long delays in the release of the 2005 and 2006 audits. A series of financial revelations in early 2008 revealed that the town had been struggling with a severe cash flow problem caused by the mounting budget deficits.
The town has overspent its adopted operating budget by millions of dollars in each of the last three years and is expected to do so again in 2008. The 2008 budget totals about $70 million.
Mr. McGintee rejected charges there was a budget deficit during his 2007 reelection campaign, and has said the deficit was unknown prior to the release of the 2005 audit after the election. But his budget officer, Mr. Hults, used nearly $8 million in revenues from the town’s Community Preservation Fund, intended for use only to preserve recreational lands and open space, to cover operating expenses in mid-2007.
Board members have said that they were kept in the dark about the town’s financial difficulties during budget discussions and Town Attorney Laura Molinari resigned earlier this year in anger over misleading statements about the town’s finances by Mr. Hults and Mr. McGintee.
Earlier this month, the board agreed to hire a financial consultant, Nicholas Lynn, to help officials straighten out the town’s books and overhaul the budgeting system. Board members have expressed strongly a lack of confidence in Mr. Hults and demanded that an independent advisor be brought in to oversee the management of revenues and the upcoming budget process for 2009. The town is also trying to fill a long-vacant position in the budget office for a certified public accountant.
Mr. McGintee said that once the current round of borrowing puts the town in the black, the town can rebuild its once robust financial surpluses. Board members have said that paying off the bond over 10 years, if the full $15 million is borrowed, will require a one-time tax increase of about four or five percent for town property owners. Budgets will also have to have guaranteed surpluses built into them, Mr. McGintee said, perhaps as much as $1 million per year, to be placed in reserve.
on Sep 9, 2008