Southampton Town Supervisor Linda Kabot this week said she is confident that the significant discrepancy in the town’s capital budget will be resolved by April, as town financial officials have promised, although the supervisor said the work completed thus far has uncovered a major problem in the town’s record keeping.
Though Ms. Kabot said a full reconciliation report will be presented to the Town Board on Friday, April 3, it seems the main cause of the confusion is in the different methods used for funding capital projects. Town officials have a grasp on those projects financed through the issuance of bonds, Ms. Kabot said, because there is a paper trail for each transaction that has been retraced. But those capital projects funded through direct appropriation—or using cash the town has on hand—have been the sticking point: According to the supervisor, former comptroller Charlene Kagel’s office failed to provide necessary documentation for those direct appropriations.
Ms. Kabot said the town has brought in certified public accountants to uncover and sort through the paperwork to back up those payments.
Ms. Kagel, however, said the supervisor’s take on her record keeping is completely off the mark.
“As usual, she’s incorrect,” Ms. Kagel said, adding that she’s in the process of working with Deputy Supervisor Bill Jones to locate those transactions. “She has no idea what she’s talking about.”
Once projects were approved by the Town Board, the comptroller’s office had the authority to transfer money from non-capital accounts to subsidize capital projects, Ms. Kabot said. However, in the supervisor’s view, that practice left a hole in the books that town officials are trying to fill. “It’s clear the records are not up to snuff,” Ms. Kabot said.
The former comptroller explained that the cost of smaller capital projects, such as a hamlet study that cost around $50,000, are often covered by surplus from general funds. “It’s like paying out of pocket, or from your savings account,” she said. Other projects, such as the construction of a playground, might have been funded through reserves in the park fund, Ms. Kagel explained.
During her tenure as the town comptroller, Ms. Kagel said, she prepared budget entries for every direct appropriation for every capital project. “We wouldn’t move the money until the end of the year,” she said, explaining that she would wait to make sure that a given project was actually completed before allocating the money to pay for it.
“If she has the records, then let her bring them in,” Ms. Kabot responded. “This isn’t about trying to blame anyone—this is about trying to solve the problem.”
In Ms. Kagel’s view, the supervisor’s failure to understand the capital funding process explains the disconnect. “There are spreadsheets in the budget books that substantiate these transactions,” she said.
Ms. Kagel said she is working with Deputy Supervisor Bill Jones to reconcile the budget and that the two are making progress. Ms. Kagel said she has full confidence in the deputy supervisor’s ability to get to the bottom of the capital budget mess.
Ms. Kabot said there are many direct appropriations not in the town ledgers and the movement of cash from general funds to capital accounts cannot be traced. “The report will speak for itself,” she said of the document due in April.
Bonds, which fund the majority of capital projects, are issued after the Town Board approves a project. Ms. Kabot said paper trails exist for those projects, and that it is just a matter of linking the Town Board resolutions authorizing those projects with the appropriate funding sources.
“I’m not trying to paint a rosy picture,” she said. Ms. Kabot said the job is a mammoth undertaking, as there are 175 capital accounts that date as far back as 10 years.
In some cases, bonds were authorized but not issued, or partly issued, and the status on the work on some of the corresponding projects is unknown. Reconciling these issues is what town financial staffers are busy doing now and the April report will reflect that reconciliation, Ms. Kabot said.
The April report will also answer questions Town Board members have been asking since the supervisor first mentioned in January that $19 million in the town’s capital ledgers was unaccounted for, she said. Since then, that amount shrunk to $250,000, according to Ms. Kabot, although the exact figure won’t be known until the final report. “We can’t put out a different number right now,” Ms. Kabot said. “It’s premature. But by April 1, we will have it.” The supervisor did say, however, that she expects the figure will be closer to $250,000.
Town Councilman Chris Nuzzi, who has been pressing for a full reckoning of the capital accounts, said he is expecting a thorough report by April 1. “I’ve been waiting patiently for those results,” he said. “But April 1 is it. Time’s up.”
In the meantime, as staffers in the town comptroller’s office scramble to meet the April 1 deadline, federal, state, and private auditors are poring over the town’s books to solve an array of financial concerns. Along with the capital budget discrepancy, the town is currently dealing with a $7.5 million deficit in its operational budget, and a Waste Management Department that is funded only through June.
The full Town Board recently passed a resolution asking for the New York State Comptroller’s Office to audit the town’s books and that review has already begun. Town Councilwoman Sally Pope started the ball rolling on the state audit when she voiced some of her concerns to New York State Deputy Comptroller Steven Hancox at the Association of Towns conference in Manhattan last month.
“She raised issues about deficits and the capital budget,” Mr. Hancox said, adding the state first conducts a “risk analysis” of the town’s finances to determine if a full-blown audit is warranted.
Along with viewing past financial statements, such as the 2007 audit conducted by the firm Albrecht, Viggiano and Zureck, Mr. Hancox said the state auditors would be talking to town officials and board members about the town’s financial affairs.
“We come in and do a more extensive review of the town’s internal controls, how they operate, how they collect cash,” Mr. Hancox said. “We’ll conduct interviews and have conversations with town officials. We’ll look into concerns, what are the problems and why.”
Current Town Comptroller Steve Brautigam said he experienced three state audits during his 10 years heading up the financial department for the Village of Greenport. “They look for trouble,” Mr. Brautigam said of the state auditors, “They don’t like deficits. They will zero in on deficits and the capital budget. They will dot every I and cross every T.”
Part of the risk analysis, Mr. Hancox said, will include keeping an eye on the April 1 deadline for the capital budget reconciliation. “Capital accounts that are unreconciled raise concerns,” he said.
If the state concludes that a full audit is necessary, that process could take up to a year. “It’s a very lengthy and detailed process,” Mr. Hancox said.
Ms. Kabot said she is also awaiting a report from federal auditors, who set up shop two weeks ago at Town Hall and have since left. Though the IRS characterized that audit as “random,” the supervisor said it was prompted by town officials who filed both W-2 and 1099 tax withholding forms, a violation of federal law.
Some of the specific concerns raised by the feds, according to the supervisor, were attorneys who once worked full time for the town and then later were retained as special counsel. “They reviewed each and every contract to examine if the town is compliant,” she said.
Ms. Kabot also said that the federal audit may turn up abuses of the town’s vehicle policy, which was altered in December 2007. Under the new, stricter policy, some two dozen town officials are no longer allowed to take home town vehicles. The auditors will also be reviewing a list of town vehicles and which employees those vehicles were assigned to, Ms. Kabot said.
Kevin McKeon, a spokesman for the IRS, would not comment on the federal audit, saying he was not allowed to discuss the matter.
Along with the state audit, Town Councilwoman Anna Throne-Holst said the town is in the process of retaining an outside firm to conduct an independent, forensic audit of the town’s capital budget. This initiative was prompted by a criticism leveled by former Town Councilman Dennis Suskind last month over the state of the capital budget. The forensic audit will go a little deeper than a routine audit and will attempt to provide answers that, so far, some Town Board members have not be able to get from town financial officials.
As Mr. Brautigam explained, forensic audits differ from routine audits in that they target specific accounts as opposed to a general analysis. “They will conduct spot checks,” Mr. Brautigam said. “They will take one account and go through every single bill. They may conduct interviews with who signed off on those bills. They will dissect each and every account, from soup to nuts.”
Daylight Forensic & Advisory, FTI Consulting, Grassi Consulting and Nawrocki Smith, LLP, as well as the town’s annual auditors Albrecht Viggiano and Zureck, are among the firms being considered for the capital budget analysis.
The forensic audit would be similar to the one Ms. Throne-Holst recommended last February for the $4.5 million Police Fund deficit. In July, the Town Board hired FTI Consulting to conduct that audit, which Ms. Kabot’s office said should be completed by mid-April.
According to the supervisor, that deficit accumulated between 2004 and 2007 due to Town Board mismanagement, not mismanagement on the part of Southampton Town Police Chief James Overton.
Brian Bossetta on Mar 18, 2009