Southampton Town must issue $16 million in bonds this year

The Southampton Town Board this year will issue some $10 million in bonds that had been approved to fund capital projects in 2005, 2006 and 2007, because the borrowing was deferred by the prior administration during those years, according to Town Supervisor Linda Kabot.

On top of that, the town must issue bonds to borrow another $6 million to cover the cost of current projects that are completed or nearing completion. That number could climb pending an analysis of the status of those 2008 projects, Ms. Kabot said, as that review may reveal that more projects are wrapped up and, therefore, in need of funding.

Although the town must float $10 million in bonds for the 2005, 2006 and 2007 projects, it’s not because those projects haven’t been paid for—they have. The money to fund capital projects was mingled in a single account, and town officials would draw funds from that collective account when they needed to pay for a project. When the capital account was low, another previously approved bond would be issued to replenish it.

The problem with this practice, however, is that money allocated for one project may end up actually funding another project, which makes keeping track of the capital budget more difficult. That is the difficulty town officials currently face as they sort through the books to determine the depth of a capital budget deficit that is currently estimated to be as high as nearly $6 million.

“Trying to trace that money back, the outflows and the inflows, is very difficult,” Deputy Supervisor Bill Jones said, adding that one way to better keep tabs on the capital budget is to have 
separate bank accounts for each project, which is what town officials are doing now. “New money is going 
into fresh accounts, starting with a zero balance,” Mr. Jones said. “That way we’ll know exactly what the borrowing is for. The controls will be much tighter.”

With all project funding mingled in a single capital account, the entire account was never emptied because of the nature of such projects, which are completed at various times. As Mr. Jones explained, it often makes sense to use available dollars in the capital account and then only borrow when necessary, or when the terms for a bond issue are favorable. When a bond is floated, the interest on that bond begins to accrue, and repayment begins, which, in turn, increases the town’s expenses for debt service. Ultimately, that impacts spending, and thus the property tax rate that pays for it.

Ms. Kabot said that’s the key to understanding the situation the town now faces because no bonds were issued in 2005, and issued late in the years of 2006 and 2007. While $11 million in bonds was borrowed in February 2006, that was to cover the cost of old projects that had finished, not to fund new ones, she said. “This only deferred the impacts on the tax rate,” she added, charging, “Forestalling bonding to keep the tax rate low was done purposefully.”

According to former Supervisor Patrick Heaney, whatever decisions the town made on the issuances of bonds for those years was based upon the professional market timing advice of Munistat Services Inc., the town’s bond counsel.

Once the Town Board authorizes a bond for a given project, when that bond is actually issued is usually a decision made by the town comptroller, according to Mr. Jones. Ms. Kabot said the supervisor gives direction to the comptroller on bond issuances.

Delaying the issuance of bonds, Ms. Kabot said, became common fiscal practice at Town Hall after 2002. “We’re all guilty of it,” Ms. Kabot said. “It delays the tax rate—but it’s risky.”

But whatever the tax implications from delaying the issuances of bonds, it did not keep any capital projects from being completed, according to Mr. Jones. “We’ve had available funds in the capital account to take us to the next borrowing,” he said.

Since problems in the town’s capital budget first came to light in January, the Town Board has decided to hold off on authorizing any new capital projects that are not essential for public safety. As the town works to reconcile the discrepancy in the capital budget—which has been reported to be anywhere from $250,000 to $19 million, although the current estimate is closer to $6 million—the Town Board will take a second look at old authorizations before any new bonds are issued.

Old projects that have received the go-ahead by the Town Board may be abandoned if work on those projects has not yet begun. Ms. Kabot said it was too early to determine what projects, if any, could be scrapped. But among the projects that could be postponed indefinitely, unless alternative funding is found, is a planned $20 million pool and recreation facility, the Southampton Aquatic Recreation Center, in Westhampton.

But what’s most troubling to Ms. Kabot is the fact that some $6 million in general fund surpluses earmarked to pay for capital projects for 2004, 2005 and 2006 was not moved into the capital account. “The bonding is not as much of a problem,” Ms. Kabot said. “So long as the Town Board authorized the bonds then we can issue them. It’s not a crisis.”

While most capital projects are financed over time through bonds, the cost of some is paid directly with money in the general fund—or cash the town actually has on hand. Such was the case in 2004, 2005 and 2006. However, while the transactions 
from the general fund to the capital fund were made on paper, the actual cash was never taken from one account to the other. Thus, the money remained in the general fund and was used 
for other purposes—instead of funding the capital projects, the money boosted the size of the general fund surplus 
and was used to avoid tax rate increases.

Former town comptroller Charlene Kagel revealed to Ms. Kabot and Mr. Jones in March that the transactions were never done and blamed “human error” for the bookkeeping blunder.

Ms. Kabot, however, said that there was no reason why the town should not have been informed of the mistake earlier. “The bookkeeping errors mark a major failure that raises questions of mal-administration. I’m shocked and outraged that this information was harbored and not shared with the Town Board,” she said. “Clearly, budgetary games were played.”

While Mr. Heaney acknowledged in an op-ed piece that he used general fund surpluses to keep taxes low, he rejected Ms. Kabot’s rhetoric. “Let’s be very clear,” he states in a Viewpoint published in this edition of The Press. “I was fortunate to serve as supervisor during a period of prosperity and economic stability. My administration was bipartisan, and Linda Kabot was there and voted in the affirmative for every budget during those years. One of the things we got right over six consecutive years was the ability to hold the line or moderate tax increases in the property tax rate because excess revenue gave us the ability to use surplus to provide a small measure of tax relief.”

Ms. Kabot, however, said taxes should have been raised incrementally during those boom years. “That’s when you should go to the taxpayers—when times are good and they can absorb it,” she said.

The $6 million accounting error, which has put the town in the hole, will likely result in raised taxes for 2010, according to the supervisor. “This may get darker and dirtier until we get to the bottom of it,” she said.