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Apr 1, 2009 1:54 PMPublication: The Southampton Press

Capital budget error bolstered budget surplus, which was used to cut taxes

Apr 1, 2009 1:54 PM

As the Southampton Town Board scrambles to deal with a potential $4.9 million shortfall in its capital fund, town officials confirmed this week that the bookkeeping errors in 2005 and 2006 erroneously inflated the town’s budget surplus in subsequent years, and that surplus was used to offset spending and avoid property tax increases.

Last week, Supervisor Linda Kabot and Deputy Supervisor Bill Jones said $4.9 million from Southampton Town general funds had been earmarked to cover the costs of capital projects in 2005 and 2006, but that money was never actually moved from general accounts into the capital budget.

Had the transfers been completed, the general fund budget surplus would have been reduced, and the result would likely have been higher taxes, according to Town Management Services Administrator Richard Blowes. That’s because it had been common practice at Town Hall during the administration of former Supervisor Patrick Heaney to use any surplus in the general fund—typically revenue generated by mortgage taxes in a booming real estate market—for tax relief.

In 2007, for instance, Southampton Town collected $12.5 million in mortgage tax revenue, but only budgeted for $8.25 million, according to Mr. Blowes. So the $4.25 million that came in over budget pumped up the general fund surplus. That windfall was then tapped to keep the town’s property tax rate level for several years running, despite escalating spending.

The budget surplus also can be used to pay for capital projects—as it was in 2005 and 2006, according to Mr. Jones. “There was substantial surplus coming in because of mortgage taxes,” he said.

Because the $4.9 million was never transferred from the town’s general funds to the capital budget, it was used instead to keep taxes stable and to help sustain the town’s operating costs. Now, the town is in the hole and must make up for the difference.

Along with the likelihood of tax hikes for 2010, layoffs and cuts in discretionary spending are other possible fallout from the multimillion-blunder.

But the failure to move the funds and the subsequent ripple effects from the error will probably lead to a full-blown audit from the state comptroller’s office, Ms. Kabot said. Meanwhile, the capital budget analysis that town officials have been promising to deliver by April 1 will be delayed.

According to town law, the tax rate for a given year may not be raised more than 5 percent from the prior year. In 2009, Ms. Kabot raised the tax rate by the maximum 5 percent, but had to use $2.5 million in general fund surplus in order to keep within that mandated percentage. In the three previous years, Mr. Heaney used surplus to avoid tax increases altogether.

For 2008, Mr. Heaney initially allocated $3.5 million from the surplus for tax stabilization, but after she was elected supervisor in November 2007, Ms. Kabot cut that allocation to $2.5 million. For 2007, Mr. Heaney used $2.8 million in surplus funds to freeze the tax rate, and $3.1 million for 2006.

According to Ms. Kabot, had the tax rates during those three years been moderately increased, she would not have had to raise the rate to 5 percent for 2009. Ms. Kabot said she probably could have kept it at to a 2.5-percent hike.

After their bitter campaign, Ms. Kabot said she reworked Mr. Heaney’s 2008 budget to include a tax rate hike that would have resulted in a $17 increase for a house valued at $1 million. But Mr. Heaney, still in office at the time, stuck with his original budget, which kept the tax rate level.

“There’s no doubt we had a tax holiday,” Ms. Kabot said. “Had taxes been increased a little, we’d be better able to deal with 2009.”

So long as mortgage tax revenue remained strong—as it did until recently—and those excess dollars continued to flow into town coffers, then town officials had a healthy surplus and used it to keep taxes low. Now, with that revenue stream having thinned considerably, and the situation compounded by a faltering economy, the pendulum is swinging the other way.

On Friday, the Town Board discussed a preliminary “corrective action plan” aimed at fixing the problem. One of the obstacles town officials face is that Local Finance Law prohibits them from simply borrowing money to cover the deficit created by the mistake made in the office of the town’s comptroller at the time, Charlene Kagel.

The town may, however, tap money from general reserve funds to pay for the 2005 and 2006 projects. But, to do that, a nexus must exist between why the bond was originally authorized and the project in need of funding now. In other words, the town may allocate park reserve funds to pay for the construction of a playground, but not for roads or drainage projects.

The town, according to Ms. Kabot, is also not in a position to take money from its surplus—or “rainy day” fund—and move it into the capital budget. The town only has $2.5 million in rainy day funds, and by law the town must maintain a 10-percent general fund balance.

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I seem to recall in a past article that LInda said all these problems will be straightened out by April 3rd. Well, Friday's almost here.
By westhamptonboy (227), Westhampton on Apr 1, 09 1:39 PM
An audit from the state comptroller’s office is the best thing that could happen. People in charge now do not appear to know what they are doing.
By Lefty46 (56), Westhampton on Apr 1, 09 2:06 PM
Linda, the buck stops with you.
By dagdavid (646), southampton on Apr 1, 09 2:06 PM
why focus on the budget? We have soup kitchens to shut down and illegals with mustaches to run out of town!
By littleplains (305), olde england on Apr 1, 09 2:32 PM
As the chief financial officer of Southampton Town I think and I EXPECT that you Madam Supervisor will resign your post now that you have made it clear you are in over you head,,what is the line of succesion
By Tianard (6), Hampton Bays on Apr 1, 09 3:02 PM
I cant understand how this went unnoticed by Linda for so long. Tianard is right, she is in over her head and casting blame. It seems to me that surplus should go back to the taxpayers, Heaney did it the right way. The more they collect, the more they spend. Give the surplus back to the residents.
By Hampton (50), Westhampton on Apr 1, 09 3:21 PM
Fire Blowes, Brautigan and whoever else participated in this slovenly, incompetence. Like East Hampton, they are going to raise taxes to cover their errors or worse their criminality. A STATE AUDIT IS AN ABSOLUTE MUST!
The money has flowed in for too long without strong oversight and transparency.
By Phanex (83), Southampton on Apr 1, 09 3:41 PM
Linda has to fix this ASAP - While perhaps guilty by association in this error I'm surprised Mr. Heaney is being defended here; as long as mortage tax money was rolling in the error was allowed to continue, and he used it for political purposes. It's imperative that a) the blame games ends, b) an audit is conducted by the State; c) and Town spending is cut so that the ensuing tax bill increases do not ruiin us all.

To Linda's credit I recall her asking good questions as to how the Town ...more
By North of Highway (280), Westhampton Beach on Apr 1, 09 4:18 PM
The 5% tax cap is there for a reason, to protect taxpayers when politicans want a quick budget fix. If Southampton residents/taxpayers care anything at all about the Town they live in, do not let the Town Board alter the tax cap law.

Even if the Board claims a modification of the tax cap is a one time event, do not buy it. If you believe that, there is a nice bridge in Hampton Bays I can sell you!

By CommonSense (71), Southampton on Apr 1, 09 4:18 PM
ahhh....the shell game is finally over. Instead of increasing taxes to fund their outrageous speding increases, they borrowed from this fund and that fund to keep the general fund escalation in spending hidden from the taxpayers by not raising taxes.

I can appreciate their effort in keeping my tax rates low, but doing so by shuffling money from this fund to that fund isn't kosher in my book and certainly not a long term solution. How about actually spending less?

It is indeed ...more
By C Law (354), Water Mill on Apr 1, 09 4:19 PM
Mike you so correct. Where were these guys? Perhaps we can look to the "Arthur Andersen" effect; alls well because we said so and hope no one looks and when they do we can blame it on the next guy.
I recall as a young budget analyst circa 1975 NYC budget crisis the budget director for the City of New york was essentially handed his walking papers when he couldn't answer the question of how many employees did the City have. He didn't even guess, he said he didn't know.
The Town needs real ...more
By North of Highway (280), Westhampton Beach on Apr 1, 09 5:02 PM
The thing that boggles my mind is tha this is not rocket science but rather Municipal Accounting 101. Clearly some training on basic budget and accountng skills are needed. As we used to say in the audits I was involved in "Tic and Tie." This is what you report, where's the back up documentation.
By number19 (111), Westhampton on Apr 1, 09 5:05 PM
Regardless of who's to blame, the Town Finances should be more visible
with an Independent Auditor at every step of the way. It's outrageous, that
we have such a Fiscal mess as our own Federal Government shows.

There's just too much Greed, Graft and Pork every step of the way !

Cut the spending, across the board and force our politicians to work for
$1 a year. Make the word " Public Servant" as it should be !
By Fordfern (6), Quogue on Apr 1, 09 8:14 PM
Forget budget & accounting training. Our tax dollars are not for training elected officials to do their jobs. They are the ones we elected to hire competent professionals to manage Town funds. CLEAN HOUSE. STOP UNECESSARY SPENDING. Cut salaries, benefits, perks, town paid vehicles, the list goes on. There's plenty of fat to cut out of the budget that the public is not even aware of, before cutting our services and raising our taxes. Forget the new courts in hampton bays, cancel any contracts ...more
By lol@hb (20), hampton bays on Apr 2, 09 9:20 AM
... the problem is that nobody understands what they are reading. Financial reports and spreadsheets are usually beyond the scope of elected officials at this level. The accountants know it, the comptrollers know it, the auditors know it, the politicos know it.

When this info is presented to a board they all nod yes - they understand - it looks good. When the financial management guys start to double talk and talk in jargon that nobody grasps - everyone simply nods yes.

I would ...more
By William Rodney (561), southampton on Apr 2, 09 3:02 PM
Tax rates, assessments, capital budgets, operating budgets, caps on tax increases; on and on it goes--a shell game to confuse the general public and manipulated to keep existing politicians in office--especially during an election year. THERE IS ONLY ONE THING THAT MATTERS AND ONLY ONE WAY TO KEEP A HANDLE ON PROPERTY TAXES--A CAP ON TOTAL SPENDING. They will argue that necessary services will have to be curtailed; blah, blah, blah, but THE SOUTHAMPTON PARTY did it successfully during the early ...more
By Doug Penny (64), Lexington, Virginia on Apr 2, 09 5:31 PM
That is exactly the case Mr Rodney, so shouldn't Mr. Blowes bear some accountability?
Doug, do you agree?
By Terry (380), Southampton on Apr 3, 09 10:09 AM
This problem appears to be the result of the same accounting practice used by the Bush administration. . . . do all republicans shift numbers like this to suit their own or party purposes and lie?
By lulubelle1956 (24), Westhampton Beach on Apr 3, 09 1:42 PM
The problem is that politicians like the last supervisor are more concerned with getting re-elected than they are with the well-being of the Town and taxpayers. Using surpluses to keep taxes down is purely to get votes, not a sound fiscal policy. Get a backbone and make some tough choices, if you want your pet projects to be funded, you have to increase taxes. If you want to keep taxes stable, stop promising new services. If the demand is there, the justification will be a no-brainer. In any ...more
By eagleeye (82), Sag Harbor on Apr 4, 09 1:42 PM
The issue is that the Photog is still stalling……what is the fund balance can u tell us now….I am sure you can’t. How much have you spent so far Photog…doesn’t anyone get it? How much are you spending of surplus……….i hear the number is about 15 million so far and I hear there is no surplus left……..is the transfer station funded for the year?.......nothing but lies and stall tactics….what is the increase going to be in taxes this year…..hey whose budget was that last one……you submitted 70 resolutions ...more
By Hamptonman911 (14), Southampton on Apr 5, 09 3:40 PM