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October 1, 2009

DiNapoli Audit: East Hampton’s Financial Mismanagement
Blamed For Big Budget Gap

Poor budgeting practices and fiscal mismanagement forced the East Hampton town board to borrow millions to cover budget shortfalls, according to an audit report released by State Comptroller Thomas P. DiNapoli. The town’s subsequent bond rating drop has also led to increased borrowing costs, which will have an impact on the taxpayer.

The audit, which covered the period January 1, 2007, to March 31 2008, found that fund balances in two funds declined by a total of $17.7 million, from a surplus of $6.9 million to a combined deficit of $10.8 million. The town added to the deficit in 2008, and will likely do so again in 2009. The town issued $10 million in deficit financing bond anticipation notes in October 2008 to address the 2007 deficit and $5 million in deficit financing bond anticipation notes to address the 2008 deficit. This year, the town could increase the deficit by millions more.

“The Town of East Hampton ignored basic accounting principles,” DiNapoli said. “The town spent more money than it had, and officials made matters worse by ‘appropriating’ fund balance moneys that just weren’t there. Now taxpayers are facing a significant deficit, and those same taxpayers will have to pay higher interest when the town borrows money to cover the deficit. Taxes are already high enough without increases forced by fiscal mismanagement.”

Town officials also took money from other funds to cover town operations, and as reported in a previous DiNapoli audit, used $8 million from the Community Preservation Fund, which resulted in the arrest of the town’s former budget director.

Among the findings of DiNapoli’s audit:

  • Taxpayers will have to pay for deficit financing bond issuance costs, as well as debt interest, a cost that has increased because of the town’s downgraded bond rating on its $86.8 million in outstanding debt;
  • Poor financial controls resulted in potential overpayments, an increased risk that town assets could be wasted or misused, and a potential conflict of interest. For example, an employee without proper authorization was able to make $8.5 million in electronic bank transfers, using photocopies of signed approval forms; further, no controls existed to prevent the unauthorized use the town checkbook;
  • Two contracts totaling $2.3 million were awarded without being competitively bid, and $2.4 million in professional service contracts were awarded without competitive proposals;
  • The town paid almost $73,000 for services from a company owned by an employee’s spouse;
  • Town officials did not realize they had improperly charged $480,000 for the Montauk Playhouse Reconstruction project to the Justice Court Building project resulting in the playhouse project costs going $330,000 over-budget. Further, the town had no assurance that $1.47 million in payments for the justice court project work were valid because it had no documentation to support the claims;
  • The town also awarded 15-year contracts for airport operations without soliciting competitive proposals between 2001 and 2005. Additionally, the town lost an estimated $248,000 in fuel fees because it failed to adjust its prices; and
  • The town’s lack of controls over its IT system makes both the system and the financial data stored on it more susceptible to inappropriate access, damage or loss.

DiNapoli’s recommendations to town officials include:

  • Prepare realistic budgets based on prior years’ experience, contracts, and available information from external sources, and monitor expenditures;
  • Generate accurate information on the town’s financial condition;
  • Ensure that wire transfers are made and checks signed only by authorized personnel;
  • Audit and approve manually signed checks prior to payment;
  • Ensure that more than one person is responsible for handling cash transactions or employ stricter supervision;
  • Follow state law and the town’s purchasing policy when awarding public works contracts and seek competition for written professional contracts and lease operating agreements;
  • Ensure that officials, employees and their spouses disclose their interest in contracts with the town as required by general municipal law and the town’s ethics code;
  • Review capital project expenditure reports and if necessary increase authorizations before they are over expended;
  • Ensure that all claims vouchers are secured, retained and available for examination;
    Amend travel policies to prevent overpayments; and
  • Strengthen the town’s IT system to be sure only authorized employees have access to system data. Also steps should be taken to protect data from damage or loss and generate audit logs for review.

Town officials generally agreed with DiNapoli’s recommendations, and indicated they would take corrective action. Click here for a copy of the audit report.


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