Budget Officer Denies Past C.P.F. Errors

(June 10, 2010) While concern about how East Hampton Town has used the millions that have flowed into its community preservation fund over the last decade — a dedicated fund earmarked only for land and historic preservation — has focused largely on the years in which former Supervisor Bill McGintee was in charge, when misuse of the fund resulted in charges against Mr. McGintee’s budget officer, Ted Hults, and the supervisor’s resignation, Zachary Cohen, a resident with a background in finance who has conducted his own review of the town’s finances, has suggested that the fund has not been well managed from the start.

East Hampton’s current budget officer, Len Bernard, was also the budget officer under former Town Supervisor Jay Schneiderman from 2000 to 2004, and oversaw transactions in the initial years of the land preservation program.

A report issued recently by accountants from Nawrocki Smith, a Melville accounting firm that, at town officials’ request, reconstructed the 11-year history of the preservation fund here, using bank statements, real estate records, canceled checks, ledger books, and the like, showed that from the very first year of the program, more money than was needed for land purchases was transferred out of the preservation fund.

The money was put into a capital project checking account that was used to cover community preservation fund expenses, but the overages should have been returned before the end of each year.

Under Mr. McGintee, money was transferred not only into the capital account but to other parts of the town budget, with as much as $18 million due back to the preservation fund from transfers made in 2007.

According to the accountants’ report, a total of $210,744 that was sent from the land fund into the town’s general budget from 2000 through 2003 must be returned. Those annual sums, Dave Tellier, a partner at Nawrocki Smith who conducted the review of the fund, said this week, paid for services such as surveys and appraisals on properties that were ultimately not purchased by the preservation fund.

In March, Mr. Cohen, whose credentials include a master’s in business administration and doctoral studies in mathematics, produced a 68-page report on “legal and financial questions concerning some C.P.F. purchases” and a 32-page report detailing “accounting errors and transactions that led to $250,000 or more of money either owed to or owed by the C.P.F.,” based on his own review of documents related to the town’s accounts.

Mr. Cohen was appointed to the town’s budget and finance advisory committee earlier this year, but resigned recently.

The community preservation fund account and two capital projects accounts — an investment account and a checking account through which money is funneled to make payments for all capital projects, including land purchases — are both contained within the same fund category, the town’s “H” fund. “To me it made sense — you’re buying property,” a capital investment, Mr. Bernard said during an interview on Tuesday

“He hardly was establishing this sense of a segregated account,” Mr. Cohen said of Mr. Bernard’s management of the preservation fund, which is supposed to be kept separate and used only for its stated purposes.

Mr. Bernard said Tuesday that he followed a system that had been set up when the preservation fund program was approved in 1999, the year before he and Mr. Schneiderman took office.

“They never worried about sending over the right amount,” Mr. Cohen said of Mr. Bernard and Mr. Hults. “It looks like Len, and Ted, would send over money and approximate it, but they would never reconcile it. It’s just more or less sloppy accounting.”

Mr. Cohen noted in his analysis that allowing money transferred, but not used, for land purchases to remain in the capital projects account, rather than transferring it back to the C.P.F. portion of the H fund could have been considered acceptable. But, he notes, not under a stricter accounting analysis, as the community preservation fund money was to remain discrete.

However, he suggested that providing extra money to the capital fund account could have been deliberate, to cover a shortage of money for projects.

Criminal charges levied by the district attorney against Mr. Hults after an investigation of East Hampton’s financial affairs included several related to misappropriation of money from the community preservation fund.

Mr. Hults openly noted those transfers, Mr. Cohen said. An entry in the preservation fund account checkbook dated Aug. 8, 2007, notes “from C.P.F. to general fund to cover warrant expenses.”

He suggested that Mr. Bernard was similarly using preservation fund money to cover a cash shortage, in his case in the capital fund, but that he did not indicate he was doing so.

“Jay’s board passed an enormous amount of capital projects between May and the end of 2003,” he said, and it appears that money from the sale of bonds, which was to pay for them, may not have been available when it was needed to pay some of the bills.

For example, Mr. Cohen said, his review of bank statements for the town’s capital fund shows that on Nov. 13, 2003, there was a $30 “insufficient funds” charge. A check written on the capital fund account to the town’s accounts payable account, for $976,037, had bounced. That payment appears to indicate the accounts payable fund had “fronted” money for capital projects, Mr. Cohen said.

“During the period from the end of October through the end of November, they would have bounced even more checks,” Mr. Cohen said, without the transfer of preservation fund money into the capital account, above and beyond what was needed to buy land. “So I see an indication that capital is pretty short on money” at that point, Mr. Cohen said. “C.P.F. was essentially underwriting capital. In my view, this is clearly money being advanced to capital beyond any proper needs of capital holding money for a purchase or any incidental costs.”

“Absolutely not,” Mr. Bernard said Tuesday. “C.P.F. money was never used to cover anything.” If bills came due before bonds were issued to pay for capital projects, he said, “we had plenty of cash in the general fund to advance,” he said. Such interfund transfers are allowed as long as an annual reconciliation takes place. According to the 2003 audit, the town’s general fund ended the year with a surplus of $5.8 million.

The budget officer, who retains the records from his previous tenure at East Hampton Town Hall, produced several resolutions from 2003, showing town board approval of just such advances for particular capital projects.

In addition, he provided statements from November and December of 2003 showing balances of $9.9 million and $8 million in the capital fund money market account at the end of each of those months.

A check did bounce, according to the records produced, but was subsequently honored. The incident was most likely due to a failure to transfer money from the capital investment account to the tandem account against which checks were drawn in a timely manner, Mr. Bernard said. “We kept very little money in the checking account,” he said.

“We never, to my knowledge, moved any C.P.F. funds out of C.P.F. for capital projects,” Mr. Schneiderman, now a county legislator, said yesterday. A number of projects already under way when he took office were unfunded, he said, but “there was no involvement of C.P.F.”

Mr. Cohen also pointed to irregularities with several land purchases in 2003, which contributed to the overages of money transferred out of the land fund.

Records of the preservation fund account provided by Mr. Bernard show a $1.2 million outlay in September 2003, for purchase of the Jossem property. But checkbook records also provided by Mr. Bernard show a total of $804,000 was spent for the land.

Both Mr. Cohen and Mr. Bernard note that not enough money had been sent from the preservation fund account to the capital checking account for the preservation fund’s purchase of the Montauk racquet club, also that month, which could account for the difference.

One piece of land bought in 2003 was apparently paid for, incorrectly, with community preservation fund money. Money for that purchase, $185,000 for the Lawrence property, was apparently included in a transfer of just over $1 million from the land fund into the capital checking account, which was to cover another land purchase as well.

Although the second acquisition, of the Koncelik and Casale land for $900,000, appears on the preservation fund ledger provided by Mr. Bernard, the smaller property purchase does not.

The checkbook stubs provided by the budget office show that the Lawrence land was miscoded as a preservation fund parcel. That error was corrected, Mr. Bernard said Tuesday, by the accountants who prepared the recent report, and the purchase amount included in the money due back to the preservation fund.

Mr. Cohen also raised questions about the purchase of the Cardone property in 2003. A closing statement provided by Mr. Bernard shows the total expenditure for the property was $52,114, on July 23, 2003. A copy of the checking register stub shows a code assigned to the purchase indicating that the land was acquired through a small-lots purchase program, and not the community preservation program. The payment does not appear on printed ledger records of the preservation fund account.

However, according to Mr. Cohen’s reconstruction of events, $1 million was transferred from the preservation fund on Sept. 9, 2003, to cover closing costs for the purchase. The transfer, to the capital projects account, appears also on that date in the checkbook register provided by Mr. Bernard, but does not appear on his ledger.

Both Mr. Bernard and Mr. Tellier said that Mr. Cohen’s interpretation that the money was transferred for the Cardone purchase was incorrect.

“Why is there such a divergence between Len’s spreadsheet and the checkbook?” Mr. Cohen asked.

Mr. Bernard said this week that the Nawrocki Smith preservation fund review was exhaustive and would have uncovered any problems in the early years. “They started with a clean slate and recreated the entire financial history of the program based on all source documents,” he said.

Mr. Tellier said that Mr. Cohen “may not have connected all the dots. You have to follow the trail from beginning to end,” he said.