Letter to the Editor: Accounting Error

March 2, 2009
Dear David,
I preface this letter with an apology that it is long and somewhat technical. But the spread of knowledge through newspapers may be the only way left to initiate action in East Hampton.

In the last 10 years, the Town of East Hampton has deposited over $49 million of mortgage tax revenue into the whole town fund when, more properly, the money should have been put into the part town fund. This is likely an error. It is certainly questionable accounting, and it has cost the residents of the town about $11.6 million in extra property taxes, while village residents have saved the same amount in property taxes that they did not have to pay the town. (In this letter the word “village” means East Hampton Village and the East Hampton portion of Sag Harbor, while “town” means town ex-village.)

The error, which may have started long ago, continues each year because the town appears to misunderstand that there is a difference between how mortgage tax is reported by the Suffolk County clerk and how it is rebated to the town and the villages by the Suffolk County treasurer (a big thank-you to Nicole DeLuca, deputy clerk of Suffolk County, who kindly took two phones calls from me on this subject).

The mortgage tax is a 1-percent tax on the value of every new mortgage. This tax is collected by the county, and a portion of the tax is rebated to towns and villages every six months. Each month, the Suffolk County clerk reports a single amount that includes all the tax to be rebated to East Hampton town and villages.

But every six months, the county treasurer divides the amount reported by the county clerk into town portions and village portions and sends each a separate check. Because the check that comes to East Hampton Town is a rebate of money paid solely by town residents, it should go to the part town fund. The part town fund covers projects and departments that are town specific; it covers expenses of the town not including the villages. For example, the Police Department is in the part town fund because the village has its own Police Department, and the two departments cover their respective and separate areas.

The villages put their rebate into their own budgets that are separate from the town. But the town puts its rebate into the whole town fund, which covers projects and expenses that benefit both town and village residents. By this accounting method, village residents are receiving the benefit of two rebates. First they receive their proper rebate that goes into the villages’ own accounts. Secondly, the village residents’ town property taxes are significantly reduced.

The town portion of the village residents’ taxes is reduced because they currently pay 23.5 percent of the whole town fund, and, of course, none of the part town fund. For whatever amount of mortgage tax is deposited into the whole town fund, the village residents’ town tax bill is reduced by 23.5 percent of that amount.

An example may make it clearer. Assume the reported mortgage tax is $4.3 million for the period, with $4 million being the town portion and $300,000 the villages’. First the villages receive their $300,000, then $4 million goes into the whole town fund. That increases the need to raise taxes by $4 million in the part town fund, taxes which are paid entirely by town residents. It reduces by $4 million the taxes to be paid towards the whole town fund. Since the villages would normally pay 23.5 percent of the $4 million, they are saved $940,000 in taxes. The town residents cover that same amount through additional taxes in the part town fund. In total, the village residents $300,000 of tax rebate has grown to a benefit of $1,240,000.

I am not advocating that the town try to correct the situation by any retroactive tax redistribution. But because of the budget deficit, this accounting error has deepening consequences. Currently, based on a recent town filing to sell bonds that was supplied to me by Dominick Stanzione, about 80 percent of the town’s deficit is in the part town fund and 20 percent is in the whole town fund. If, hypothetically, the $49 million had been placed in the part town fund, and assuming no other changes, the part town fund would have a huge surplus, and the whole town an even larger deficit. The total deficit would be the same but its distribution would be different.

The size of the deficit in each fund is important in properly determining how to apportion the principal and interest payments that have commenced on our deficit bond anticipation notes and on the deficit bonds that will be sold this year. If the town is allowed to restate their books going back just three years so as to reflect this error, then all of the deficit would move to the whole town fund. This would reduce the tax burden on the town residents.

Unfortunately, the town budget office does not seem to understand correct methods for apportionment of the debt service. It appears that the 2009 budget puts almost all the new debt service for the $10 million bond anticipation note, which is being used to cover the existing deficits through 2007, into the whole town fund. This overcharges the village residents, though only based on the current, uncorrected accounting of the mortgage tax.

I would give more precise figures, but debt service only appears in the budget in gross aggregations. I have often complained that this opacity hinders good decision-making. I strongly urge the next budget to include more debt detail, and specifically have two separate budget lines, one for the principal and one the interest, for any deficit financing in the whole town, and the same for any deficit financing in the part town fund.

I am also concerned that the town budget office, and consequently, our town board, may not understand that the mortgage tax number reported monthly is more than the town will receive. That was demonstrated when Bill McGintee reported that the revenue shortfall for 2008 in the mortgage tax was about $1.7 million. He got to that number by taking the $5.95 million of revenue expected in 2008 and subtracting the $4.185 million reported by the county clerk. (I noted in my letter to The Star of Feb. 12 that I would have calculated that as $1.8 million.)

But, as explained earlier, the county number overstates the revenue to the town by about 7 percent, since part of the money will go to the villages. So more likely, the shortfall will be over $2 million (again referring to my Feb. 12 letter, that makes the known deficit over $15.6 million). Obviously, Supervisor McGintee is not receiving accurately analyzed information.

I am confident that Janet Verneuille, a certified public accountant who is the town’s new comptroller, will understand this issue. I think she and a representative of the village should sit down and sort out where the town’s mortgage tax revenue should be deposited, as well as set up the proper accounting for debt service so that both town and village residents are treated correctly.