Letter to the Editor: Budget Deficit

East Hampton
February 16 2009
Dear David,
    I sat in the audience of the budget advisory committee s meeting of Feb. 9. I had the advantage of having already studied most of the issues as well as the actual budget numbers last autumn, and I am able to report the following important conclusions.

    First, and most important, the budget deficit at the end of 2008 will be over $15 million. I base my statement on Supervisor Bill McGintee s report to the B.A.C. that the deficit at the end of 2007 will be about $10.1 million. He then said that there was a $1.7 million shortfall in revenue from the mortgage tax (I actually calculate $1.8 million), and a likely deficit of about $2 million from the underfunding of the employee health benefits.

    In addition, my continuing study of the community preservation fund bud≠get allows me to add, sadly, but with confidence, that there will be a deficit to the 2008 whole town fund of about $1.6 million on the revenue line that covers C.P.F. charge-backs. Charge-back expenses are the ones in the budget that the town pays for the C.P.F., such as staffing costs, and which later the C.P.F. reimburses the town.

    This C.P.F. revenue estimate can be traced to improper 2008 budget design done in October-November 2007. The 2008 budget document inexplicably added over $2.2 million of C.P.F. charge-backs to the 2008 budget as revenue that would be fully collected, when only about $600,000 to $700,000 was realistic. The actual 2008 C.P.F. charge-back expense number looks to be $600,000 (about the same amount as in 2007) if all expenses are approved as legitimate by the C.P.F. auditor. This leaves over $1.6 million in uncollected 2008 tax levy.

    Thus the total deficit comes to at least $15.4 million through 2008. This has serious repercussions since the town is only approved to borrow up to $15 million in bonds to cover the deficit.

    Second, Joe Gaviola astutely asked about revenue anticipation notes. These are issued when money is needed for operating expenses before anticipated revenue comes in. In most cases, the expected revenue is from property taxes, though it could be anticipated proceeds from the mortgage tax, which is only sent to the town twice a year.

    Supervisor McGintee responded that revenue anticipation notes are a standard operating procedure to cover cash flow discrepancies that arise when expenses must be paid before the arrival of expected revenues. That is true as a definition but false as applied to the situation of East Hampton Town.

    Supervisor McGintee gave as an example that school districts use RANs frequently because the school year starts in September but property taxes are paid later. However, in the case of East Hampton Town, our budget year is a calendar year that runs from Jan. 1 to Dec. 31. Our town s property tax year actually precedes the budget year since it begins on Dec. 1, a month before the budget year. East Hampton Town receives significant revenue in late December before the budget year even begins. Certainly, some revenue is received in arrears, but it is also likely that as many 2008 expenses are paid in arrears. Whether a cash flow problem is caused by a mistiming of expenses and revenues, or whether it is caused by an actual deficit imbalance of expenses exceeding revenues can only come from a full audit, but the town does not really have time to wait for a full audit.

    There are already indications that the need for RANs comes from the growing deficit. I have not been able to fully verify my dates and amounts but I believe that the most current RAN for $4 million was sold in late 2008 to be paid for by property taxes in 2009. This sale occurred after the $10 million bond anticipation note, which was issued in anticipation of the up to $15 million actual deficit bond.

    It is not hard to match up the numbers and see that the $10 million BAN was needed to cover the deficit through 2007 and that the RAN (or other BANs) would be needed to cover the deficit as it grew in 2008 and into 2009. Another indication of the growing deficit was the occasional  borrowing  in 2008 of the $1.4 million Highway Department surplus by the general fund to cover cash flow problems. The total of the borrowings comes close to my calculations of the total deficit to date.

    A final point on the RAN is that future budget documents need to be improved so that the public can see them. I asked for more debt detail during the autumn budget preparation but did not receive it. I believe that while the interest expense of these is included in 2009 budget document, the principal payments are not.

    The implication of not including the principal payment of the RAN in the 2009 budget is that the 2009 budget is precisely in deficit for the amount of the RAN when the RAN is paid for out of property tax collections. This deficit may be covered by future borrowing but the deficit creation and future borrowing need to be shown separately to properly understand the situation. The pay-off and reborrowing are separated in time and in different forms of debt instruments.

    Lastly, Supervisor McGintee said that we should have some indication by the end of April of whether the current budget is headed for a surplus or deficit. He was especially concerned about the $4 million estimate of expected revenue from the mortgage tax. Numerous people, including myself and the New York State auditor, told the board in the autumn that we felt this number was overly optimistic.

    It is not necessary to wait until April to learn about trends that affect the current budget. While the mortgage tax is paid out after March, the information on how much is collected is available monthly from Suffolk County. The January number should now be available. Also, the 2009 budget includes an estimate that about $66,000 will be collected each month by the Building Department and a little less than $15,000 a month will be paid to the Planning Department. These numbers can be easily checked monthly and adjusted for any seasonal patterns. The optimistic size of the Building Department estimate is worrisome because in 2007, a good year for construction, the actual amount collected averaged $58,000 per month, $8,000 a month less than the estimation for 2009.    

    Given that the deficit to Dec. 31, 2008, is already over the maximum of $15 million that we can borrow, we cannot wait to implement actions that will ensure that 2009 ends in a surplus. There is very little contingency built into the 2009 budget, as most of the contingency line is already earmarked to pay for the binding arbitrage of the police salary increases. For any budget reductions to affect the 2009 budget, their planning needs to begin now.

ZACHARY COHEN