By Kathryn G. Menu
On Monday afternoon, former East Hampton Town Budget Director Ted Hults pled guilty to two misdemeanor counts of securities fraud and official misconduct before State Supreme Court Justice William Condon in Riverhead.
In exchange for the plea deal, Hults, 43, of Sag Harbor, will not serve any jail time and was only required to pay a $200 discharge fee.
The charges were among 14 felony and misdemeanors charges laid against Hults after an investigation into financial mismanagement in East Hampton Town. Former East Hampton Town Supervisor Bill McGintee, who resigned last fall in the midst of revelations about the town’s deepening financial woes, will not face any charges.
Hults admitted in court that official statements on the town’s financial position issued to Wall Street investors considering the purchase of East Hampton’s Bond Anticipation Notes (BANs) contained misrepresentations about the town’s financial status, according to a release issued by Suffolk County District Attorney Thomas Spota. Hults also admitted that he illegally transferred $8 million from the town’s Community Preservation Fund (CPF) to other town operating budgets to meet day-to-day expenses, and that he was warned by then town attorney Laura Molinari that such a practice was illegal.
“I don’t believe you are a bad person,” said Justice Condon to Hults on Monday, calling his incompetence as a budget director “nothing short of stunning.”
According to Government Corruption Bureau Chief Christopher McPartland, it was Hults’ lack of a criminal record and the fact that he did not personally profit from his criminal behavior that led the county to accept the guilty plea in exchange for a conditional discharge. As long as Hults stays out of legal trouble, all other counts against him will be dropped.
Following Hults’ plea, on Tuesday Spota released a blistering grand jury report. compiled during a six-month long investigation, detailing the “rapid collapse of the Town of East Hampton’s financial condition” from 2003 to 2009, resulting in a $30 to $40 million deficit.
McGintee was supervisor from January of 2004 to 2009 with Hults serving as his budget officer. Suffolk County Legislator Jay Schneiderman was town supervisor in 2003, with Len Bernard, the current East Hampton Town Budget Officer under supervisor Bill Wilkinson, serving as his budget officer.
The town’s debt will be bonded through deficit financing approved by the New York State Legislature, “at a great cost to the Town of East Hampton taxpayers,” the grand jury statement reads.
According to the report, the financial decline of the town was the result of “steadily increasing costs,” in particular for employee benefits, salaries and retirement costs, with town officials at the same time “for political expediency” refusing to raise taxes or cut expenses.
In respect to rising employee benefit costs for town civil service employees and police officers, the report states that the town under budgeted $6 million to cover those expenses from 2004 to 2007.
The grand jury found that tax cuts without spending cuts under the Schneiderman administration in the 2003 and 2004 budgets left the town in need of a 25 percent tax increase, with a McGintee administration town board only adopting a nine percent tax increase for the 2005 fiscal year.
In interviews with town employees during the course of the investigation, the grand jury states it was told the reasons to not raise taxes despite the necessity were politically motivated.
“Each witness testified consistently that taxes were not raised to meet expected costs in order to preserve elected positions,” the report reads. “The stated concern was that if taxes were raised substantially, then those facing election might be voted out.”
The town’s refusal to follow the advice of independent auditors and implement financial controls is also cited as it contributed to the financial meltdown. In recommendations made in 2003 and November of 2004, auditors urged the town to establish procedures to monitor the town’s budget, and take steps to better control spending. Auditors also noted that the town’s books and records were not being closed properly, on a monthly basis, and that accounting records were not being maintained “timely and accurately,” and suggested the town use software to track expenditures of capital projects rather than track them manually.
As of 2008, none of these practices were implemented despite the recommendation, according to the grand jury report.
“This decline in the town’s financial condition occurred because the Board and Town officials engaged in poor budgeting practices, including failing to appropriate adequate funding for expenses, and then routinely over-expending the appropriations,” read a statement from the New York State Comptroller’s Office. “Rather than taking necessary steps to match revenues to expenses, the Board and Town officials tried to finance budgets by appropriating unavailable fund balance, which further increased deficits. In addition, Town officials did not provide, and the Board did not demand, accurate and timely financial information to prepare sound budgets and to monitor spending.”
According to the grand jury report, the State Comptroller’s office found that poor budget estimates and non-existent fund balances led to a $7.5 million decline in surplus funds from December 2003 to December 2007.
The grand jury also found $8 million of CPF monies were improperly used – a fact, it notes, that was hidden from the town board and the public, and $4 million funds for capital projects like the Montauk Playhouse were improperly used to pay for general fund expenses.
According to the county district attorney’s office, McGintee and the town board were unaware Hults was illegally moving the CPF monies to cover general expenses in the town.
“The Town of East Hampton’s financial condition was propelled into a state of crisis between 2003 and 2009 by town employees who destroyed the financial health of the town,” concludes the grand jury report. “Trained professional accountants and lawyers gave critical advice regarding the town’s finances which was disregarded by certain town employees to the detriment of Town of East Hampton residents.”
The grand jury adds the town board should enact legislation creating liability and accountability for officials “who delegate authority blindly” and adopt secure financial policies.