FTI Consultants, a firm hired by Southampton Town, has finally completed a forensic audit of the town’s police fund and the firm presented their astonishing findings at a town work session on Friday, July 17. Brian Ong, speaking on behalf of FTI, enumerated the myriad ways mismanagement of the town’s police fund monies lead to a near $4.6 million dollar deficit at the close of 2007. However, the silver lining to the team’s audit was a list of recommendations for the town moving forward, many of which have already been undertaken by the town to clean up their accounting practices.
FTI’s forensic audit analyzed the police fund from January 1, 2003 through December 31, 2007. Ong and his team spent several months interviewing town employees and wading through electronic records of the town’s financial documents. FTI hoped to piece together the town’s complicated accounting practices from this time period and unearth the cause of the fund’s staggering deficit.
At the start of 2003, the town’s police fund was enjoying a healthy fund balance of a little over $3 million. Due to unexpected and unbudgeted Patrolman Benevolent Association (PBA) settlements, normal and disability retirements, over allocation of police expenditures and other budgetary variances the fund balance was not only whittled away to nothing, but by the close of 2007 the police fund was in the red. Between 2003 and 2007, the town’s police fund overspent by around $8 million, though the fund’s surplus was used to augment this figure. In 2003 and again in 2005, the town paid around $2.5 million, in total, for retroactive PBA contract settlements, which Ong pointed out contributed to a substantial amount of the overspending in the police fund.
“Additionally, we noted issues caused by unanticipated retirements, unanticipated normal retirements as well as disability retirements. Each of which resulted in lump sum distributions of severance which were not budgeted for at adequate levels,” added Ong.
Beginning in 2003, the police fund operated at a deficit, yet taxes in the town’s police districts weren’t levied to pay off these responsibilities. According to Wright, the town raised taxes just enough to maintain operations, though not to address the fund’s indebtedness. Furthermore, new tax monies, added supervisor Linda Kabot, were sometimes used for the incorrect budgetary year, consequently masking the actual deficit of the fund.
“Money was coming in from property taxes and so forth, and it was really earmarked for next year’s budget but was being used for the current budget in order to make payroll, etc.,” explained Kabot.
Ong added that over-allocation of police expenditures further exacerbated the police fund’s predicament. According to Wright, certain expenses, such as dental insurance, optical insurance, and workman’s compensation was erroneously charged to the police fund, when it should have been charged to other town funds. Another facet of the over-allocations were certain expenses that were charged in 2007, when they should have been charged in 2008.
However, between 2003 to 2007, to help make the police fund whole at year’s end and continue operations, the town often loaned money from one fund, primarily the general fund, to the police fund which the town refers to as an interfund loan. Under state law, interfund loans must be paid back to the lending fund within a year’s time, and if the loan isn’t paid back after a year the loan begins to accrue interest.
“Some years these loans would be paid back with the new tax money, so technically the loans weren’t outstanding. However, the taxes weren’t budgeted for that,” pointed out Wright, who added that during her research she found that once the police fund was low on money a loan would often be given.
The previous town board, however, didn’t sign off on these interfund loans. Instead, noted Kabot, the function of giving out interfund loans was under the purview of the comptroller’s office. Ong said he wasn’t aware of a law, which prohibits this practice, but said it is a good management policy to make town board members aware of interfund loans.
Going forward, Kabot said it was necessary for the town to draft a repayment schedule for the police fund.
According to Wright, the town has already implemented procedural changes to circumvent a deficit of the police fund in the future. Wright said the town has improved digital financial accounting and enacted a new system by which to manage separate accounts for a particular fund. Earlier this week, Kabot presented a draft law mandating the town board to pass interfund loans by way of resolutions.