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Riverhead Town has been improperly charging special districts and certain special funds for administrative costs, the Office of the State Comptroller says in a report of its audit of the town’s administrative chargebacks fund.

Improper chargebacks totalled at least $779,829 dollars in 2012, the comptroller’s office said.

The comptroller said the town’s practice of applying a flat percentage to the annual budgets of 11 special districts and funds to determine chargebacks for administrative costs is improper. Instead the town should calculate administrative cost allocations based on the actual services being provided by the town to the special districts.

The town calculated the administrative chargeback rate at 14.2 percent in 2012, the fiscal year audited by the state.

Further, the comptroller said, the town cannot charge clerical and administrative expenses of the town highway department to the highway fund, which is a separate fund authorized by state law.

“[C]lerical and administrative expenses of the town highway department are general fund, not highway fund, charges and are not subject to reimbursement from the highway fund,” Deputy Comptroller Steven Hancox wrote in a March 1 letter to the supervisor and town board.

The comptroller ordered the town to prepare a corrective action plan and file it with the state within 90 days.

Riverhead Supervisor Sean Walter could not immediately be reached for comment, but in a Feb. 25 letter to the comptroller, written in response to the audit findings, he said the town agrees with the comptroller’s office and made changes to the chargeback policy in 2013, excluding from the calculation of administrative costs the salaries of the town supervisor and town clerk, excluding justice court and municipal garage charges, and excluding payroll costs for districts and funds that do not utilize payroll services.

Highway department administrative costs would also be charged to the general fund, not the highway fund, in the future, Walter wrote. The 2013 adopted budget transfers $516,000 from the highway fund to the general fund for administrative expenses, down from more than $769,000 in 2012 because of the changes implemented this year.

Riverhead Highway Superintendent Gio Woodson said he feels vindicated by the comptroller’s report. He has been complaining about the amount of administrative chargebacks being deducted from the highway fund for years. See prior story.

The chargebacks to the highway fund began in 2008, during the administration of former supervisor Phil Cardinale, after current financial administrator William Rothaar was hired.

Up until 2008, there were no administrative chargebacks to the highway department — though the practice of charging administrative expenses to other special districts, such as the water and sewer districts, had been in place for many years prior.

But with 2008 and the new financial administrator came a change in practice. That year, for the first time, the chargebacks to all special districts was based on a percentage — then 12 percent — that was calculated as the “administrative cost center,” according to then-supervisor Cardinale. Up until 2008, the administrative chargebacks to the other special districts was a number that Cardinale characterized as being pulled out of thin air. The new financial administrator, Rothaar, was “aghast” at the town’s past practice, Cardinale said at the Nov. 20, 2007 town board meeting, according to the minutes of that meeting. Riverhead would put into practice a policy Rothaar said was used in every other town, charging back based on a percentage, Cardinale said, and the percentage would be the same for every town department and special district.

Woodson said today he would be sorting out what the comptroller’s findings will mean to his department’s bottom line. He would look to recoup funds improperly transferred from the highway fund to the general fund in past years, he said. 

“I can take some of that money and put it into equipment and paving,” he said.

Administrative chargebacks have also been a bone of contention between Riverhead Business Improvement District Management Association president Ray Pickersgill and the town financial administrator.

“Every year they take $26,000 out of our account for administrative chargebacks,” Pickersgill said. “I knew that was wrong.”

“Chargebacks for services provided for the operation of a business improvement
district (BID) must be consistent with the BID Plan,” pursuant to state law, the deputy comptroller wrote.

Riverhead administrative chargeback audit report by

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