Riverhead Town pierced 2% tax cap for 5 years without following proper procedure: audit report

An error in calculating the tax cap for the 2018 fiscal year led to Riverhead Town piercing the cap in 2018 through 2022 without the Town Board adopting the local law required to lawfully pierce the cap, according to the town’s independent auditor’s report for 2021.

The mistake, first discovered by the auditor as it completed the 2020 audit, was fully corrected by fiscal year 2023 and the town faces no penalties for the error, according to Riverhead Financial Administrator Bill Rothaar.

State legislation that took effect in 2012 prohibits a local government from increasing its property tax levy by more than 2% or the rate of inflation (whichever is less) without first adopting a local law authorizing it to exceed the 2% cap. (The state law allows certain adjustments that effectively raise the 2% limit, including increases in assessed valuation and certain capital expenditures.)

Jennifer Clark, senior audit manager at PKF O’Connor Davies, the accounting firm the town hired as its independent auditor for fiscal years 2020 and 2021, mentioned the tax cap issue during the firm’s presentation of the 2021 auditor’s report to the Town Board at its March 2 work session.

“This issue was identified during the 2020 audit, which at that point was too late to correct the 2021 money, so the comment has been repeated from the prior year,” Clark said.

The 2021 audit report states: “The Town exceeded the 2% property tax cap for the year ended December 31, 2018 through December 31, 2021 without adopting a local law in accordance with the New York State enacted Chapter 97, Laws of 2011 Real Property Tax Levy Cap and Mandate Relief Provisions. As a result, the Town has recorded an accrued liability for the amount of $1,531,049, which will be utilized to reduce the levy for the year ending December 31, 2022.”

The report also says the town would exceed the cap in 2022 by nearly $404,000.

Rothaar explained in interviews after the meeting that the town inadvertently exceeded the 2% tax levy cap in the 2018 budget, which was prepared and adopted in 2017, by $350,000. Unaware of the error, the excess compounded in succeeding years, growing to more than $1.5 million in 2021.

Meanwhile, the town changed auditing firms three times, from its longtime auditors AVZ to Cullen and Danowski in 2018, back to AVZ in 2019 and then to PKF O’Connor Davies in 2020, when AVZ merged with PKF O’Connor Davies.

The error wasn’t picked up until PKF O’Connor Davies did the 2020 audit during 2021, Rothaar said in an interview Thursday afternoon. By then, it was too late to fix it for both 2021 and 2022.

“So we had to go back and fix it after the fact,” Rothaar said.

The “fix” is to record an accrued liability and offset the amount by which the tax cap is exceeded with money from a reserve account established for that purpose. It essentially requires the town to set aside funds in the tax levy reserve account that might otherwise be spent on operations.

When the adopted budget didn’t raise the tax levy for the 2022 fiscal year, “we made up a large portion of it that year,” he said. The town was left with only about $250,000 to make up for in 2023.

Then last year the Town Board authorized piercing the tax cap in fiscal year 2023, increasing the town’s property tax levy by 4.51% over 2022. That included the amount needed to eliminate the last $250,000 this year, Rothaar said.

“It shows on the [2021] report, and also as a previous comment, because it doesn’t go away until we get through the end of this year [2023],” Rothaar said.

Rothaar said there is no penalty to the town because it began correcting the error as soon as it was discovered and the mistake has been disclosed in the town’s audited financial statements.

Board members did not comment on or ask questions about the situation during the work session. The issue was never mentioned during any public budget discussion that took place in any of the years in question.

During the auditors’ presentation of the 2020 audit, which took place at the Town Board work session on Feb. 17, 2022 — a presentation opened by Rothaar telling the board the audit was “routine” and “there’s nothing out of the ordinary, basically the same as last year, everything’s fine” — the fact that the town had exceeded the tax cap in prior fiscal years was disclosed toward the end of the presentation, a review of the meeting video showed.

“The town was in excess of the legal limit on the property tax for the years of 2018 through 2020,” without the proper approval in advance, Clark told the board during the Feb. 17, 2022 work session. She said it appeared to be a result of an incorrect number that pre-filled on the state’s website. Board members made no comment and asked no questions.

In a separate matter, the audit report discussed a “material weakness” in the town’s failure to issue Justice Court audits for the 2020 and 2021 fiscal years.

“The town is required to issue those within 60 days of year end,” Clark told the board during the work session presentation. The audits have not been issued, though they have been completed, Clark said. “Once we receive a signed management representation letter for both of those audits, we will be able to issue them,” she said.

The Justice Court audits were delayed by staffing shortages in the court office, he said.

Staffing is a problem town-wide, Rothaar said, including in the accounting department.

While the 2021 audit report was presented to the Town Board at a work session later than usual, it was completed on time, by the Sept. 30 deadline, Rothaar said.

“It’s been on the town website,” he noted.

Nonetheless, board members said they needed time to review the printout of the report distributed to them at the work session before they could formulate any questions.

“I think we need time to review it.” Council Member Ken Rothwell said. Members Tim Hubbard and Bob Kern agreed. Member Frank Beyrodt was absent.

“This is a big item and we need time to digest it,” Supervisor Yvette Aguiar said.

The supervisor asked whether the copy the Town Board had before it was “the final copy.”

PKF O’Connor Davies partner Jeff Davoli said it was. “We issued our final copy on Sept. 30 of last year,” he replied.

“I see that there’s a lot of blank pages. And I feel very uncomfortable when a financial report is issued and there’s a lot of blank pages — two or three pages in between,” Aguiar said. “Is there a reason? It states here on some of them ‘this page was intentionally left blank.’ As a person that understands finances, I’m uncomfortable with that,” Aguiar said.

Rothaar explained that the blank pages that are marked that way are just a function of formatting. “So there’s never a back that starts a new section of the report,” he said.

The blank pages without that note were in the document he distributed to the board because he didn’t print it correctly, Rothaar said. That is not how it appears in the bound copy, he said.

“I can’t sign off on a financial report that has blank pages, especially in one section that had three of them,” Aguiar said.

The supervisor also said she was “surprised” that the board was not supplied with a copy of the PowerPoint presentation, because no one could see what was presented and no one could hear the auditors, who attended the meeting by Zoom videoconference.

Davoli said if anyone had any questions, they should call him directly or he could come in for a meeting.

The supervisor said she expected to have questions for Davoli “as soon as I can digest this.”