At the Thursday, November 9, Middleburg Town Council meeting, Town Auditor and Leesburg CPA Jeff Mitchell delivered what he termed "a little bit sobering" preview of his forthcoming audit of the town's financial records for the fiscal year that ended June 30, 2006. There was no evidence of fraud or embezzlement, he noted, but, on the other hand, in one year, the Town had spent itself deeply into the red and spent proceeds from bonds issued by the Virginia Municipal League for "operations" rather than for capital investment, "the purpose of the borrowing."

Both missteps, Mitchell suggested, could have serious legal as well as financial consequences.

Mitchell also called on Town Council to take immediate steps to establish more effective budget oversight and control.

"We simply weren't monitoring our spending to the budget that had passed," he warned Council. "I would just like to emphasize that that is SUCH an important function for local governments . . . to review your budget in relationship to what you're spending."

The Good News

Mitchell began his "preliminary" audit report by noting, "We found, generally speaking, your books and records to be in order; funds accounted for."

"If there were issues we felt were irregular, or some sort of defalcation [embezzlement, theft or misappropriation of funds] we would immediately communicate to your Mayor," he continued. "There were no instances; there were no issues."

On the other hand, Mitchell's audit brought to light other significant "issues," he described as "not easy" and requiring immediate action by the Council.

Issue I: Middleburg's General Fund Deep in the Red

The Town Auditor's first concern was Middleburg's "negative general fund balance." Mitchell made clear that the Council should focus on both the legal and financial implications of such a deficit.

"Ms. Whiting is here, your legal counsel, is here," he noted, "and she will advise you at the appropriate time what the issues are with that. But that's a HUGE issue . . . to have your general fund have absolutely no surplus and be in a deficit position."

A cash shortage had already forced the Town to float an emergency loan from Middleburg Bank to pay its bills. A balanced town budget is required by law in Virginia.

A Budget Primer - The Three Funds

Generally speaking, Middleburg's Town Government pays its bills from three different "pools" of money, three "funds," each roughly similar to a checking account. They are:

1. The "General Revenue Fund" (where tax money is deposited and most operating expenses are paid.)

2. The Health and Special Revenue Fund (a restricted, mostly charitable-use fund, which receives revenues from the Town-owned "Health Center Building" (which houses, among other things, police headquarters), and from "Pink Box" proceeds (funds raised by and for the town's visitor center))

3. The Water/Sewer Fund (where proceeds from water and sewer bills are deposited, and related operating expenses are paid.)

The Cash "Issue"

On June 30, 2005, the Town of Middleburg had $624,000 "in the bank" in fund number 1, its tax-based "General Revenue Fund."

By June 30, 2006, that fund was $94,000 in the red, a negative change, in the course of one year, of some $718,000.

Fund 2, the "Health and Special Revenue Fund" (with a surplus of just under $20,000) and Fund 3, the "Water/Sewer Fund" (showing a surplus of just over $76,000) helped offset the "General Fund" shortfall . . . but only a little.

Bottom line: The Town's cash and readily accessible investment assets, in total, declined more than $623,000 in the course of a year.

Mitchell described the problem, with an accountant's understated precision, as "a substantial drop in your cash position."

The Equity "Issue"

Similarly, the Town's total "equity" (that is, what's left over after subtracting debts owed by the Town from the total value of its cash and other assets) fell more than $913,000 in a single year . . . from $693,409 in the black to $219,726 in the red.

Income vs. Expenses

According to Mitchell & Company, the Town appears to have spent $913,186 more than it took in last year.

The "Pink Box" and the Town's Water and Sewer System at first glance made money.

The "Pink Box," raising money through contributions and sales at the visitor center, contributed nearly $1,750 to the town.

The Water and Sewer System took in more than $936,000 and spent just over $879,000 . . . netting a paper "profit" of almost $60,000.

The "Health Center" fund, which "spends" most if not all its "profits" each year on charitable contributions, "lost" only $3,631.

If Middleburg had spent no money at all on "public improvements" in fiscal year 2006, its General Fund would have found itself only a little more than $60,000 in the red. Revenues amounted to $1,309,349. Operating expenses totaled $1,368,968. The resulting deficit, though serious, would have been only around 4.5% of revenues. "Public Improvements", however, added another $853,567 in expenses to be paid out of the already-in-deficit general fund.

Despite the Virginia requirement that budgets be balanced, the Town recorded "General Fund" expenses that were nearly 70% higher than revenues, and "Total" expenses that were nearly 35% out of line.

How Did This Happen?

The town's auditors began their answer to "What did they know and when did they know it?" by first looking at the budget approved by the Town Council that served under Mayor Tim Dimos and Assistant Mayor Betsy Davis for fiscal year 2006, comparing the amounts budgeted to the amounts actually spent.

Middleburg's expense budget is divided into 12 major categories, roughly, though not precisely, corresponding to the Town's administrative "departments."

According to Mitchell's preliminary report, black ink appeared in only two of those twelve categories: "Insurance" ($526 under budget) and a catch-all "Miscellaneous" category (assigned a precise $48,338 "budget," but showing NO expenditures assigned to it during fiscal year 2006.)

"Tourism/Marketing" expenses were, for all practical purposes, on target for the year . . . with $50,334 budgeted, $50,353 in expenses, and only a $19 deficit.

Five of the remaining nine budget categories, however, were significantly in the red:

The "Capital Outlay, Improvements and Contingent" budget was worst: $768,567 in the red. With an approved budget of only $85,000, the Town spent ten times more than that: $853,567.

The town overspent its $108,947 "Public Works" budget by $87,608.

"Public Safety", budgeted at $267,118, was more than $46,000 in the red. (Though $20,000 of that amount, spent on equipment, will be returned to the town in the form of grant monies, promised, but not yet collected.)

The Town spent $298,220 on "Administrative Salaries", some $40,000 over its $257,569 budget.

"Planning and Zoning" activities, budgeted at $54,000, actually totaled more than $93,000, more than $39,000, roughly 72% over budget.

"Administrative Services" contributed more than $34,000 to the deficit, with expenditures of $151,187 and a budget of only $117,000.

"Building Expense", "Administrative Supplies", and "Employee Benefits" contributed significant, but lesser amounts to the deficit.

Issue II: A Water/Sewer System That Leaks Cash (and Water)

From a cash-flow perspective even the $56,978 in black ink contributed by the Town's "Water and Sewer Fund" was described as something of an illusion.

The town earned $87,953 last year from rental of space on its water tower to cell phone companies, and $300,434 in one-time "availability" or "hook up" fees. Clearly, Town Auditor Mitchell noted, these amounts did not represent income directly generated by ongoing "operations" of the water and sewer system.

After adding back "depreciation" of $216,359 (which had been charged as an "expense" but did not really represent an outflow of cash) water and sewer system operating losses, in cash terms, came to $115,050.

Mitchell also pointed out, with some dismay, that the town continues to bill water system customers for only about 55% of the water that it is pumping from its wells.

"We highlight that every year," Mitchell said. "You're treating and pumping a lot of water that you're not billing for, for whatever reason."

Issue III: Unauthorized Spending of Funds from Virginia Municipal League Bonds

In 2005, the Town of Middleburg borrowed $1,305,000 to finance "capital improvements" to the Town's decrepit water and sewer systems. The money was borrowed from the proceeds of a Virginia Municipal League bond issue.

After paying $55,000 in "issuance" costs for the loan, the town was left with $1,250,000 to spend on capital improvements.

Audited records show that the Town actually spent only $1,017,657 of that amount on expenses that fit, in the auditor's words, "the purpose of the borrowing."

Ostensibly, that left $232,343 still available to be spent on capital improvements. Good news, it would seem at first glance.

But an audit of the town's Water/Sewer Fund showed only $75,646 in cash on hand at the end of fiscal year 2006 . . . NOT the $232,343 that should have been left in the fund.

Where was the missing $156,697? Spent, and worse, spent, apparently, on the wrong things.

"What we've done," Mitchell told the Council, "was take these bond proceeds, and spent them for operations."

"We have not spent the money for the purpose of the borrowing," he continued. "I just wanted to point that out."

Mitchell concluded his report by reiterating that ". . . Ms. Whiting is here. She's legal counsel. At the appropriate time she will be communicating with Council on these issues."

Whiting noted that she has been actively engaged for the past month "doing research in response to Jeff Mitchell's findings" . . . research as to "what options are available for mid-year correction in terms of trying to find sources of income that can start to retire some of the red ink from last year's budget."

Council Reaction

Even Council Members who had been well briefed during the preceding months appeared shocked at the scope of the problem, revealed officially by Mitchell, unusually, at a full Council meeting rather than at a preliminary meeting of the Town's Finance and Personnel Committee.

"When will we get the full report?" several members asked.

"Very soon." Mitchell replied. "Certainly this month, November."

Veteran Council Member Mark Snyder noted that Council was already aware of "some" of the issues but "not the severity of all of them." He asked if Mitchell's final report would include any "specific recommendations."

"Obviously," Snyder said, "We're all very concerned about this."

Mitchell volunteered to attend a work session to discuss the audit in more detail. As for policy, Mitchell said he did not intend to make "specific recommendations" but, he said ". . . there's lots of issues here."

"We need to get back on track. Obviously we've gone way off track," Snyder concluded. "It's the worst financial report I can ever recall."

Mayor Davis "State of the Town" Message Promised for December

Mayor Betsy Davis noted that the Town Staff and Council has been hard at work trying to address many of the issues raised by Mitchell for some time.

She, like most members of her Council, was hesitant to make detailed comments before reviewing Mitchell's final audit report, due later this month.

"I don't really want to comment too much on specifics at this time," she noted, "as we are still processing all of the facts and figures. It would be unfair to make specific comments until we have reviewed everything thoroughly."

"Once we make our final report," Davis said, "we can move forward and make ourselves stronger than before. We need the support of our town and its citizens and hope that they will help us to continue to move forward."

News of Note

New Town Manager

Mayor Davis also noted that the Town had just voted unanimously to hire Jerry Schiro of Luray as Middleburg's new Town Administrator. Schiro is scheduled to start work in Middleburg on January 2.

"We are thrilled," she told the Eccentric. "He comes to us with over 30 years of municipal experience and will be a great asset to our town."

Davis also expressed her thanks to Acting Town Administrator, Claudia Dornin. "She has done an outstanding job under extremely hard circumstances," Davis said, "and we are grateful for her dedication and perseverance."

Indeed, she continued, "All of our employees have worked very hard to make sure everything continued to run smoothly. We are very proud of all of them."

Town Businesses (and Smokers) to Pay?

Significant debate on revenue enhancements had, indeed, already taken place.

As early as August 29, the Town's Finance and Personnel Committee indicated that "revenue increases" in the form of tax and utility rate hikes "would likely be necessary in FY2007" to offset deficits.

After meeting with the Town Auditor and the Town Staff on November 1, and with her full Council later the same day, Mayor Davis proposed convening a public hearing in December to discuss, among other things:

- a 10% increase in water and waste-water treatment fees
- a 33% increase (from 3% to 4%) in the Town's "Meal Tax"
- a 67% increase (from 3% to 5%) in the "Occupancy Tax"
- a $0.35 tax per pack on cigarette sales.

Town Attorney Liz Whiting pointed out that these fees and taxes were roughly equivalent to those charged in neighboring communities.

She also noted that a real-estate-tax increase had been considered, but rejected because of the high costs of implementing such a mid-course correction.

On November 9 Council voted unanimously to convene a Public Hearing on December 14, at 7:00 PM at the Town Offices, to consider the increases. Seven days earlier, on November 2, 2006, the long awaited proceeds from a TEA-21 grant to build the Town's new Liberty Street parking lot were finally deposited, adding $157,998.85 to the Town's coffers.

Tax Revenue Down; Tax Bills Delayed

With the town already operating on borrowed money, Town Treasurer Debbie Jewel reported a $5,000 decrease in receipts from the Town's "Meal and Occupancy" tax, some 20% less than receipts "from last year's revenue at this time.

She also reported that tax bills had not gone out on time, because critical data from Loudoun County had not been forthcoming in a computer format that she could use. "Other towns are experiencing the same problem," she noted, speculating that once she received properly formatted data, things "should go smoothly."

Fee Waivers for Windy Hill

Despite concerns over costs, and the relatively high concentration of "affordable housing" projects in and around Middleburg, Council voted unanimously to approve a request by Kim Hart on behalf of the Windy Hill Foundation to waive development fees totaling $8,385 for the Windy Hill Elderly Housing Project.

The Middleburg decision improves Windy Hill's chances of gaining reductions in similar fees at the County level of some $40,000.

Such signs of "community approval" and "engagement" at the town and county level also significantly enhance the Foundation's standing in the eyes of other potential partners and sources of funding.

Christmas Gifts for Board Members and Town Employees

Council also passed, unanimously, a proposal to fund Christmas gifts for Town Employees and people who had served on the Town's Boards during the past year. Town employees receive $50 gift certificates, redeemable at Middleburg merchants and restaurants. Members of the Town's Planning Commission, Historic District Review Committee, and the Board of Zoning Appeals receive $25 certificates.

No Right on Red

Eura Lewis's Public Safety Committee reported that a new, no-right-on-red, policy for Middleburg's only traffic light would soon be implemented for a six-month trial.