What if Salamander doesn't build its long-debated Inn and Spa in Middleburg? What were the results of the long-awaited "final audit" of the Town's books for fiscal year 2006? February's expanded Town Council Meeting raised big questions and provided few if any answers as Middleburg continues to work through a difficult period of administrative transition and a doubling of its geography.

On February 8, Council Member Catherine ("Bundles") Murdock raised five questions about what, if anything, Salamander intended to build on its Middleburg property if, "for some reason" their plan to build a world-class Inn and Spa on land recently annexed by the town "fell through."

On the financial and administrative front, the long-awaited, corrected and "final audit" of the Town's books for 2006 didn't make the Council's regular agenda, even though Town Auditor Jeff Mitchell had formally presented his findings at a sparsely attended "work session" on February 5. Mitchell's "preliminary audit report," based in part on incorrectly coded bookkeeping entries, had produced negative stories in national media, complete with caveats about possible violations of state law and million-dollar-level overspending.

Salamander Surprises Due Diligence, Proffers, and "Vaguely Mentioned Doubts"

During a joint meeting of the Town Council and Planning Commission, called to order an hour before February's regular Council meeting, Murdock directed five pointed questions at the Town's legal and administrative staff, and, indirectly, to the attending press and representatives of Salamander Development.

Murdock, one of three Council Members who had voted against the Town's current agreement with Salamander (and the only such member still serving on the Town Council) noted that her ongoing "due diligence" responsibilities demanded that she raise the questions, while citing other unnamed sources of what she termed "vaguely mentioned" concerns. Observing that both representatives of Salamander and "the media" were present and urging them "...not to read anything into this...," Murdock noted, "We have fiscal responsibilities . . . we have legal responsibilities to know . . . what if . . . as has been vaguely mentioned . . . what if the resort was not able to proceed as we all hope it's going to . . . .?"

Noting that the town's professional staff was currently deeply engaged in preparing a new budget, Murdock nevertheless requested that both the Town Planner and Town Attorney "do some research" on what she described as "five very general questions:"

1.) What can Salamander build on the property if they do not build the resort? How many houses can be built and on which part of what acreage?

2) What is the status of the open space easement they gave Loudoun County as part of the site plan they gave to the County?

3) What is the status of the new sewer plant? Are the plans finished? Is Salamander obligated at this point to build the water treatment plant if they do not build the resort?

4) If houses are built instead of the resort, what is the Town's responsibility to provide water and sewer if there is NOT a new sewer plant?

5) What is the status of the wells on the property if the resort is not built?

Council Member Mark Snyder, who voted in favor of the much-debated "Memorandum of Understanding" with Salamander, immediately observed that some of Murdock's questions were moot. "It's a pretty simple task to look in the zoning ordinance and see . . . and know definitively . . . what could be built on that property . . . and what's in the M.O.U [the Memorandum of Understanding between the Town and Salamander] is in the M.O.U."

Snyder, Mayor Davis, and several other council members told the Eccentric that they believed Murdock's questions were, truly, just matters of "due diligence." Others were not so sure, with at least one source close to the Council speculating that what was once a 100% certainty, might now be closer to 75%.

Zoning Issues

Snyder, noting "we are all in favor of the INN," proposed a number of steps to streamline the zoning, permitting and approvals process for the Inn itself. Noting that a June completion date for finalizing approvals for the entire Salamander tract was "ambitious at the very least," he suggested treating construction of the Inn separately from other, thornier issues such as housing, commercial development, open space on the property, and proffers.

Snyder continued to express concern about just what level of financial compensation, or proffer, Salamander should and would offer the town in exchange for zoning that would allow a higher proportion of commercial development on Salamander land.

Vice Mayor Darlene Kirk warned that a more precisely worded agreement should be drawn governing how ANY new commercial development would relate to and affect Middleburg's existing "downtown."

Salamander Committed . . . and Surprised

Salamander's Prem Devadas told Council directly that he was committed to moving forward with the Inn and Spa, and had been working closely, and well, with Town Staff to facilitate and schedule zoning, public hearings and other approvals required to meet an accelerated building schedule.

In response to the linking of an agreement on proffers to completion of the process, however, Devadas noted, "I wasn't under the impression until this moment that the inability to meet our schedule was based solely on the Town Council."

"I wasn't aware, until right now," he repeated, "that it was solely the Town Council. I thought it was a process that David [Beniamino, the Town Planner] had articulated, in which he wanted to take things through very carefully . . . and THAT I can understand."

"I can also understand the Town Council," he continued, "but I think that your wanting to tie in whether we proffer or not, and what we proffer is not what I thought the issue was."

Choosing his words carefully, Devadas continued. "What I'm speaking to, really, is the process that we UNDERSTOOD that was going to take place, and if there's a different schedule, that does not match up with ours, but that everybody thinks can reasonably be achieved, then we would be happy to talk about it. . . . but, again, to be able to put that process off without some kind of idea about what the deal is . . . . is impossible for us to do and meet a reasonable schedule."

Devadas concluded his remarks by assuring Council Member Murdock that now, he, too, would like to get the answers to her questions "as soon as possible as well."

Mayor Davis assured Salamander of the Council's good intentions and asked Town Planner David Beniamino and Town Attorney Liz Whiting to look into Murdock's questions and report back to Council as soon as possible. "Time is money," she said.

Town Finances: The Good, The Bad, The Ugly

On December 18, 2006, the Washington Post's Amy Gardner reported that Middleburg had "...overspent its $1.2 million budget last year by nearly $1 million . . . a practice that is illegal in Virginia." Citing "an audit report" she continued, "The town used borrowed money intended for construction projects to pay its recurring bills -- also illegal."

Those who read the complete story would discover, on page 6 of the "B" section, that both former Mayor, Tim Dimos, and former Town Manager, Mike Casey, thought what was really just a "preliminary audit report" might be seriously flawed.

Nevertheless, largely on the basis of that report, Middleburg's Town Council raised some existing taxes and fees, and introduced new ones. Mayor Davis, speaking for the council, promised that such a failure of oversight would "never happen again" and Casey's replacement as Town Administrator, Jerry Schiro, assured the Town's citizens that he would henceforth double-check ALL financial transactions personally.

The Good

As reported in last month's Eccentric, the best news coming out of the revision of Jeff Mitchell's "preliminary audit" was the discovery that there was no illegal use of bond money for current expenses. Miscoded capital expenses had created an unfortunate false impression. The new, "final" audit confirmed that happy news.

Town Revenues for the year, $1,309,349, were $221,642 greater than the $1,087,707 original budget projections. The size of the Town's budget deficit was also significantly less than had been originally reported.

Finally, as new Town Administrator Jerry Schiro pointed out, the increases in taxes and fees passed by the Council, though painful, turned out to be "a wise and prudent move" especially with regard to the town's water and sewer rates.

At this point, "our operational costs still exceed our revenues," he noted. "Water and sewer rates should cover the operational costs of the system. Connection and facility fees should fund capital programs."

Unfortunately, Schiro conceded, that means "water and sewer service is expensive in Middleburg" in large part because the system's costs must be paid by a relatively small customer base.

"No matter how small the customer base, there is a certain unavoidable fundamental cost associated with the operation of a water and sewer system. Much of this cost," he continued, "is practically unavoidable, and is associated with the nature of the business, the requirements for licensed personnel and unfunded state mandates from the Virginia Department of Environmental Quality and the Virginia Department of Health."

The Bad

Unfortunately, the revised "final audit" also confirmed serious overspending and little or no effective financial oversight and control during fiscal year 2006. According to Auditor Jeff Mitchell, the Town's combined year-end fund balances totaled $190,452 in 2006, down from $936,891 at the end of fiscal year 2005. During the same period the Town's total debt increased by $1,204,810 and the Town overspent its operational budget by $54,777.

The Disappearing Reserve Fund

According to former Town Manager Mike Casey, he had recommended that Council take actions which would "draw down" the town's cash reserves. The actual decision to do so, however, was not his.

"Council adopted the policy and Council approved a Capital Budget which implemented the change . . . by including a series of projects which would use a major portion of the considerable cash balance," Casey told the Eccentric.

Moreover, Casey contends, "Council approved a series of construction contracts which would be financed at least in part with a portion of that cash balance" and at one time actually "approved an increase in a contract to provide a more desirable surface for a parking lot, knowing that it would require an additional $40,000 in funds from that cash balance.

Sources close to the Council note, however, that the approved FY '06 budget only contained capital funds for a fraction of the contractual obligations assumed. Indeed, the FY 2006 budget, as approved and appropriated, indicated that the reserves would be drawn down by only around $87,000. Even that level of draw-down appears to have been controversial. The debate over the Town's reserve funds led to a separate council meeting to approve the budget and, according to some sources, contributed to current Mayor Betsy Davis's Spring, 2006, decision to resign from the Finance and Personnel Committee.

Overspending

Perhaps the most disheartening part of Mitchell's final audit was the department by department documentation of overspending, despite long-standing rules and new policies adopted as late as March, 2006. Under the rubric, "general government," spending for "Engineering and Consulting Fees" were nearly $22,000 over budget. The mysterious and otherwise undetailed "other expenses" category was nearly $21,000 in the red. Indeed, only the $4,800 per year "compensation of council" line was in the black among "administration" costs.

In the Treasurer's Office, the salary lines for the town Treasurer and an administrative assistant accounted for nearly $24,000 of a total of $31,475 in overspending. Engineering and consulting fees comprised the largest overspent categories in the Town's Planning and Zoning Department: $22,382 out of a total deficit of $37,896.

The audit found the Police Department $46,037 over budget. Some $22,000 of that was attributed to the mysterious "other expenses" category. The rest was more or less evenly distributed among the overtime and other wages, advertising, fuel and insurance expense categories.

As for Public Works, the department spent $87,611 more than was budgeted, most of it on salaries, maintenance and repairs, the purchase of parking meters, supplies and equipment.

The Ugly

Problems with financial reporting and Council oversight continue. When Mayor Betsy Davis convened the regular monthly session of the Town Council at 7:30 PM on February 8, members of the Council found only a one-page Treasurer's Report, summarizing revenues and expenses year-to-date and a note reading "Financials: Will be Distributed at Town Council Meeting Thursday, February 8th."

When Town Treasurer, Debby Jewell distributed the missing Financials they contained little, if any information required for easy oversight of the town's spending by either the general public or by all but the most actuarially proficient members of Council. An unannotated "flash report" for January seemed to indicate that the Town's "General Fund" (from which day-to-day operating expenses are paid) was $137,647 in the red. The "Utilities Fund" (from which expenses related to the town's water and sewer system are paid) appeared to be more than $70,000 in the red.

When asked about the report, most Council members either had no idea of what it meant, or referred queries to the Treasurer.

Mayor Davis and the Town Treasurer both later confirmed that "neither the general fund nor the Utilities Fund is in the red." However, she conceded, "The Town Administrator has noted that receipts this year are running behind last year's."

"Starting the year with greatly diminished reserves while also facing diminished revenues is a matter of great concern to the council and increases the importance of seizing all opportunities for finding savings."

The detailed financials that Jewell presented to Council indeed indicated that, among other things, expenditures coded to four budget categories had already exceeded their ANNUAL budgets . . . and that one, "capital improvements," was, mysteriously, already more than $77,475 over its annual budget of $0.00."

Because financials had just been distributed and had not been reviewed by Council members, Jewell made no oral report at Thursday's Council Meeting. Council, having just received their copies of the detailed financials, asked no questions of Jewell.

Mayor Davis later told the Eccentric that, despite appearances, "The treasurer's report was not late." "The goal," she said, "is to have it available by the 10th of each month, although there are times when the press of other business, such as getting out tax or utility bills, may result in it being completed later."

According to Davis, such delays in reporting have been "standard operating procedure for years." She noted, however, that she and "several council members" had noted that "receipt of financial reports and their completeness became inconsistent in early 2006."

In early 2006, the Council had just adopted a new set of financial guidelines, former Town Treasurer Betty Wolford had resigned, and Mayor Davis, then Vice-Mayor, had resigned as Chairman of the Town Finance and Personnel Committee, leaving that task to former Mayor Tim Dimos.

In conclusion, Davis noted that she and the council "are encouraged by the procedures that the Town Administrator and Treasurer have put in place to assure that payment requests are supported with documentation and that they were authorized in the adopted budget or have been specifically approved by the Council or Town in accordance with the financial management policies."

Premature Conclusions? PR Disaster?

Given the negative stories about Middleburg driven by Jeff Mitchell's unfortunately misleading "preliminary audit," who decided to make that document public and why? According to sources in the public accounting community Mitchell was faced with a difficult choice when his preliminary review of the Town's books appeared to show rampant, and possibly illegal, overspending and misappropriation.

If he truly suspected fraud or illegal activity, he was honor bound to report it to the Council, and thus, inevitably, make his preliminary findings public. If, on the other hand, there was a possibility that simple accounting errors were skewing first appearances, he could also ethically and honorably review his initial findings with the Town staff and Mayor.

Reliable sources tell the Eccentric that Mitchell, working with Acting Town Administrator Claudia Dornin, Treasurer Debby Jewell, and Town Attorney Liz Whiting, first suggested that his preliminary findings be brought to the Mayor's attention, before he made a formal report to the Town's Finance Committee, and then, to the Council as a whole.

Given the seriousness of Mitchell's preliminary findings, however, Whiting, Dornin, and Jewell all agreed that Mitchell should report immediately to the Council as a whole. Thus, Mitchell made his "preliminary" report not just to the Mayor, but to a full meeting of Council, skipping the normal process of first airing such matters at Committee level.

In response to questions from the Eccentric, Mayor Davis replied, "It is standard operating procedure for the auditor to present a preliminary report of his findings for review and comment before producing his final audit and Jeff Mitchell emphasizes that he reports directly to the council. Given the gravity of his findings, the decision was made to have Jeff present his findings at the regular council meeting. Although I cannot recall how that decision was made, it is fair to attribute the decision to me. The council and I promised a full accounting of the affairs of the Town and receiving Jeff's report at the regular meeting is consistent with that promise."

So far, no other members of Council have come forward with an alternate explanation. The Mayor, the Vice Mayor, and most if not all the other Council members have, at one time or another told the Eccentric they had no idea why the preliminary audit was made public. Some speculate that doing so was just an unfortunate oversight. Others remarked that "it was always done that way." Darker speculations, linking the premature release of Mitchell's findings to ongoing efforts to justify the firing of Mike Casey, have also surfaced.

Casey himself speculates that Mitchell found himself conducting his audit "without the benefit of being able to work with a permanently appointed Town Manager, who would probably have been able to discuss the issues in a professional manner from a background of experience and education."

The former Town Administrator also speculates "that some on staff and, perhaps some on the Council itself, had an interest in making things look as bad as possible (and, in particular, making me look as bad as possible) to protect themselves in the aftermath of my termination."

No Material Weaknesses?

In transmitting his final report to the Town Council, Jeff Mitchell noted that his audit, "...noted no matters involving the internal control over financial reporting and its operation that we consider to be material weaknesses."

A "material weakness," he defined as "...a reportable condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risks that misstatements in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a time period by employees in the normal course of performing their assigned duties."

When asked how there could NOT be "material weaknesses" in a bookkeeping and control system that led Jeff Mitchell, a reputable, well-trained, certified public accountant, not to mention a major national newspaper, to conclude that the Town had possibly misspent bond funds, broken the law, and exceeded its budget by nearly $1 million, Mayor Davis replied:

"Jeff's engagement is to report what he finds in his examination of the Town's books and his report was an accurate reflection of what he found. The fact that in retrospect, the Town has been able to shift how certain capital expenditures were classified, resulting in an improved result for our books, doesn't render the auditor's preliminary report inaccurate."

Jeff Mitchell reported that he could follow the receipts and expenditures of the Town and that they reflected that funds expended were expended for public purposes. As a matter of accounting, this may be consistent with concluding that there are not material weaknesses in the reporting."

"The auditor's engagement," Mayor Davis concluded, "does not extend to reporting on the adequacy of communications between the Town staff and its elected officials. In the end, that is a conclusion the council must make."

Other Problems Revealed in the Audit?

When asked about the changes in the Town's cash balances and the excess spending documented in Mitchell's final audit, Mayor Davis replied, "I cannot explain why the fund balance declined or why all departments (other than Economic Development) went over budget other than to note that expenditures beyond budgeted funds were made."

Asked why, she continued, "The council reviewed, revised and approved the budget brought to us by the Town Administrator." She reiterated. "I noted earlier that the receipt and completeness of financial reports became inconsistent in 2006. This was also the time when we experienced essentially 100% turnover of staff in the Town office, so I think there may have been a consensus that we needed to let new staff get their feet on the ground."

Davis also continues to lay most of the blame for the Town's financial condition on Mike Casey and, by implication, former Mayor Tim Dimos, who chaired the Finance Committee after Davis's resignation in the Spring of 2006.

"The Town Administrator's job is to execute the policies adopted by the council," Davis noted. "This critically includes executing and managing the budget approved by the council."

"At the Town Administrator's recommendation, the council adopted financial management policies that added flexibility to his ability to shift funds to perceived needs while, we thought, requiring council oversight and approval of changes of significance in the approved budget.

"The Town Administrator did not seek supplemental appropriations or advise Council of the need to meet expenses beyond the contingencies included in the approved budget."

Mike Casey, as noted above, takes strong exception to Davis's account and assignment of blame.

Public documents confirm that Council received reports of most, if not all the major expenses that, miscoded, led to Mitchell's unfortunate "preliminary audit."

Moreover, Casey insists, "I had developed a draft budget amendment which I planned to place before the Finance Committee as part of the 'budget clean up' action which Council had taken each of the previous two years at the close of the fiscal year . . . I did not present it to the Committee's meeting in July because (1) the Council was still getting organized with its newly-elected members and (2) I was preoccupied with discussions with Mayor Davis and Vice Mayor Kirk about my tenure with the Town."

Getting the Story to the Voters?

Given the enormous interest in the Town's financial status, not only among citizens of Middleburg, but throughout the county and beyond, Mayor Davis was asked why neither the good news nor the bad news reflected in the final audit made it onto Thursday's Council Agenda or into any of the Town Staff's formal reports.

"Jeff had already made his report at Council's Monday Work Session," Davis replied.

Currently there is no provision for citizens attending regular Council meeting to ask questions and have them answered immediately and directly by members of the Council or Town Staff.

Asked if it might be a valuable idea to add to each month's regular agenda a New England Style "Town Hall" session, in which the Council and Town staff respond directly to questions from the public, the Mayor replied:

"We've never had a request from our constituents to include such a session. My experience is that our constituents generally make use of the public comment sections of our meetings, public hearings, committee meetings, Town Office business hours and, yes, even the idle time in line at the Post Office or Safeway to make their views known and get answers to questions. Middleburg is blessed to have such active involvement from its citizens and business leaders."