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Ocean Pines GM weighs in on audit and budget deficit

Ocean Pines Association General Manager John Bailey

By Josh Davis, Associate Editor

(March 22, 2018) It’s a popular misconception the projected $2 million budget deficit in Ocean Pines is somehow connected to multiple theft allegations that recently led to approval of a forensic audit, General Manager John Bailey said this week.

“The [deficit] is dealing with red ink in the current year and it’s pretty easy to find. You don’t have to go sorting through 100-200 pages of a budget,” Bailey said in an interview with the Gazette. “And that’s totally separate from the issue of the need for a forensic audit.

“You don’t need a forensic audit to say this is why we’re in the red,” he added. “The forensic audit is going to get at, did somebody steal money, is there fraud?”

Bailey said theft of $2,500 to $10,000 occurred during a prior fiscal year, sometime before last May.

Another alleged theft, of $26,000, “is still under investigation with WCBI (Worcester County Bureau of Investigations),” Bailey said. “That is certainly something that occurred during the current fiscal year and it’s a financial transaction – that doesn’t mean it’s red ink, it’s a cash transaction.”

He clarified the money came from food and beverage operations, but never made it to the bank.

“And then you’ve got this [third] figure floating around out there, in the rumor mill, of six figures. That may or may not be the case. So far, it’s rumored, it’s not substantiated in any way, but that’s what the forensic audit will find out,” he said.

Bailey declined to speculate on how long theft or impropriety may have occurred, or how much may have been stolen, but offered, “You have the cash transactions with staff and you have the point of sales system that’s subject to technical machinations, so who knows?”

“In order to pursue something or someone, you’ve got to have evidence of it. Will the forensic audit be able to prove that something happened? Perhaps. Will they be able to prove it to the point of pursuing action against somebody – that’s a different question,” he said. “They may come up with evidence that, yeah, money went missing. Can we ever prove who did it? Perhaps not and perhaps so.

“There’s too many outstanding questions there that we’ll let the forensic audits pursue … and hopefully be able to get all of this behind us, so we focus on moving forward,” Bailey added.

According to documentation provided by Bailey on Tuesday, the $1.584 million in budget deficits during the current fiscal year primarily come from 10 areas.

About half comes from food and beverage, with gross revenues at the yacht club off $560,000 and gross revenues at the beach club missing the mark by $285,000.

A 20-percent food and beverage discount, implemented after budget adoption and without board approval, added another $145,000.

Personnel costs related to several employee contracts were over budget by $100,000. Contract closure and vacation payouts of several food and beverage employees added another $140,000.

Two new unbudgeted platform tennis courts cost $94,000. Unusually high bad debt was $70,000 more than what was budgeted.

Unbudgeted mold remediation at the yacht club ran $55,000, legal services ran over budget by $110,000 and auditing services, including the “deep dive” audit, were $25,000 more than budget.

With the addition of $363,640 in deficits from the previous fiscal year, the projected two-year total is now $1,948,140.

“It’s not like somebody stole $2 million,” Bailey said. “Here are the things that weren’t budgeted for – or weren’t budgeted for that amount. That’s why you have the red. You don’t need a forensic audit to show you why you’re in the red. I think a lot of people, for whatever reason, were tying that together.

“There’s unknown question marks on the finances from years ago, for sure, that have raised the issue and need for doing this forensic audit,” he continued. “Let’s find out for sure if anything untoward took place. If it did and it’s something that the forensic auditors are able to provide enough evidence to go after it, OK, that’s a different decision point. But we’re not there yet. The deficit issue is totally separate.”

As for the deficit itself, Bailey admitted he’s never seen anything like it. Hired in September, he previously managed several associations in Virginia.

“I have seen places with overly optimistic revenue numbers. It’s a classic faux pas of government, HOAs or anywhere, ‘OK, we can squeeze another $10,000-$20,000 out of that revenue stream, let’s push the envelope a little bit.’ It’s seen a lot. I don’t normally see such big figures,” Bailey said.

Bailey started work on the fiscal 2019 budget just weeks into his tenure. He said gutting the budget and/or raising assessments drastically “wasn’t the proper thing for the new guy to do.”

Instead, he proposed a $60 assessment increase and the board-approved budget cut that in half, instead finding cost savings in across several departments. Bailey said the process was a good one.

“Last year’s budget was broken. So you’ve got to fix last year’s budget. Done,” Bailey said. “You’ve also got to address the deficit and you can’t address all $2 million of it all at one time.”

Along with making up that amount, gradually, Bailey said the association could do a better job of educating membership.

“You start the education process and you keep going with it, because you’ll have new people moving in all the time,” he said. “The membership needs to understand how we fund all of this stuff.”