"IT IS THE DUTY OF THE PATRIOT TO PROTECT HIS COUNTRY FROM THE GOVERNMENT." - THOMAS PAINE (1737-1809)


Wednesday, February 11, 2009

INDIANA TOWNSHIPS HAVE $200 MILLION OF TAXPAYER MONEY IN RESERVE

Review shows reserves typically exceed annual budgets

By Mark Alesia, Tim Evans, Heather Gillers and Mark Nichols
Posted: February 11, 2009

Indiana's 1,008 townships have amassed more than $200 million in taxpayer money that is stashed in reserves, yet no one -- township officials, state officials or lawmakers -- has made any effort to curb the property tax collections that generated the surplus.

A review by The Indianapolis Star shows that in some cases, the reserves represent more than 10 times the township's annual budget -- far more than necessary for even the most prudent rainy day fund, according to financial experts.

And, despite tough times, the massive reserve includes $50 million in unspent money that was raised specifically to benefit the poor.

Database: See how townships are spending (or not) your money.

The growing bankrolls are fueled, at least in part, by a system that encourages townships to collect the maximum amount of property taxes allowable every year, regardless of need. If townships don't raise the maximum, the amounts they can raise in following years are reduced.

Marion County's Center Township, for example, started this year with a reserve of nearly $10 million, the largest in the state. But it hasn't lowered property taxes.

"If you cut your levy, you don't get to just add it back," said Alan Mizen, the chief financial officer for the township.

So townships keep collecting and, in many cases, stockpiling cash, often without investing any of it.

"To have an excess like that is unconscionable," said R. Mark Lawrance, senior vice president of the Indiana Chamber of Commerce, which has been at the forefront of the move to eliminate township government.

"It's not the townships' money," he said. "It's the taxpayers' money, and the townships shouldn't continue taxing property owners when they have those reserves."

The huge pool of money is almost certain to be a point of contention when state senators begin debating a bill today that would do away with township government.

The reserves, based on 2007 audited figures, the most recent available, highlight the lack of oversight and accountability that Gov. Mitch Daniels and lawmakers such as Sen. Connie Lawson, R-Danville, the author of Senate Bill 512, cite as reasons for eliminating township government.

"I strongly believe that beyond some point government should stop taking dollars it does not need from taxpayers who do need them," Daniels said.

Township officials, however, contend they are just being prudent, preparing for an economic downturn like the one currently cutting into government revenues and creating a growing need for services.

In the grand scheme of things, said Deborah Driskell, executive director of the Indiana Township Association, townships have little impact on property tax bills, accounting for only about 3 percent of all property tax spending statewide.

But tax watchdogs and advocates for the poor say it is not wise or fiscally responsible for townships to horde the large reserves at a time of unprecedented need and growing public unrest over escalating tax bills.

Accountability

Who's to blame?

Township officials, state bureaucrats and lawmakers all appear to have some culpability.

"We all have to look in the mirror and say, 'How did we allow this to happen?' " Lawson said.

"A couple of things concern me. Why would (townships) want to raise taxes when they have money in the bank? I also don't know why the state ever allowed it to happen."

A 13-year veteran of the Senate, Lawson said she wasn't aware that the township reserves had grown so large.

"I'm not sure if even the Department of Local Government Finance was paying close enough attention," she said of the state agency responsible for reviewing tax rates and approving how much local units of government can raise and spend.

Townships' annual budgets are developed by the trustee and a township board, then reviewed by the county council. But any recommended changes from those reviews are nonbinding.

Once the budget has been approved at the county level, it goes to the Department of Local Government Finance for a final review.

Department spokeswoman Mary Jane Michalak said the agency checks to make sure the tax rates and levies fall within appropriate state guidelines. However, she said, the department cannot dictate how or whether money is spent.

Michalak said there is no requirement that townships or any other unit of government reduce their property tax rates if they have a general fund surplus.

A report by the Montgomery County League of Women Voters said the budgeting process basically encourages townships to collect as much as the state will allow. The report found some township trustees were discouraged by the Department of Local Government Finance from using surpluses to lower taxes. The unnamed trustees in the report said the department told them "tax rates are difficult to increase once they are lowered."

Michalak said she can't speak to what may have occurred in the past. She said her agency doesn't make such recommendations but acknowledged that some "consider it a penalty if they don't collect the max levy."

"We answer their questions according to the statutes," she said. "We tell them you can (reduce the rate), but just know that your levy will be cut the next year."

Oversight

Townships also have been able to build the reserves because of the autonomy they have long enjoyed, including almost nonexistent public oversight.

Among the latest 57 township audits posted on the State Board of Accounts' Web site, 40 cited problems. The reports are filled with examples of sloppy accounting, nonexistent documentation, overpayments, inappropriate payments and little attention to detail.

The property tax crisis that erupted in 2007 brought the situation to lawmakers' attention as they looked to lower taxes by cutting government costs. A recent review by the state's Office of Management and Budget estimated a $170 million savings if townships drew down their reserves to 10 percent in the next budget cycle.

Indiana does not have any standards for how much townships should have in reserve funds. It also does not require townships to invest those funds to earn interest.

As a result, some townships have not invested, costing taxpayers even more in the loss of interest.

"It is expensive to hold cash, as it could earn interest or otherwise be put to use," said Jason Seligman, assistant professor of public finance at Ohio State University.

How much is too much?

Seligman said a general rule for county government is a cash balance of about 25 percent of expenditures. Smaller governments such as townships, he said, may want slightly higher cash balances because of less access to credit.

Lawson, the state senator, said 10 percent of the annual budget is a reasonable reserve. She said that is about the amount the state is holding in its rainy day fund.

Mary Hart, president of the Indiana Township Association and trustee of Pigeon Township in Vanderburgh County, said no township should have more than one year's budget as a cash reserve, or 100 percent. Her own township had 29 percent in 2007, according to the state.

Yet five of the 10 townships listed as represented by officers or directors of the township association had more than a year's budget as a cash balance.

Hart said her association communicates best practices but can't force anyone to comply.

"Some elected officials are going to do what they want," she said, "even if it reflects badly on the rest of us.

"We have some (townships) that have always held a high cash reserve. . . . They could lower the tax rate, and that's probably what they should do. But a lot don't because of the unstable economy."

Randy Allen, trustee of Kankakee Township in Jasper County, couldn't explain why his township's cash balance of $708,000 was more than 12 times (1,256 percent) the amount it spent in 2007, according to state figures.

That is the largest such difference, by percentage, in the state.

"I've only been in (office) for two years, and it was that way when I took over," Allen said. "I really don't have an answer. We really haven't talked about it."

Longtime Center Township Trustee Carl Drummer, who announced last month he is leaving the office for a lobbying job, could not be reached for comment. His resignation was effective Monday, and precinct committeemen will vote this month on his replacement, said Marion County Democratic Party Chairman Ed Treacy.

Treacy said Drummer's decision to save up township money, including poverty assistance funds, may turn out to be prudent, given the current economic climate.

"People may have been wondering about that money," Treacy said. "But a lot of people may be happy that that money is there to serve people that really are going to be in desperate need for services."

Still, Aaron Smith, Lebanon, founder of the tax advocacy group Watchdog Indiana, said it is wrong for townships to pad their budgets on the backs of Hoosier taxpayers.

"What it boils down to," he said, "is that some townships have been taxing as much as the law allows when they don't need to spend as much as the law allows. And that is not right."

• Call Star reporter Mark Alesia at (317) 444-6039.

From the Indianapolis Star

Blunt Proof of the Feasibility to Permanently Abolish Property Tax

IMMEDIATE RELEASE
Media Contacts:
Melyssa Donaghy 317-938-8913
Max Katz 765-409-6669
www.HoosiersForFairTaxation.com

BLUNT PROOF OF THE FEASIBILITY TO PERMANENTLY ABOLISH PROPERTY TAX.
Hoosiers For Fair Taxation, Senator Delph, Representative Noe, Representative Elrod and many other legislators along with Stop Indiana, attorney John Price, Eric Miller's Advance America, and the Statewide Taxpayer Alliance know that property tax abolishment, without substantial increases in sales tax and income tax, is realistic and possible. The economist Dr. Bill Styring's 2/2/2 Plan demonstrates that the state of Indiana can completely replace property tax without changing the state's current spending habits.

Dr. Styring's plan does not account for positive changes in Indiana's economy that will undoubtedly follow the elimination of property tax such as heavy real estate investment and increased consumer spending due to increased statewide disposable income. The real estate investment in Indiana alone would cause such an economic boom that it could likely end our abandoned property and foreclosure crisis. Property tax elimination would also likely cause a surge in Indiana's population as more people locate to Indiana to take advantage of real estate purchase opportunities without the burden of property tax. With the population surge would come more sales and income taxes.

The General Assembly does not have to adopt a specific plan until the year 2011. In the meantime, we recommend that the General Assembly approves the 27steps outlined in the report prepared by the Sheperd Kernan commission. While the Governor's commission cannot forecast the savings to the state once the plan is implemented, there is no doubt that the savings would be substantial--perhaps equivalent to the the entire property tax burden currently placed on Indiana's homeowners because our legislators have not had the political will to liberate Indiana's governing structure and her taxpayers from the 19th century.

Our citizen networks will work to replace all legislators who do not support property tax repeal in the November 2008 election.

The 2/2/2 Plan, to replace property taxes in Indiana based upon the latest revenue forecast (07/08 fiscal, estimate):

1) Current IN sales tax (state level rate of 6%): $5.601 billion2% increase would yield an additional $1.867 billion

2) Current corporate profits tax: ~$2 billion

2% increase would yield an additional $.286 billion ($286M)

3) A 2% statewide average of the COIT would yield $2.705 billion to cover local civil units of gov.

By adding these three together ($1.867 billion + $.286 billion + $2.705 billion), a total of $4.858 billion is realized; enough revenue to replace property taxes.

PROPERTY TAX HISTORY PREPARED BY DR. BILL STYRING
Indiana has a 70-plus year history of attempts to lower property taxes by raising other, non-property taxes. In every case these have failed miserably. The new taxes, or higher rates on old taxes, remain in place. And, in short order, property taxes rise back to their old levels, poised to roar even higher.

--1933. General Assembly imposes two new taxes: an individual gross income tax and a corporate gross income tax. The morgue of the Indianapolis Star indicates that the political leadership at the time said this was for property tax relief (1933 was the pits of the Great Depression, and people were losing their homes. Home prices declined by over 40% in the 1929-1933 period). Property tax relief was nonexistent. The state used the money to bail out the state's own finances.

--1963. General Assembly imposes a new sales tax at a rate of 2% and changes the 1933 individual gross income tax (from 1933) to an adjusted gross income tax (the one we have now) at a rate of 2%. Again, the ostensible reason was for property tax relief and again little PTR was forthcoming.

--1967. Those 1963 tax changes were raising more money than projected. The GA decides to give back 8% of sales and income tax revenue to local government for property tax relief. Local units spent the money. No PTR.

--1973. Gov. Otis Bowen launches the most determined PTR offensive yet. The sales tax goes to 4% and a new corporate supplemental net income (profits) tax is imposed. Strict property tax levy controls are imposed. It works... for a time. By 1980, property taxes adjusted for inflation are some 30% lower than in 1973. When Bowen leaves office the levy controls are relaxed. By the end of the decade, property taxes (adjusted for inflation) are back to 1973 levels. The doubling of the sales tax rate from 2% to 4% remains in place, along with the new corporate SNIT.

--2002. More fiddling with the sales tax in the hope of property tax relief. The results of this are obvious, or we wouldn't be debating the current property tax mess. All of this suggests that unless the property tax is totally ripped up by constitutional amendment, the assessment and collection mechanism dismantled, it will grow back. The PTR-inspired hikes in other taxes remain. That is our history. It is a terrible deal for taxpayers.

2. A vote in the 2008 legislative session for a constitutional amendment to repeal property taxes does not amend the constitution. It merely starts the amendment process. Amendments must be passed by two consecutively elected General Assemblies, then submitted to a referendum. Thus any amendment passed by the '08 Assembly must be passed by either the 2009 or 2010 legislatures, then submitted to the voters at the 2010 general election. The General Assembly does not need to decide on a "replacement revenue" package until the 2011 session.

3. What might such a "replacement revenue" package look like? The particular answer will come from the 2011 General Assembly and cannot be determined now (if for no other reason than forecasting state level taxes and property taxes out that far would be a most unreliable exercise. No one need be locked into any particular plan just yet. However, as an illustration that a replacement plan is feasible and less scary than many fear (we don't need to be talking about a 12% or 13% sales tax ... in fact, we should not be), consider just this one possibility.

Local sales taxes are generally very bad policy, for a whole host of reasons too numerous to mention in this short sketch. Sales and corporate taxes are best levied at the state level. It happens that roughly a 2% increase in the sales tax and a 2% increase in the corporate profits tax roughly take care of school propertytaxes. The loss of local control by the state assuming school property taxes is minimal. About the onlylocal control left is on building projects.

For local civil units, a statewide average increase in the individual adjusted gross income tax of about 2% suffices to replace local civil government property taxes, higher than 2% in some units, less than 2% in others.

Thus, a "2-2-2" plan~2% sales and 2% corporate profits at the state level for schools and a 2% average on personal income taxes for civil units—is about what would be needed. This is merely a ballpark projection to 2011.

There may be better plans, it's really a policy question for the General Assembly: do you want to make the trade of something like this in exchange for no-property-taxes-forever-on-anything? Everyone understands "zero."

4. Are there "practical problems? Of course. The two identified are how to make the civil government transition from a property tax base to an income tax base, and how to handle debt backed by property taxes. Without elaborating, the former can be handled using locator software (Map quest-type programs). The debt problem might be handled by treating the current state paid PTRC's as in lieu of property taxes (which they are) and paying PT-backed debt service from each unit's own PTRC.

Conclusion: Total elimination of the property tax via constitutional amendment is the only way to give property tax relief that will stick. The other tax action necessary to achieve this goal—in 2011-are large but not so scary as "a 13% sales tax." They are feasible. The question is for the General Assembly. Are we going to once again go down that 70-odd year path of failed PTR policies or are we going to rip the property tax up by the roots?

Posted by Hoosiers For Fair Taxation on Friday, January 4, 2008.