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