Business & Economy

State auditor clashes with administration, towns on tax financing program

State Auditor Doug Hoffer, right, with Vermont Attorney General Bill Sorrell. Photo by Roger Crowley

State Auditor Doug Hoffer, right, with Vermont Attorney General Bill Sorrell. Photo by Roger Crowley

A three-way battle is brewing between the state auditor, the Shumlin administration and a handful of towns, and the Legislature is intervening in an unlikely and obscure battleground: tax increment financing (TIF) districts.

Earlier this month, the Shumlin administration told lawmakers they should “wipe the slate clean” for disputes over this complex municipal financing scheme, by forgiving $6 million that the state auditor says four towns owe to the state education fund.

Tax increment financing districts are state-approved zones where municipalities use statewide property taxes to pay for public infrastructure. The investments are designed to stimulate downtown development. As property values rise as a result of redevelopment, the town or city keeps those extra tax dollars instead of remitting them back to the state.

Shumlin said auditor Doug Hoffer backed the $6 million amnesty to towns at a press conference at the beginning of March. His administration Secretary Jeb Spaulding said: “The current auditor supports the proposal in front of us, because there’s a great deal of uncertainty about where those numbers [the $6 million] come from.”

But that contradicts the latest message from the auditor’s office. Earlier this week Hoffer wrote a letter to Spaulding, saying his office “does not agree with total forgiveness of the amounts owed,” describing that as a “blanket amnesty.”

The letter added that, contrary to news reports and what administration officials stated previously, “None of the findings reported by the SAO [state auditor’s office] relative to the amounts owed by the municipalities were the result of inconsistent or ambiguous statutory provisions.”

Shumlin had also argued earlier in March that the disputes were due to ambiguous statutes, which need clarification. Although all parties agree that parts of TIF statutes are obscure and invite technical dispute, the letter from Hoffer says the auditor’s office only relied on the undisputed parts of the law.

On Thursday, Spaulding said he couldn’t recall whether they’d asked Hoffer specifically if he backed the $6 million amnesty, before claiming his support.

“My recollection is that the auditor agrees generally with the proposal the administration has put forward,” said Spaulding. “Having some kind of dispute resolution process where they’re not totally forgiven – I’m not sure what he said.”

“We definitely were in touch with the auditor,” said Spaulding, adding that they’d invited him to the press conference. But Spaulding couldn't recall exactly what Hoffer supported at the time, and he wouldn’t comment on Hoffer’s claim that the audit reports were based on clear and undisputed interpretations of the law.

Hoffer’s letter goes on to say that some of the alleged mistakes in towns applying TIF statutes will allow towns to wrongly withhold money in the future, above and beyond the so-called $6 million “amnesty.”

If the amnesty is granted, the letter warns, Burlington might withhold a further $1 million it owes from now until 2018, and Winooski might not pay $1.3 million it owes from now through 2024.

Hoffer writes that a “more limited forgiveness criterion” could be reasonable, such as a downgrade Milton’s alleged debt to the state from $3.1 million to $1.3 million.

Milton town manager Brian Palaia has a response of his own to Hoffer’s letter. Milton has long disputed the auditor’s January 2012 report, which claimed Milton owed the state $3.4 million.

Palaia told Hoffer this week that Milton had hired its own auditor to review its TIF administration, and that the auditor had found no problems with the program.

Palaia’s letter accused the state auditor’s office of withholding audit work papers that would have helped Milton identify exactly how the audit report calculated its final figure. Milton’s peer audit was conducted by Ron Smith, of RHR Smith & Associates, a Buxton, Maine resident who audits TIF districts in Maine and who has audited municipal bodies in Vermont.

“Right along we’ve not understood where they’re coming from,” said Palaia, of the auditor’s office approach to the Milton audit. “They’ve not showed us their work papers they relied upon to come to their conclusions.”

Palaia did say that former auditor Tom Salmon shared about six workpapers out of about 34 total, but added that in November 2012, Salmon denied a request to release the rest of the papers, citing “attorney-client privilege.”

Palaia also attacks parts of Hoffer’s most recent analysis – his letter to Spaulding – as flat-out wrong. A $2.8 million inter-fund loan attributed to Milton wasn’t a loan at all, but a straight payment to a vendor, Palaia said. The auditor's letter includes a mysterious $1.3 million Milton supposedly owes, which Palaia says he can’t account for at all.

Earlier this month, Hoffer told VTDigger that towns often dispute the state auditor’s findings, but don’t usually provide evidence or point out specific problems with findings. He defended past reports as “spot on,” adding: “I’ve yet to see a response from communities that provides evidence that counters the findings...Milton’s response was one page and said ‘We disagree.’”

“Basically they said we think we did it by the books. The report went to great length to explain why they didn’t. Milton for its part did not provide any additional evidence to correct the findings,” said Hoffer.

Hoffer declined to comment on Thursday afternoon, saying his office would release letters on Friday morning, with detailed replies to town’s concerns. He said the letters would speak for themselves. (VTDigger will update this story with those letters when they’re released.)

The original four audits were done under the supervision of Salmon, Hoffer’s predecessor. Responding to Hoffer’s charge, Palaia said: “I guess it’s just the opposite: The state auditor hasn’t sufficiently proven their findings. When we were going through the audit process, through the draft stage, not at any point did they offer us support for conclusions they had reached."

“It’s a pretty serious claim to come out and say that a town owes $3.4 million, and not be able to show the work papers you relied upon to make that claim,” he said.

The TIF topic hits a nerve for many officials, especially politicians from the four recently audited towns of Burlington, Winooski, Milton, and Newport. Early in January, Rep. George Cross, D-Winooski, said the auditor’s latest TIF capstone report “riddled with factual errors.” A coalition of eight mayors has also called for TIF reform in recent weeks.

Meanwhile, Spaulding and other state officials visited the Legislature on Thursday afternoon to offer their views on TIF changes, earning both criticism and support from those on the Senate Finance Committee.

Sen. Peter Galbraith, D-Windham, warned that a $6 million amnesty could send a bad signal, by showing interest groups that if they bring their tax or financial dispute to the Statehouse or the governor, they could see full forgiveness via legislation, instead of an impartial hearing through a neutral fact-finding process.

He compared the debt-forgiveness tactic to a 2011 moratorium on cloud computing taxes, passed after businesses widely protested a retroactive administratively imposed tax.

Galbraith asked Spaulding for his thoughts on the idea that, “If you get into trouble, and get a disputed charge, whether you’re a cloud computing company, or a town found in an audit to possibly owe money, then instead of having that process resolved to determine whether in fact you owe the money or not – instead you get the Legislature or the governor to intervene, and wipe out your debt.”

Spaulding responded that he’d welcome any mechanism to resolve these disputes in the future, even if lawmakers should end up ultimately disagreeing with the administration’s amnesty.

Although lawmakers are on the sidelines of this dispute, they’re also the only ones who can rectify the situation.

“Anybody that spends any time on this issue would conclude that the status quo is not acceptable,” Spaulding told the committee. “If we don’t do it this year, there’s going to be ongoing controversy: He said, she said, between the auditor and the communities … The only people that can clarify the rules of the road is the Legislature.”

“Currently we have confusion, we have controversy, we have disagreement,” continued Spaulding. “Doing nothing is the worst thing that could happen here … We’re in no-persons land, which is not where we want to be.”

He raised the specter of pushing towns into default by collecting these debts, soon after Galbraith repeated his call for a “fair, neutral, non-political process” to solve these problems. Earlier in the meeting, Sen. Bob Hartwell, D-Bennington, called an unexamined amnesty “the easy way out.”

UPDATED: Below are the responses from state auditor Hoffer to the letters from the two towns. They were released on Friday, March 22.

UPDATED (at 10:13am 3/25/2013): Hoffer’s reply to Milton states that the auditor’s office gave detailed information to Milton town officials on many occasions, including work papers, with its calculation of Milton’s debt based partly on an opinion from the attorney general.

Hoffer’s response also says that the auditor’s office gave Milton several chances to provide input and comment to its original 2012 audit.

It adds that the $1.3 million Milton would still allegedly owe under limited forgiveness is derived from Milton’s “failure to utilize any of the municipal tax increment to fund improvements in the TIF district from 1998 to 2008.”

The original state auditor audits and the final capstone report, summarizing these audits and providing recommendations, are here:

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Nat Rudarakanchana

About Nat

Nat Rudarakanchana is a recent graduate of New York’s Columbia University Graduate School of Journalism, where he specialized in politics and investigative reporting. He graduated from Cambridge University with a B.A. in philosophy: hence, the slightly odd accent. Raised in Hong Kong in a Thai family, he has interned for the Bangkok Post and The New Paper, with experience reporting across several Asian countries. He enjoys news photography and state and city politics.

Email: [email protected]

Follow Nat on Twitter @natrudy

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