Comptroller finds lack of oversight, pattern of incorrect billings, loss of $2.1 million in tax revenues

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New York City Comptroller William C. Thompson, Jr. today charged that the City has flouted the law by not directing “Payments in Lieu of Taxes (PILOTs)” to City coffers within 30 days, by improperly shifting PILOT funds into economic development projects with little public oversight, and by failing to return properties whose PILOTs expired onto City tax rolls, costing the City $2.1 million.

“I directed my staff to audit out of a concern about the transparency and accountability of the process through which the City receives and disburses PILOT funds,” Thompson said. “My office discovered a lack of compliance with City and State laws. The City's failure to remit PILOT funds within 30 days to the City's treasury violates General Municipal Law, and creates a system with a lack of public oversight and accountability for the use of these funds.”

The audit – which covers Fiscal Years 2002 through 2004 - examined whether PILOTs were properly calculated, billed, accounted for, and reported; whether the amounts collected were appropriately deposited into the Industrial Development Agency (IDA) Trust Account (IDA PILOTs) or the City treasury (Economic Development Corporation (EDC) PILOTs); and whether PILOT disbursements from the IDA Trust Account were made in accordance with State law.

Property owners who are seeking to establish or expand their businesses in the City can obtain various benefits from the IDA, which promotes City economic development by its approval of industrial and commercial development projects. IDA also offers benefits to property owners to induce business to remain in or relocate to the City, including exemptions from City and State mortgage recording, sales and use taxes, and granting PILOTs.

PILOTs are contained in lease agreements between the City and property owners and are intended to offer owners real property tax relief. Under these arrangements, property owners are exempt from paying real property taxes. Instead, they pay an amount prescribed by the agreement that is generally less than the property tax.

In FYs 2002 through 2004, IDA billed $147.6 million and collected $152.5 million in PILOTs from property owners who had agreements with IDA.

According to a 1990 Memorandum of Understanding between the IDA, EDC, DOF and OMB, PILOTs collected from property owners who have agreements with IDA are deposited into an account maintained by an independent trustee. The Department of Finance (DOF) bills property owners and directs them to make payments to the trustee. The trustee may disburse PILOT funds in the account only at the request of the EDC, as directed by the City's Office of Management and Budget (OMB). Funds are distributed to either the City treasury or to EDC's operating account, depending on OMB's direction.

Additionally, EDC, which works with the private and public sectors on economic development initiatives to revitalize business, create jobs and generate revenue, obtains PILOT funds from the operators of 15 development projects that it directly administers.

DOF bills, collects and directs property owners to deposit these PILOT funds into the City treasury. The amount of PILOT funds collected from the property owners of the 15 projects was about $17 million for FYs 2002 through 2004.

Thompson's audit found that PILOT amounts that were collected were properly accounted for, reported and deposited. However, auditors discovered a number of problems.

OMB was not directing that PILOTs be remitted to the City treasury within 30 days of receipt, in accordance with New York State law. During FY 2002 through 2004, OMB directed EDC to disburse about $150.5 million of PILOT funds, including $128.4 million to the City treasury. None of that money was remitted to the City treasury within 30 days. Additionally, OMB directed that $22.1 million of PILOT funds be transferred to the EDC operating account for “economic development projects” rather than to the treasury, again in violation of the General Municipal Law.

“These funds were used to reimburse EDC for various ‘economic development projects,' such as a cancer research center, expenses at the Police Museum , and an anti-jaywalking campaign,” Thompson said. “These projects were not reviewed and approved through the City's normal budget process, but instead approved by EDC's Executive Committee without any public scrutiny.”

Thompson said that “the law does not allow funds to be redirected to EDC for projects that bypass the City's normal budget process” and that transferring funds directly to the EDC operating account “prevents public oversight and accountability.”

Thompson noted that – as of May 31, 2005 - approximately $59.4 million has been on deposit with the trustee for more than 30 days and that those funds should immediately be transferred to the City treasury.

Thompson pointed out that EDC has $601,381 in its operating account that should be returned to the trustee for remittance to the City treasury. In 2002, EDC entered into a $250,000 contract with Deloitte and Touche LLP to assess the economic impact of proposed sports and entertainment facilities in the City. OMB allowed EDC to draw down $773,818 in IDA PILOT funds to pay for work under the contract. EDC has since paid Deloitte only $172,437, so $601,381 remains in the operating account that should be returned to the trustee.

In its response, EDC stated that it has transferred these funds to other economic development projects. The Comptroller noted, however, that this continues to violate the law, which does not allow those funds to be redirected to EDC for projects that bypass the City'snormal budget process.

“These funds are assets of the City of New York , and they belong to the people of the City of New York and should be treated accordingly,” Thompson said.

The audit also determined that DOF did not always calculate – and thus, bill – property owners for the proper PILOT amounts due. This oversight meant that the City failed to collect approximately $415,653 in PILOT revenue.

Of the 139 individual IDA PILOT calculations DOF made for 50 sampled properties in the audit, 78 were wrong. As a result, 62 percent of the 50 properties were incorrectly billed for FYs 2002 through 2004. Forty-three incorrect calculations resulted in property owners being underbilled by $683,777; the other 35 resulted in owners being overbilled by $228,823.

Similarly, six of the 15 property owners were incorrectly billed for their EDC PILOTs. The audit found that DOF made nine incorrect calculations for these six property owner sites. Two incorrect calculations resulted in property owners being underbilled by $56,214. Seven incorrect calculations resulted in property owners being overbilled by $95,515.

Furthermore, IDA PILOT revenue is not recorded on the City's books until it is transferred from the trustee to the City treasury instead of when it is received by the trustee. As a result, the City did not have an accurate account of available revenue for budget purposes.

“Recognizing revenue in the fiscal year that it becomes available is important to ensure proper public oversight and accounting of these funds,” Thompson said

Finally, DOF did not always ensure that properties whose PILOTs expired were properly returned to the City's tax rolls – and as a result, the City has not collected about $2.1 million (estimated taxes owed as of June 30, 2004). For the audit period, 62 of the 300 IDA PILOTs expired; of those 62, 37 were not reentered on the tax rolls; one dates back to October 2001.

Thompson issued a series of recommendations to EDC, OMB and DOF. He recommended that EDC remit the $601,381 in excess funding to the trustee for remittance to the City treasury. He recommended that OMB: ensure that the current balance of the trust account - $59.4 million as of May 31 – be immediately transferred to the City treasury; ensure that all future PILOTs are remitted to the City treasury within 30 days; and, report PILOT revenue in the fiscal year that it becomes available.

Thompson asked DOF to: accurately bill property owners for PILOTs in accordance with terms of the lease agreements; ensure that properties whose PILOTs expire are immediately recorded on the City's property tax rolls; and, recalculate the PILOTs due for the properties identified in the audit. In addition, DOF should credit those properties where overpayments were made and seek to recover the underpayments, if permissible by law.

OMB disagreed with the Comptroller's interpretation of the law relating to PILOTs, but agreed to comply with a recently enacted “local law governing the use of PILOTs.” EDC defended its treatment of PILOT funds as appropriate and in accordance with the law.

DOF, meanwhile, agreed with the audit's general findings and recommendations and has “taken steps to collect every penny owed the City by rebilling owners and retroactively restoring former PILOT properties to the tax rolls.”