Audit Report on the Administration of the Payments In Lieu of Taxes Program by the New York City Department of Finance

Executive Summary

The City of New York offers incentives to induce commercial, industrial and manufacturing businesses to undertake major capital investments that are expected to result in the creation and retention of jobs in New York City.  Payments in Lieu of Taxes (PILOT) are a property tax incentive that can be obtained through a project agreement with the City.  Under such an agreement, the City exempts property holders from paying real property taxes and instead agrees to accept a set payment (less than the expected real estate tax) for a period of years.

The New York City Department of Finance (DOF) is responsible for calculating PILOTs and issuing bills to property owners pursuant to a 1992 Amended Memorandum of Understanding between the New York City Office of Management and Budget (OMB), the New York City Economic Development Corporation (EDC), the New York City Industrial Development Agency (IDA) and DOF.  Currently, DOF manually calculates and bills the PILOT amount due based on the PILOT terms negotiated between IDA and individual project owners.

IDA is empowered by the New York State Industrial Development Act (Article 18A, Title 1 of the New York State General Municipal Law) to provide benefits to induce business owners to remain, establish or expand their businesses in New York City.  It provides companies with access to financing or tax benefits to strengthen and diversify the City’s tax and employment base, helps businesses locate and expand their operations within New York City, and encourages economic development by retaining jobs and creating new ones.

When a project’s PILOT benefit terminates because the property owner opts out or the property owner defaults due to non-compliance with the terms of the agreement, IDA issues a Tax Directive Letter (TDL) notifying DOF of the project benefit’s end.  The TDL alerts DOF to record the property on the City’s property tax roll and reestablish the levy of the real property tax.

Audit Findings and Conclusion

The audit found that DOF failed to accurately bill a total of $3.5 million in PILOT-related revenue during the period under review.  Of this amount, DOF underbilled a total of $1.3 million for four IDA PILOT projects and failed to place the properties of two terminated projects back onto the City tax roll in a timely manner, which resulted in $478,533 in additional uncollected tax revenue.  Further, we found that DOF miscalculated the PILOT for two projects and overbilled those property owners approximately $1.7 million.

Recommendations

To address these issues, we recommend that DOF:

• Determine whether the four sampled PILOT projects’ approximately $1.3 million in underbilled revenue can be recovered by the City and take all appropriate steps to recover all funds due.
• Determine whether any refunds are due to property owners who were overbilled and take all appropriate steps to notify the property owners of the overbilling.
• As part of its PILOT calculation, assess project owners for the portion of land utilized by any subtenants.
• Review all project agreements to identify and assess all the components of the methodology to ensure PILOT calculations are accurate.
• Consider utilizing its Property Tax System to perform its PILOT calculations.
• Request EDC provide DOF with annual submissions of Subtenant Occupancy Surveys. Then ensure that all PILOT calculations are adjusted accordingly to reflect current subtenant occupancy.
• Improve its processes to ensure that all PILOT properties are immediately returned to the City’s tax roll when projects’ PILOTs expire or are terminated.

DOF Response

DOF officials agreed with the findings related to the two terminated PILOTs that were not returned timely to the tax roll, but disagreed with most of the findings related to its inability to consistently apply the correct methodology when calculating PILOTs and stated that EDC officials either explicitly agreed with DOF’s calculations at the exit conference or did not object to them.  DOF officials also disagreed with the audit finding that Project # 861 was overbilled by $1.7 million because they claim that DOF has no way of determining if the methodology utilized to compute this figure is correct.  In total, of the seven recommendations, DOF agreed with three, partially agreed with two, and disagreed with two.

In objecting to certain audit findings, DOF took issue with our interpretation of certain lease terms, stating that “[t]he Comptroller’s Office drew inferences based upon literal translation of lease language, rather than seek clarification with the drafter of the lease(s) and the Law Department.”  DOF further stated that “[t]he Comptroller’s Office did not engage the Economic Development Corporation (EDC) for this audit. . . . [or] the Law Department, the City agency charged with litigating disputes that arise from leases that default due to non-payment of Payments In Lieu of Taxes (PILOT) or violation of other lease terms.”  In addition, DOF stated that “after review with DOF’s legal team, we have determined that the Comptroller’s Office went outside the scope of its own audit (which was limited to the period 2010 – 2015), as well as the statute of limitations, to formulate findings and recommendations.”

DOF’s arguments, however, are belied by the facts of the audit, which are described in detail in this report.  Moreover, to the extent that DOF’s objections to the audit findings are based on the notion that the public and the parties cannot rely on the “literal translation of lease language,” they are deeply troubling.  The language of the signed agreements between EDC and the lessees that DOF now selectively contends cannot be relied on, is supposed to represent the terms agreed to and binding on the parties.  To the extent that DOF comes to believe those terms do not actually reflect the parties’ intentions, it is incumbent on DOF to obtain written documents that clearly set forth the actual terms of the agreements.  The PILOT agreements must be based on clear and complete writings in order to ensure transparency, accountability and to protect the City’s interests.  If there is a drafting error or a change in the terms of the agreements, those agreements should be amended.

Additionally, DOF’s assertion that the auditors did not consult with EDC in connection with this audit is incorrect.  As the primary source of information for the PILOT agreements and related information, EDC was involved in the initial and subsequent audit discussions.  In fact, we had numerous meetings with EDC and sent EDC officials copies of both the preliminary draft and draft audit reports.  In addition, EDC officials attended the exit conference at which the preliminary draft audit report was discussed.

Further, DOF’s contention that the audit exceeded its stated scope and the statute of limitations reflects a fundamental misunderstanding of the audit process and the Generally Accepted Government Auditing Standards (GAGAS) that govern our work.  While the audit was designed to cover Fiscal Years 2011 through 2015, much of the information analyzed from this scope period resulted from decisions and activities that occurred prior to Fiscal Year 2011.  Therefore, pursuant to GAGAS, we have appropriately considered relevant information outside the audit scope period where necessary.