School districts were underpaid in economic development deals

Two Ohio cities underpaid their local school districts more than $6 million due to miscalculations over a common type of development agreement in which some property taxes are withheld from the schools and used instead to fund the developments’ roads or other infrastructure.

Lebanon recently repaid two school districts just shy of $4 million after discovering one of the miscalculations. In 2017, the city of Green, near Akron, paid $2 million to a local school district because of the same oversight.

Warren County Auditor Matt Nolan said this week he fears these mistakes are the tip of the iceberg because problems are almost inevitable accounting for millions collected in these kinds of deals - called tax increment financing districts (TIF).

“I can say with some level of certainty, that any school district that has a lot of TIF districts is going to have some errors in their payments,” Nolan said. “Not that they can’t be fixed, not that they are large, but the process itself is too demanding to have them perfect.”

Local governments, schools need training, plan to manage process

Sean Fraunfelter, a certified public accountant brought in to help figure out the Lebanon and Akron-area underpayments, said the mistakes have occurred because some local governments and school districts are under-staffed and ill-trained in the intricacies of TIF-accounting.

“You have to have a process in place,”said Fraunfelter. He is also the finance director for the Dayton Montgomery County Port Authority, Warren County Port Authority and Montgomery and Butler county transportation improvement districts.

Last year, there were 365 tax increment financing districts in the 10-county Dayton region. This ranged from 140 in Butler County to one in Preble County, according to the Ohio Development Services Agency, the state’s TIF clearinghouse.

Most TIFs involve multi-million dollar business developments in which some or all of the property taxes on the improvements are withheld and used instead to cover debts taken on to pay for sewers, roads or other infrastructure. Many TIF agreements also include a smaller payment, called a Payment in Lieu of Taxes, to be made directly to school districts alone. It is those PILOT payments that were miscalculated and underpaid over several years in the Warren County and Summit County examples.

The calculations setting aside payments in lieu of taxes (PILOT) are set up through agreements between local governments..

No state agency oversees the distributions from these deals.

“We do not have oversight responsibilities for payments in lieu of taxes. I recommend you speak to the local organization that formed the TIF,” emailed Todd Walker, chief communications officer for the state development agency - and TIF clearinghouse.

“It’s not something we monitor or are directed to. It’s strictly a local matter,” said Gary Gudmundson, communications director for the Ohio Department of Taxation.

Mistakes are unlikely to show up in state audit reports.

“If an entity corrects a mistake (such as repaying an underpayment) before our office looks at their financial statements, then we would be able to see the correction but it would not show up in our report,” Jake Gordon, Ohio Auditor of State emailed in response to questions.

Two cities underpaid 3 districts $6 million

After discovering it underpaid on its TIFs, Lebanon City Council recently approved payments $2 million to the Kings Local Schools and $1.9 million to the Lebanon City Schools, based on Fraunfelter’s calculations of underpayments on 29 TIFs.

The problem was recognized in 2017 when local officials noticed there was more than $5 million in the city’s TIF fund and all the improvements were accounted for and in place.

Fraunfelter was hired at a cost of $4,000 to sort out the problem.

For example, in a TIF on a E-Beam Services development, the city started reimbursing the Lebanon school district $7,477 a year for 13 years, starting in 2003. But that PILOT payment was supposed to have grown every year, according to City Auditor Dan Burke.

The school received $96,811 when it was due an additional $262,124, Burke said.

“Each of the parcels had similar issues,” he said in an email.

The city plans to end the TIF districts by July 1, 2019.

“None of the existing agreements will be replaced,” Burke added. “The City would not rule out using T.I.F. funding in the future but we would structure the agreements in a way that is easier to monitor and administer.”

TIFs have been established along North Broadway in Lebanon as part of efforts to redevelop this corridor, just north of downtown.

Tip of the Iceberg?

Nolan indicated other Warren County districts probably had miscalculated PILOT payments.

However treasurers from Springboro, Mason, Franklin and the Little Miami districts in Warren County said they had not had this problem.

Nolan, who oversees the incentive review councils in Warren County, said the problem was statewide and long-standing.

“This is an ongoing problem around the state, but has nothing to do with county Auditors. The school district and local entities work out agreements and often do not include the County in them at all. We have no way of knowing what is owed on TIFs and no way of enforcing the agreements if we do,” he said.

What can be done?

Nolan said property calculations are sometimes so complicated, mistakes are made occasionally in his office. He said he had tried unsuccessfully to include closer scrutiny of the school payments in lieu of taxes diverted for TIF review councils.

“I have been working to have my office more involved in these, but the ORC (state law) does not include the Auditor in them at all,” he said in a series of emails answering questions about Lebanon’s agreement with the Lebanon and Kings districts.

Nolan and Fraunfelter recognized Lebanon for identifying the mistake and publicly acknowledging the settlement. Green did likewise, although there is no legal requirement.

Under the current process, school treasurers are responsible for ensuring their districts get what they are supposed to.

Acknowledging the complexity, Fraunfelter said he includes seven to 11 pages of documentation explaining PILOT payments.

“That’s what they should be asking for,” he said..

Tax Increment Financing Districts, By County

Butler: 140

Warren: 98

Montgomery: 84

Greene: 11

Darke: 10

Champaign: 8

Miami: 6

Clark: 4

Shelby: 3

Preble: 1

Source: Ohio Development Services Agency

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