Administrative Complexity, Staff Turnover, and Poor Recordkeeping Contributed to Millions of Dollars in Mistakes.
Tables and map were taken from Report.
Vermont Business Magazine State Auditor Doug Hoffer released a new audit today of Burlington’s Waterfront TIF district. TIF districts allow municipalities to designate an area for public infrastructure improvements, incur debt to pay for the work, and use a portion of the area’s property tax revenue growth, which would normally pay for education, to pay back the debt. During the last decade, the City has issued nearly $16 million of bonds for public improvements in the Waterfront TIF such as the Moran Frame, Waterfront Access North, Bike Path, and Waterfront Park projects.
“This was one of the most difficult audits my office has ever conducted,” said Hoffer. “Managing the complexities of this TIF district proved challenging for even the largest municipality in Vermont. A number of factors explain the problems we found – poor recordkeeping, key staff turnover, and slow adoption of strategies recommended by the City’s own auditors. In a way, each factor compounded the others.”
Key findings of the audit include:
- The City struggled to produce accounting records that showed how they paid for various improvements, resulting in the City needing to revise its records as issues were uncovered during the audit.
- The City did not provide adequate evidence to substantiate that $173,056 of bike path rehabilitation costs was for work inside the TIF district boundaries, making those costs ineligible to be funded with TIF.
- The City underpaid the State Education Fund and owes an additional $197,510.
- The City spent $1 million more for certain project costs than was authorized by voters. Disarray in records and a lack of documented procedures for accounting for TIF improvement projects were the main causes of this mistake.
- The City’s errors were so numerous and of so many different types, it is clear a new process is required to reduce the risk of significant errors in the future.
For full report, click HERE.
Hoffer added: “Advocates for the TIF program frequently suggest it is a straightforward and effective tool for municipalities to fund public projects. This audit paints a much different picture. Despite the best efforts of City staff, millions in errors were made, and the City has had to hire two different consulting firms to help clean things up. And it isn’t a cheap way to pay for infrastructure. We estimate Burlington will pay more than $11 million in interest for $32.6 million borrowed to pay for improvements.
"With unprecedented levels of federal infrastructure money and massive amounts of unexpected state general fund money at Vermont’s disposal, the question is not whether we should support municipal infrastructure investments, but rather how to do it at the best cost, with the least unnecessary complexity, and resulting in the broadest benefit to communities across Vermont.”
Burlington Mayor Miro Weinberger released the following statement today in response to the report:
“The State Auditor’s report on the City’s Waterfront TIF District documents significant errors in the district’s administration. The City regrets these errors and will take prompt action to resolve them completely.
"The Auditor’s report covers an 11-year period beginning in 2011 and, regrettably, it is unsurprising that the City made major errors early in this audit period, as we had fundamental issues in our financial systems at that time, which in 2012, resulted in a downgrade to the edge of junk bond status and financial disaster. From the day I took office that year, fixing the City’s finances has been one of my highest priorities. While we continue to make improvements, we have made great progress, eliminating $24 million in deficits and restoring our AA credit rating to save taxpayers and ratepayers tens of millions more.
"That work has put us on a strong financial footing that will allow us to address the findings of this report without impact on operations or tax rates, and to continue the growth on our waterfront and in our downtown that the TIF program has supported for decades.”
See the City's itemized response below.
In 2013, the Legislature required the Auditor’s Office to conduct a series of audits of each TIF district in Vermont to prevent errors and mismanagement which could negatively impact the state’s Education Fund. Burlington has two TIF districts. This audit focused only on the Waterfront TIF, which despite its name also includes portions of downtown including the former mall property. An audit of the City’s other TIF district will commence in the next 8 to 12 months.
Hoffer said: “Policymakers established laws and rules governing municipalities who’ve been given the privilege of withholding funds from the Education Fund in favor of funding local capital projects. One of the added challenges of the TIF program is that from time to time, communities seek specialized rules for their towns or law changes to excuse them from regulatory or auditing findings. Each time this happens the program becomes more complex and less accountable. I hope policymakers let the rules be the rules, and that they consider simpler, cheaper strategies for the future.”
Miro Weinberger responded to the report of State Auditor Doug Hoffer on the recent audit of the City of Burlington’s Waterfront Tax Increment Financing District. The City has worked collaboratively with the Auditor’s office for over a year and will promptly complete adjustments necessary to address the errors documented. The City previously instituted significant improvements to its project accounting systems that are otherwise responsive to the Auditor’s findings and is well-positioned to make financial adjustments that will have no impact on the City’s operations, nor will they trigger a need to increase tax rates.
City of Burlington Response
The City disputes some of the findings and characterizations of the report, most notably the Auditor’s statement that Burlington’s “errors” have resulted in nearly $200,000 being owed to the State Education Fund. However, the City is committed to continuing the already ongoing process with the State Tax Department intended to ensure that payments to the Fund are accurate and complete.
Burlington’s Chief Administrative Officer Katherine Schad stated, “Since I joined the City team in early 2020 I have taken multiple steps, with the support of the Mayor and City Council, to address issues with the City’s project accounting system first identified by our auditors in 2018. While this work was slowed by the pandemic, we have now added two senior accountants, an ongoing relationship with a respected consulting firm, and an independent trustee in place to help us manage our TIF districts. I am confident that with these resources now in place Burlington will no longer experience the accounting issues that have previously challenged the administration our TIF districts.”
Background on Waterfront TIF District
Tax Increment Financing is a State program that allows municipalities to invest in public infrastructure by paying up-front the public costs from the full anticipated increase in tax revenue generated by the project. The City established the Waterfront TIF District in 1996 to redevelop Lake Street and nearby waterfront property. The District was expanded in 1997 to support new housing and parking between the lakefront and Church Street. Public improvements paid for by Waterfront TIF District bonds include investments in Waterfront Park, the Bike Path, Lake Street, Waterfront Access North, the Moran Frame, and the Skate Park, as well as public improvements that have helped make possible the building of a new Community Sailing Center, the ECHO Sustainability Park, and the Burlington Harbor Marina. The Waterfront TIF district is currently expected to fund more than $15 million in further public infrastructure improvements on the blocks surrounding the CityPlace project in the years ahead.
Impacts of Audit Findings
The audit period was for fiscal years 2011 to 2021, and the City participated in the audit process from September 2021 to January 2023. The net effect of adjustments in response to the audit will be a reduction of the City’s Unassigned Fund Balance (UAFB) of approximately $500,000. The City has an additional potential liability of $197,510 regarding discrepancies in Education Fund calculations which the City will work to resolve with the Vermont State Tax Department and private contractor New England Municipal Resource Center (NEMRC).
Though the Auditor’s report characterizes certain increment calculations as City “errors,” many of these calculation differences arose due to programming problems within the State’s property tax data system, administered by the private contractor NEMRC, and the balance stems from an unresolved dispute over how a former garage should have been taxed. The process to resolve these issues is underway and the City is committed to paying any funds owed to the Education Fund agreed upon with the Tax Department and NEMRC.
Since 2015, the City has had a Fund Balance Policy that commits the City to maintain the UAFB at 5-15% of the annual operating expenses to serve as a reserve for unexpected expenses. Following the audit adjustments (including adjustment for up to $197,510 in Education Fund payments if necessary) the UAFB funds will continue to exceed the 10% target balance and no adjustments to operations or tax rates will be needed to maintain this healthy level of reserves.
The City will promptly take the following steps to fully resolve the finalized audit findings:
- The City will transfer a total of $1,181,034 from its General Fund to Burlington’s Waterfront TIF District fund. This transfer will come from two sources:
o $681,040.49 from unexpended Waterfront Access North (WAN) sources that have not yet fully been drawn down (in part because expenses were previously improperly applied to the Waterfront TIF District instead of WAN)
o $499,993.51 from the City’s Unassigned Fund Balance
- The City will correct the Waterfront TIF payment of $173,056 of ineligible expenses through one of the three options supported by the SAO (see page 55 of the SAO report)
- The City will complete the ongoing process with the Vermont State Tax Department and NEMRC to determine whether further payments are owed to the Education Fund
Steps the City Has Taken to Address Project Accounting Systems
In 2012, the City was downgraded to the edge of junk bond status when an annual audit found 12 material weaknesses and noted particular problems within the City’s capital project accounting, documenting nearly $24 million in deficits owed to the General Fund. Since that time, after much hard work, the City has eliminated all of the material weaknesses and long-term deficits to regain its AA credit rating.
Nonetheless, the City recognized in 2018, following its own annual audit of the fiscal year 2017, that its project accounting systems needed additional improvement, and has taken the following actions since then:
- In January 2019 the City engaged the accounting and management consulting firm BerryDunn to review project accounting practices, procedures, and technology;
- In August 2019, the City created a Public Works project accountant position;
- In February 2020, the City hired the management consultant firm Clifton Larson Allen to develop and implement overall capital accounting policies and procedures for the City and to reconcile past accounts;
- In April 2021, the City hired a Senior Accountant to specialize in project accounting and hired MuniCap, a public finance consulting firm nationally recognized as TIF experts, to help the City manage the finances and administration of the Waterfront and Downtown TIF Districts;
- As of July 2021, the City had fully implemented project accounting for the City’s capital funds allowing Clifton Larson Allen to focus on instituting project accounting for the City’s TIF projects; and
- In August 2022, the City established a Trustee to hold TIF funds and pay invoices on the City’s behalf. This Trustee provides another level of oversight to ensure that TIF administration is handled correctly.
Full Comments from City Management to the Auditor can be found on page 55 of the report in Appendix VIII.
1.23.2023. MONTPELIER, VT – State Auditor