Tax anticipation loans — helping or hurting Connellsville?
EDITOR'S NOTE: This is the fourth in a series of articles concerning the City of Connellsville, its financial problems and what the future might hold. Today, the tax anticipation loans the city takes out to cover its expenses.
Connellsville City Council will soon begin preparations on its 2014 spending plan.
That means looking at where money will come from to be able to cover the expenses incurred throughout the year.
During the past six years, the city has taken out a tax anticipation loan at the end of the year in order to help meet expenses.
The tax anticipation loan helps governments keep balance with their revenue cycles when the timing of the government's revenues do not match the timing of its expenditures. The government body then will use the following year's tax revenue to pay off the loan.
Connellsville City Treasurer Judy Keller said the tax anticipation loan is to see the city through until March, when the early returns come in from real estate taxes.
But, she said, the city has used the loan to keep itself afloat for 12 months.
Keller said that since 2007, the city has paid approximately $83,000 in interest on tax anticipations loans.
“The purpose (of the loan) is to give the city enough cash on hand to meet obligations from Jan. 1 until taxes start coming into the coffers,” said Connellsville Councilman Brad Geyer, who is also director of the city's finances.
Geyer said if it weren't for the tax anticipation loan, also known as a Tax Anticipation Note (TAN), the city would not have the money to operate for the first few months.
“The TAN keeps everyone working and the city functioning without disruption,” Geyer said.
The city has taken out the loans for several years, always making payment back to the bank before year's end.
However, last year, the city found itself unable to make payment on the principal of $450,000. That forced council to take out a tax anticipation loan of $675,000.
The city used $450,000 from the $675,000 loan to pay off the 2013 tax anticipation loan from Scottdale Bank & Trust, Geyer said. That left the city with $225,000 to pay expenses until 2013 tax revenue started to come in.
The $675,000 loan is a one-year loan with a 2 percent fixed interest rate and no bank fees. Geyer said because of the bank's assistance, the city avoided a property tax increase and other cuts to services.
Scottdale Bank & Trust officials said they could not comment on the loan since it was a contract between itself and the city.
Geyer said the city is paying off the interest on the loan. He believes the city will be able to pay off the entire loan by year's end.
Geyer puts much of the blame for the city's financial problems and need for additional tax anticipation loan money on Central Tax Bureau, also known as Centax.
Until 2012, Centax collected several taxes for the city, including the Earned Income Tax, a flat rate of one percent of a worker's earnings.
Centax blamed software problems and claimed that it would catch up, but it ended up closing its doors. There was never any evidence Centax employees stole money, but simply fell woefully behind in processing payments.
Geyer said the city has collected between $7,000 to $10,000 that Centax had in its files.
“However, the city was still short of money that seems was not collected,” he said. “We are working with Southwest Regional Tax Bureau to collect. We have had good talks with them and have a plan as to re-billing and going after delinquent money owed to the city.”
Centax also collected Occupational Privilege Tax, Mercantile Tax, Real Estate Tax, water and sewer fees and other taxes for the municipality.
“We believe we are going to collect the funds that are owed to us,” Geyer said. Southwest Regional Tax Bureau has become the city's tax collecting agency that replaced Centax.
Council passed a $3.7 million 2013 budget which kept millage at 6.66.
Councilwoman Marilyn Weaver, at the time, did not support the spending plan. She suggested a small tax increase. At the time, she also voiced concerns over the tax anticipation loan.
At the time of the budget adoption, Councilman Tom Karpiak said the bank didn't just decide “willy nilly” to give the city more money.
He said the taxes were being collected but the city wasn't receiving them through Centax. He said at the time the city was in a dire situation once the company shut down. He believed a tax increase should be a last resort.
Weaver, at the time of budget adoption, said that by overestimating the revenues coming in, the city had done a disservice to the residents, and apologized for the action.
In speaking with officials from several other municipalities, Keller said they did not report budgetary problems due to the Centax issues.
Aaron Zolbrod, a Connellsville business owner and city council candidate, has publicly questioned council on inflated budget figures and its tax anticipation loan.
“People keep bringing it up to council and they are ignoring it. Instead of facing the problem head-on, they act like it doesn't exist,” Zolbrod said.
Connellsville Mayor Charles Matthews and Geyer disagreed.
“If the Centax thing wouldn't have been there, we'd be OK with the changes and the cuts we made over the years,” Matthews said. “But I think it will work out.”
What will happen in the coming year? Will the city see a need for another tax anticipation loan? And for how much?
Geyer said it's too early to say, but he and Matthews believe the city will need to ask the bank for another TAN. In what amount, neither could guess.
“Even if you raise taxes, it's going to take a couple of years to get that tax money,” Matthews said. “It's really going to depend on where the budget is now.”
“I'm sure we will need one for next year,” Geyer said. “But it's early.”
Geyer said he believes the city will be able to make full payment on this year's loan when it is due.
But what about next year?
“What happens if we don't get the tax anticipation loan next year? What happens when we get cut off?” asked Zolbrod.
Zolbrod has said he worries that when the city pays back the $675,000 loan, it could be left with a shortfall.
Keller worries that the city depends too much on tax anticipation loans. She has other concerns as well, including taking money from other accounts to help fund the general budget to keep the city afloat.
“Starting in 2007, they took $30,000 out of the parking lot fund to pay bills and make sure the city was operational throughout the year,” Keller said.
In 2008, that practice continued when officials took $40,000 from the parking lot fund to help pay bills. It continued each year and in 2012, $124,000 was taken from the parking fund. “That's robbing Peter to pay Paul,” Keller said. “To me, it's not good finance.”
Keller also worries there may be a practice of inflating revenues in the budget during its preparation, a concern voiced by Weaver during budget adoption late last year.
For example, Earned Income Tax budgeted for the city for 2008 and 2009 was $500,000 each year. The city did receive $545,037 in 2008, taking in $45,037 more than budgeted. But in 2009, the city only took in $440,826. That's $59,174 less than budgeted.
After that, when preparing the 2010 and 2011 budget, council set the Earned Income Tax line item at $570,000. In 2010, the city only collected $516,456, a difference of $53,544.
That collection rate went down to $422,374 in 2011, a difference of $147,626.
In 2012, budget preparers lowered the Earned Income Tax line item to $550,000, but the city still received no where close to the estimation. The city collected $367,579 — $182,421 less than estimated. Council has said the 2012 figure is lower due to the collection issue with Centax.
Keller said she has spoken to other leaders in other municipalities. The appropriate way to set budgets is to take the line item amounts received for the last five years and average them out to determine what next year's budgeted line item would be.
With the data from the last five years of received Earned Income Tax, the average comes to $440,254.
The 2013 budgeted line item for Earned Income Tax for Connellsville is $550,000. As of July 31, the city received $258,964.
“Why are these line items and revenues so high when we didn't get those before?” Keller said. “I've said it publicly and to the council, I've talked about it at budget meetings for two and three years: Stop inflating the revenue to balance the budget.”
Keller said inflating budgeted revenue items and continuing to take out tax anticipation loans are practices that will come back to haunt the city.
Geyer said when preparing the city budget, council starts with the current year and uses it as a benchmark. He said they evaluate each area of income to determine if there may be an increase or a decrease in each revenue stream.
He said council looks over a number of previous years to see historically what unexpected changes impacted previous budgets.
“There is always that possibility (of a tax increase),” Geyer said. “This council has made every effort to not raise taxes and I know we will continue to do the same.”
Matthews said it's too early to tell if taxes will be raised next year.
“With everyone else around here raising taxes, we tried to take it easy,” Matthews said.
Zolbrod agrees with Matthews and Geyer and Karpiak. He said he doesn't think it's fair to raise anyone's taxes. It should be a last resort.
But, he has said publicly, the city needs to find ways to generate new revenue and to look closely at the budget and cut items. He said every department in the city should look at the budget and look to see where cuts could possibly be made.
Keller said most taxpayers could handle a small increase of possibly a quarter of a mill every year. But it's when governing bodies wait and must force the inevitable two to three mills all at one time on the taxpayers that causes distress.
“Nobody wants anyone to lose their job, but you've got to do whatever it is for the best interests of the community,” Keller said.
Keller said she fears tax practices and the inflating budgets have brought up many red flags that trouble could be on the way. “I hope for the good of the city and the people here that I'm totally wrong, but now it doesn't look real good,” she said.
Next: What does the city's future hold?
Mark Hofmann is a staff writer with Trib Total Media. He can be reached at 724-626-3539 or firstname.lastname@example.org.