Audit: Town owes $3.4M

By COURTNEY LAMDIN | Staff Writer
courtney@miltonindependent.com

"If I were to tell you we’d be rich after Husky comes in, it would be a lie.”

Those were Town Clerk/Treasurer John Cushing’s words back in 1996 when Husky Injection Molding Systems announced it would locate to Milton.

He was addressing citizens’ concerns about the business that planned to bring 1,000 jobs and $1 million in local tax revenues to town.

Sixteen years later, Vermont Auditor Tom Salmon might agree.

Salmon released a report last Thursday that alleges Milton mismanaged its tax increment financing districts where Husky is located and owes the state $3.4 million in back education taxes.

The 48-page report, “Tax Increment Financing Districts: Town of Milton Appropriately Established Districts, but the Administration was Flawed” was made public on Thursday, Jan. 19. The audit began a year ago.

The town responded to the report immediately, saying in a press release that Salmon misinterpreted the TIF statutes and purpose of TIF districts. In a follow-up interview, Palaia said Milton doesn’t intend to pay a cent back.

Salmon’s main contention is Milton broke TIF administration rules dating back to March 1998, when Milton formed its first two TIF districts for the Catamount Industrial Park and Husky Injection Molding Systems off North Road. The districts are geographically separate but considered whole by the state.

TIF districts are development tools that allow towns to use a portion of state education tax revenue for infrastructure projects. The auditor’s office reviews the state’s TIF districts every four years. Milton’s is the second audit.

Milton has three TIF districts, the most in the state. The Town Core TIF was just approved in April 2009 and is not subject to this report. (See more on Milton’s TIFs here.)

Salmon’s report says Milton used $3 million of accrued TIF revenues to pay for ineligible purposes, including expenses unrelated to the district and for direct construction costs, specifically for the wastewater treatment plant expansion and sewer line down Route 7. These projects were needed to secure Husky’s move to Milton and to provide sewer capacity for the industrial park.

The audit also says Milton didn’t submit timely reports or create ways to measure the TIFs’ goals, like job creation and development.

Palaia said Salmon’s interpretation of the statutes “vary with the legislative intent and purpose of the TIF districts,” and said laws have changed multiple times since the first TIF legislation passed in 1985.

Salmon’s report explained

Milton owes $3.4 million to Ed Fund: According to Salmon, Milton set up its TIF districts correctly – holding required public hearings and getting state approval for planned improvements – but didn’t comply with statute in implementing them.

He specifically noted the “proportionality” section of the law, which allows towns to keep a portion of local and state tax revenue.

When TIFs are formed, the town freezes the assessments of all the properties in the district and adds them together. This is called the base. Every subsequent year, the town calculates the increase in value – called the increment, the “I” in TIF – and the town and state get a portion of the increased revenue.

Up to 2006, towns could keep 100 percent of the state increment, but Salmon and the town of Milton disagree about how the current law divvies up the taxes.

Act 184 of that year said after the town takes on debt, both the town and state must contribute up to 75 percent of the increment to pay down that debt. This is what Milton has done since, Palaia said.

Salmon says the town calculated incorrectly. He says towns can only keep the amount of increment needed to pay down debt. That’s to say if a project cost $1 million, and the town needed $50,000 to pay the first loan payment, it should only retain the percent of revenue needed to pay off this debt; the rest of the state portion should be given back to the state, the report said.

That’s how Salmon arrived at the $3.4 million figure.

Palaia said since the TIFs’ inception, Milton has run its plans by the Vermont Economic Progress Council, an arm of the Vermont Department of Economic Development, which approves TIF applications and is considered the state expert on how TIFs work.

“That would create an interesting liability for the state,” Palaia said of Salmon’s conclusions. “We’re taking these actions relying on the advice of state officials.
“It was never our understanding that we retained [only] what was due every year,” he continued. “That kind of counters having a TIF fund.”

Salmon’s audit of the town of Newport’s TIFs, one of the first in the state that predated Act 60, came to similar conclusions. In that report, published in June 2011, Salmon said Newport owes $81,600 to the ed fund.

Milton spent $3 million on ineligible purposes: Salmon also included calculations showing how Milton used $3,037,000 in TIF revenue to pay for construction or costs unrelated to the TIF – both not allowed by current statute.

All TIF projects are included in a financing plan approved by VEPC. Salmon’s report says Milton spent $2,838,000 on direct construction and $177,000 on other projects. The remainder was a loan payment outside a defined borrowing period.

“Town officials appear to have used their own judgment to determine how incremental property tax revenue should be used, rather than referring to the requirements delineated in the statute,” Salmon wrote.

Salmon says towns can only use tax revenue to pay down or prefund debt. Instead, Milton used accruing TIF funds to pay construction costs for the wastewater treatment plant on Lamoille Terrance and for the sewer line that runs to the industrial park.

Palaia, who was not town manager at the time, didn’t dispute this claim: “I think we did pay directly, and I don’t see that as being a problem,” he said.

The town used water/sewer funds to pay for some of these projects and repaid those funds with TIF revenues, the report said. Salmon said taking on debt is a must.

At the town’s legislative breakfast in mid-December, Town Clerk/Treasurer John Cushing said the town thought it did everything by law – or what the town thought the law would be when it was finalized.

VEPC wasn’t even created when Husky was built in 1997 – the same year that Act 60 was passed, creating the state education tax and further complicating TIF legislation.

“No one understood what the law was, so everybody was making judgments on it, which we felt financially was the right thing to do,” Cushing said.

“We had the cash. We set that aside in an account, which was audited annually,” he continued, noting the TIF funds. “Why would you borrow when you’ve got money in the bank?”

Next steps

Besides asking for the $3.4 million in taxes, Salmon’s report ended with suggestions for Milton’s oversight of TIFs.

He recommended Palaia designate an employee to document how to administer TIFs, including how to calculate the increment, and assign an official to monitor TIF progress against measurable targets like job creation, additions to the tax base and increased development.

What comes next is somewhat unclear. As auditor, Salmon doesn’t have authority to enforce his report, he said. Any payment arrangements would go through the Department of Taxes, which could set up a payment plan with Milton, Salmon said.

Bill Johnson, director of DOT’s property valuation and review division, said the tax department could send out a bill to collect, but because Milton’s audit reported such a high, contested figure, he’s not sure how the issue will proceed.

“We have to let this play out a bit,” he said. “Newport acknowledged that a certain amount of the money they shouldn’t have had, and the assessment on them was not contested. We’ll have to see what happens over the next few months.”

For Salmon’s part, he’ll continue auditing the Burlington and Winooski TIFs and write a capstone report, summarizing common problems between towns. He said his office usually follows up on audits every two years.

In the meantime, Salmon said Milton will turn to the legislature “to fix their problem.”

“That’s really none of our business,” he said. “We’ve done our job, and we’ll be answering questions.” He plans to meet with the House Ways and Means Committee this week.

As for Milton, the town will analyze the report further and release a statement so the public better understands the town’s position, Palaia said.

“What the legislature and what the administration choose to do with these conclusions and recommendations remains to be seen,” he said. “The town’s level of response will depend on what those bodies intend to do.”

Read more on TIF districts:

Turner on audit: 'Outrageous'
What are TIF districts?
Where are Milton's TIF districts?