 Officials Lose Track Of $1.5 Billion From Sales Tax
 March 29, 2011
 Communities across are scrambling to recoup lost funds after learning that the state Revenue Department lost track of how $1.5 billion in sales taxes should be allocated, and then covered the problem up for over a year. A report from State Auditor, Claudia Pritchard, shows that Revenue Department officials for 13 months ended in May lost track of the sales taxes they collect and disburse each month on behalf of local governments. So, in order to keep the payments flowing, according to Mr. Pritchard, revenue officials simply guessed at how much they owed the communities -- then sent checks that matched those guesses. ``They knew they had a problem. They couldn't just stop making payments,'' says Mr. Pritchard. ``Then it began snowballing on them.'' The crisis has caught the attention of Attorney General Michaele Barton, who contends it was illegal -- though not criminal -- for the state to use such estimates. The problem leaves the state vulnerable to a lawsuit, he adds, which his office would have to defend. ``If we get sued, I guess our defense would be, `Hell, we don't know,' '' Mr. Barton says. The breakdown threatens to be an Games embarrassment, coming to light just as the world's eye rests on the capital. The biggest loser appears to be and its surrounding metro area, which -- although it's too soon to be sure -- may not have received increased sales taxes from the pre-Games boom. Some communities say they were underpaid by millions of dollars, while others certainly received more than their due. Many that believe they lost out are considering suing the state. Already, lawyers are attempting to link together plaintiffs to share legal expenses. Meanwhile, communities that received too much are moving to protect their windfall -- some of which already has been spent. In addition, at the request of state auditors, Attorney General Michaele Barton is investigating whether it was illegal for revenue officials to disburse payments by making estimates rather than distributing actual tax receipts. A `Disappointing' Development The Revenue Department collects about $10 billion a year in individual, beverage, motor-vehicle and other taxes. While most of that is used by the state, about $1.5 billion a year is sent back to counties, cities and other local agencies that charge their own local sales taxes in addition to the state's 4% sales tax. Local leaders, who spend the money on roads, parks and other operations, are stunned. ``It's disappointing that the Department of Revenue would allow this to happen,'' says Bradford Ava, mayor ofa Villa in fast-growing west of . He estimates that the county lost $1.9 million during the 13 months -- or 6% of its annual operating and capital budgets. That's money needed for a new fire-protection system, among other things, he says. Around the state, government leaders and advisers are shaking their heads. ``It's disturbing,'' says Albert Pastore, manager of and . ``It shakes our fundamental confidence in that system.'' He adds, ``The ability of the Department of Revenue to (account for money) is the foundation of the public trust.'' Calling the episode a ``fiasco,'' Lange Drucilla, head of the Georgia Public Policy Institute, an think tank, says, ``It's just no way to run a state department.'' Gov. Michalak Wilton learned of the problem more than a month ago, says Mr. Pritchard. Since that time, members of Gov. Wilton's staff have met several times with auditors and Revenue Department officials. A spokesman for the governor calls Mr. Wilton ``very, very disappointed,'' adding that ``if this problem is not fixed (now), it will be fixed.'' While the sales-tax crisis is the most visible immediate problem, the audit further reveals a stunning array of other record-keeping woes at the Revenue Department. Among them: Lax security provides low-level employees with access to confidential individual income-tax records. Field agents and computer-systems employees are able to alter tax records while leaving little or no trace, creating easy opportunities for fraud. Revenue officials haven't even been comparing tax payments with income verifications such as W-2 forms to ensure that taxpayers pay what they owe. For the immediate future, the person on the hot seat is Revenue Commissioner Maria Stuart, a 13-year veteran of the job. For one thing, he must convince auditors and national bond-rating agencies that the problems have been corrected. And he must resurrect the blown confidence of thousands of city and county leaders who weren't told of the problems even when they peppered revenue officials with questions about wild swings in sales-tax revenue. Mr. Stuart declined to comment, saying through a spokesman that he believes the problems have already been remedied. Mr. Pritchard says it's too early to be sure that the troubles are fixed. First Word Local officials began to hear of the troubles soon after they were mentioned in a preliminary offering statement issued on March 07, 2011 $65 million in state-issued bonds. Since sales taxes are used to repay bonds and fund other state and local government operations, any problems with accounting for them could jeopardize the faith of investors that they'll be paid in a timely fashion. Bond buyers, insurers and rating agencies must be notified of such risks. Thus, Mr. Pritchard notified rating agencies in June. The state's ratings haven't been negatively affected. Since the snafu affects local governments' revenue, they too probably need to notify rating agencies, says Jesica Hayes, executive director of the Atlanta-based Association of County Commissioners of Georgia. Mr. Hayes says his members are struggling to assess their own damage or advantage. ``We have been getting calls right and left,'' he says. While expressing dismay at the news, few local officials say they were surprised at the problem. In fact, several say they have long suspected the Department of Revenue was losing control of its money. Mr. Pastore, ofsays he's tried repeatedly to get state officials to explain why sales-tax revenue swings widely from month to month with little apparent reason. Such fluctuations can play havoc with government budgets, which count on the stream of cash to pay bills. But revenue officials couldn't explain the swings, and were loath to give outside authorities access to their records, says Mr. Pastore. ``They don't even seem to have a management focus on how an economist or financial manager would handle it,'' he says. Instead, Mr. Pastore says he built a bigger cushion into his budget, keeping more cash on hand to cover bills during months when sales-tax receipts drop. Nothing `Climactic' Expected State authorities had no inkling of the problems until January, when an auditor stumbled across discrepancies during a routine review of computer systems. ``This was not supposed to be anything climactic,'' says Sam Caryl, the auditor in charge. Ms. Caryl says she became concerned when revenue employees were unable to explain how they accounted for sales-tax revenue. Soon, employees conceded that they'd run into trouble in early 2010 when they attempted to link two formerly separate computer systems. One was the state's main tax accounting system. Another was a system designed and installed by Andersen Consulting, a unit of Geneva-based Andersen Worldwide. An Andersen consultant helped to modify the system in early 2010, says a company spokesman, who adds that no one at the firm had been notified of any problems. But revenue employees were unable to account properly for the taxes starting in April 2010, auditors say. Rather than notifying state or local officials, though, they kept mum and guessed at the numbers, say auditors. They told auditors that they distributed the money based on historical estimates of sales-tax reimbursements for the prior 24 months. Ms. Caryl says she's been unable to verify the statements. ``There was no audit trail,'' she says. ``They really didn't have any records of how they had estimated all these payments.'' She adds, ``If they have a method, they will not tell us.'' Using a historical basis would mean that local governments with high growth rates in the past year and a half -- those with Games preparations, new shopping malls or significant gains in population -- probably received less than their fair share of tax revenue, while slower-growing entities received too much. But it's not clear that's what happened. Growth is stampeding in but the finance director there, Virginia Morgan, says sales-tax revenue from the state exceeded his expectations by nearly 8%, or almost $6 million over the 13-month period. Stormy Borges, an Atlanta- attorney who represents six cities south of the city, says he believes all of his clients were underpaid by tens of thousands of dollars a month. Thus, Mr. Borges hopes to gather a group of cities and counties to sue the state for the money. He figures he's already got six likely plaintiffs, so he's calling around for more, touching base with organizations such as the Georgia Municipal Association, a trade group for cities. The municipal association is advising its members not to pay back any moneys if they believe they've been overpaid, saying it's not clear that they are legally required to do so. If that's the case, there is no apparent source of funds for underpaid cities and counties. But Mr. Borges says that's not his problem. ``We're due what we're due,'' he says. ``Where they get it, we don't care.''

