The Department of Finance is costing New York City millions of dollars. It’s as simple as that. An audit by my office has found that the Department has failed to accurately calculate tax benefits under the Section 421(a) housing program, which provides tax exemption benefits to owners of residential real estate property who construct new multiple dwellings or convert, alter, or improve existing buildings for residential use.
The program was created in 1971 as a means of encouraging housing development in the City. In Fiscal Year 2009 alone, close to 38,000 properties did not have to pay approximately 600 million dollars in taxes because of the 421(a) program. The Department of Housing Preservation and Development is responsible for administering the program and issuing a certificate-of-eligibility to property owners who meet program requirements. The city’s Department of Finance then calculates the tax benefits granted under the program. My audit report clearly shows that the Finance Department routinely bungled its math and miscalculated the taxable assessed values of nearly 100 percent of the Manhattan properties we looked at that are currently receiving 421(a) tax exemption benefits.
If the Finance Department fails to rectify this problem, the City will not only lose revenue but face potential lawsuits in instances where properties have been overcharged. Under-billing could result in a loss of over $130 million for the duration of tax benefits for affected properties. Clearly, in these tough fiscal times, when every dollar counts, we cannot afford to shortchange ourselves of these vital resources.
First, the Department incorrectly calculated the taxable value of 48 of 50 properties we looked at using their own methodology. As a result, the City did not collect close to 10 million dollars in real estate taxes for 37 sampled properties. The Department could under-bill close to 116 million dollars in additional taxes in the years remaining for the exemption benefits.
For 11 properties, the Department collected excess taxes totaling more than $1.2 million. Second, more than 5 million dollars in additional real estate taxes were lost due to improper exemptions. In total, if the Department continues to under-bill and over-assess these properties, the City will lose nearly $130 million dollars in additional taxes throughout the remaining terms of the exemption benefits.
Additionally, we found that the Department has significant problems with regard to the administration of the 421(a) program, with poor record-keeping and procedures for calculating tax information going unwritten. To receive a tax exemption, a property owner must submit a certificate-of-eligibility to the Department. Information about a property’s tax status is contained in FAIRTAX, which is the Department’s computer system. In our audit, we discovered that certain program information recorded in FAIRTAX was inconsistent with the information manually-reported on property cards. As a result, we have reason to doubt the accuracy of FAIRTAX as a source for recording base-year assessed values.
This problem further highlights the Department’s inability to properly calculate and monitor taxable assessed values, exemptions, and taxes due the City. Unbelievably, seventy percent of the properties we looked at lacked certain required documentation, such as preliminary and final certificates-of-eligibility. Maintaining these documents in the appropriate files is necessary for the Department to substantiate that a property is eligible to obtain benefits under the program.
As a result of our findings, my staff scheduled a meeting with Department officials to resolve these discrepancies. However, the Department cancelled that meeting and at a subsequent audit exit conference continued to fail to explain what they believe happened with their calculations and why. Their refusal to provide substantive evidence to resolve these discrepancies is simply inexcusable. Going forward, the City must ensure that this program is administered correctly in order to minimize the fiscal impact of the Department’s mistakes.
As a result of our audit, my staff made 10 recommendations for review of assessed values, the recouping of real estate taxes, and the creation of formal written policies and procedures to calculate proper values and exemptions in the future. It is my hope that these recommendations will be followed to address the errors we found. Sadly, the errors we uncovered may be just the tip of the iceberg. Because this problem is so rampant among Manhattan properties, we must assume that it is a systemic problem that may ultimately result in the loss of hundreds of millions of dollars in real estate tax revenues citywide.
Such losses are not only unconscionable as we struggle to cope with an economic downturn that has deprived the city of critical revenue, but would be a grave disservice to the many New Yorkers who work hard to pay their taxes in these tough financial times.