AGA Today
City Auditor Urged Close
Look at Property Tax Funds in '04
By David Nakamura, Nikita Stewart and
Yolanda Woodlee
Washington Post Staff Writers
Thursday, November 15, 2007; A01
The D.C. auditor
urged city government officials three years ago to "closely monitor" the
flow of real property tax revenue after she noticed a spike in the
amount of money refunded to property owners.
Deborah K.
Nichols's reports, made in the summer of 2004, did not suggest
wrongdoing in the Office of Tax and Revenue, the department now at the
center of the largest financial scandal in the city's history. But she
noted that the amount of property tax refunds was 105.7 percent higher
than projected over three fiscal quarters, a jump not easily explained.
She suggested that officials take a closer look.
Nichols said
yesterday that the refunds "raised a red flag because they were running
so high when fewer appeals had been decided during that time."
Chief Financial
Officer
Natwar M.
Gandhi,
who is under increasing pressure to explain how the burgeoning tax
refund scam happened on his watch, said yesterday that he was aware of
Nichols's report. He added that the refunds did not seem extraordinary
because so much revenue was being generated by a hot real estate market.
"We were dealing
with huge sums of real property tax revenues," he said, adding that he
had talked with tax office managers, who "gave me assurances that things
are all right."
Gandhi has ousted
10 employees, including the tax office's director, Sherryl Hobbs Newman,
saying they must be held accountable even if they were not directly
implicated. The city has lost more than $20 million at a minimum,
authorities said, and according to a
Washington
Post
analysis of tax records, that amount could reach more than $31 million.
Two office workers have been arrested and charged with fraud for
allegedly producing phony property refund checks.
Nichols's report
came a year before Hobbs Newman took over the tax office, which has had
a history of troubled leadership under the four directors Gandhi has
hired in the past seven years. He hired Hobbs Newman to lead the
600-person department in 2005 despite being cautioned by aides to
Anthony A.
Williams
(D), the mayor at the time, that she had served poorly in two Cabinet
posts.
Yesterday,
government leaders announced that the D.C. inspector general will review
Gandhi's office and that the
D.C. Council
will conduct a separate investigation. Some officials are suggesting
that Gandhi and his 1,250-person, independent agency need stricter
oversight. Gandhi, who was hired in 1997 as part of the team assigned to
rescue the city from financial ruin, is set to appear at a council
hearing today, along with Hobbs Newman and Nichols.
"I'm not a
quitter," Gandhi said during a combative news conference at the
John A.
Wilson Building.
"I will not end my professional career with this blot on my record."
Mayor Adrian
M. Fenty (D)
called the corruption case a breach of public trust but added that
Gandhi should be judged on his 10 years of helping the city recover
after nearly being bankrupt.
"I continue to
stand right beside Natwar Gandhi," Fenty said. "He has managed the
city's finances exceptionally, and he's good for the future of the
city."
Gandhi's ousters
were meant to signal to city officials and business leaders that the
alleged scheme was an aberration that should not cast doubt on the
city's financial integrity. But Hobbs Newman has released a statement
defending her tenure, and another ousted employee, Thomas Branham, is
demanding that he be reinstated.
John M. Clifford,
the attorney for Branham, said his client had not wanted to take the
management position, agreeing in July to serve on an interim basis after
being pressured by superiors. Branham had spent six years as chief
assessor.
Wall Street
analysts said this week they are not considering downgrading the
District's bond ratings. But even some of Gandhi's closest allies said
the scandal could erase much of the District's improved image.
"No one believes
in him more than I do," said Williams, who appointed
Gandhi
to fiscal chief in 2000. "But do not underestimate the blow this is to
the District. From an accounting point of view, it's immaterial. But one
of the things we did, Nat and I, was restore the faith of people in the
District. This really fundamentally undermines that."
Some have
suggested that Gandhi can move forward only with increased oversight.
The Office of the Chief Financial Officer was established by Congress in
1996 as an independent agency. Appointed by the mayor, the chief
financial officer can be fired only for cause through a mayoral
resolution approved by two-thirds of the council.
"I don't know how
aggressive the oversight of the council has been on him, because he's
like an extension of Congress," said the council's chairman,
Vincent C.
Gray
(D). "We've all operated in this post-control board dynamic, and maybe
that needs to be changed."
Nichols, the city
auditor, who works for the council, examined the tax office's revenue
collections and refunds in 2004 in the middle of a real estate boom.
From 2001 through this year, real property tax revenue soared from $635
million to $1.45 billion. That has helped the city's bond ratings, which
had hit junk status, rise to A-plus, an improvement for which Gandhi has
been largely credited.
In two reports in
2004, Nichols raised questions about dramatic increases in property tax
refunds. In a July 30 report, Nichols wrote that the amount of property
tax revenue was lower than expected, in part because of an increase in
refunds. Instead of returning a projected $7.3 million to property
owners who had overpaid in the first two fiscal quarters, the tax office
had refunded $11.9 million.
In a second
report, dated Sept. 7, Nichols noted that by the third quarter, the real
property tax refunds for fiscal 2004 had reached $21.3 million, $10.9
million more than projected. She wrote that the 2004 refunds were 149.8
percent higher than the refunds for the same period in fiscal 2003.
The city had
recently switched from assessing properties on a three-year cycle to
annually, which had generated a large increase in appeals. Nichols took
note of that in her report. But, she concluded, "District officials
should closely monitor this revenue source."
During fiscal
2004, the city refunded $26.4 million in real property taxes, a huge
increase over the $12.5 million refunded in 2003. The Post analysis of
real property tax records showed that a pattern of suspicious refunds
dates to at least 2001 but ramped up in 2003.
Gandhi was asked
yesterday whether the city was so flush with cash that the tax office
might not have been worried about the refunds. "That impression can be
made," he said.
In an interview
last week, Gandhi said he relies on his deputies to be vigilant.
"The dilemma here
in management is, as you go up, it's like you're traveling in a plane
and look outside and things look so beautiful," he said. "Only when you
go down, then you realize that, 'My God, there are problems here.' This
was so down in the valley that you did not feel it, could not see it.
But those that are down there have to check these things out. That's why
they are there and I am here."
Yet Gandhi's
hiring record for tax office directors has been troubled. Herbert J.
Huff, who took the job in 2000, resigned two years later after a female
staff member accused him and his wife of leaving a threatening message
on her answering machine. Huff's successor, Phil Brand, lasted about a
year before departing for the private sector. He was replaced in early
2004 by Daniel L. Black, who took a leave of absence after his father
died and then resigned in 2005.
Gandhi turned to
Hobbs Newman that year. She was a tax collector in
New York
in 1997 when Williams, then the chief financial officer, hired her.
Gandhi, who was director of the tax office, put Hobbs Newman in charge
of customer service.
When Williams
became mayor in 1999, Hobbs Newman became his
Department of
Motor Vehicles
director. She initially won raves for improving customer service, but
she made missteps. During her tenure, a new computer system crashed,
residents received the wrong car registration stickers and the
department acknowledged overcollecting $800,000 in ticket fines.
At the start of
his second term, Williams moved Hobbs Newman to the role of secretary of
the District. Four former high-ranking Williams aides, who requested
anonymity because they now work for private companies, said they were
surprised by the new appointment because of her DMV performance.
"I was cautioned
about that," Gandhi said of the criticism of Hobbs Newman. "I was
willing to take her because I had worked with her. I had confidence in
her."
In two e-mails,
Hobbs Newman defended her record, adding that her anonymous critics are
hiding "under the cover of darkness."
"I am proud of my
accomplishments," she wrote, noting that during her tenure the office
generated $53 million in additional revenue by revamping collection
procedures and reducing customer waiting times.
Staff writer
Clarence Williams contributed to this report.