PILOT Blues, the Tax Cap, and Unintended Consequences

TL;DR - It's as Bruce Singer described.  PILOT payments can slip through the cracks.  The worst part of it is that it's nobody's fault.

It's time to ramp up our discontent with Albany politicians.  Here's why...

As I described in my last post, the process for determining how much tax New York State will allow us to levy for a given school year is rigid.  Bruce Singer has shared with me the calculations made to determine the maximum levy.  From all outward appearances, he's followed the process outlined in the law to a 'T.'  (If you feel like giving yourself a headache, start at page six on the linked PDF to see how it works.  Or, if you need guidance, try the PDF guide here.)

I had a call with Brookhaven Town's assessor (and CFO of the IDA) James Ryan, and I was able to confirm the following by speaking to him, comparing his comments to my notes from various e-mails exchanged with Bruce Singer, and by reviewing the law.

Essentially, if we compute our maximum levy, make all the adjustments necessary with PILOT payments, and then learn that one isn't coming in at a later date, there's nothing we can do.  The levy is locked in and it's collected.  There's no bringing the levy back up to compensate for the PILOT once the levy is locked in.  If we did, we'd be breaking the law.

This represents a huge blind spot in the tax cap law.  Granted, there are other reasons to hate the tax cap - I'll post on that later - but politicians need to know about this gap.

There's also, in my opinion, a gap between the IDA, assessor and the school district.  It's really nobody's fault, but the issue is that there are no clear lines of responsibility for projecting PILOTs so that the school district can adequately and accurately prep its budget.  PILOTs can change, and they can change quickly.  Mr. Ryan said he and his office are reluctant to provide projections, given that they could change - through no fault of their own - and blame would fall on the IDA for providing inaccurate figures if they changed between the projection and the realization of those numbers.

It's important to understand that.  This isn't the fault of our local officials.  It's an unintended consequence of state law, and we need to be vocal about it.  More later.

More Information on the PILOT Situation

TL;DR – The PILOT situation isn’t as simple as I made it out to be.  Before we can hold people accountable for it, there are details of state law that need to be understood.

First off, I need to thank some people who have been helping me get information, and who have been giving me their time when they clearly have a lot of other important things going on:

Councilman Neil Foley has been eager to help me get this figured out.  He has run my questions past people in the IDA office and the assessor’s office, scheduled phone calls, sent e-mails on my behalf, and pretty much done everything he can do to help get to the bottom of this issue.  Thank you, Councilman Foley.

Associate Superintendent for Business Bruce Singer has sent me explanations of workflow, financial analyses, and answers to questions.  He has also confirmed my assumptions and my understanding of a few concepts to make sure I understand what he and the BOE have to contend with during the budget process.  Thank you, Mr. Singer.

IDA Deputy Director Jim Tullo was kind enough to sit on a conference call with Councilman Foley and me, discussing the role of the IDA, the specific situation surrounding this PILOT, and has helped me with several questions.  Thank you, Mr. Tullo.

Just last week, I thought this was a simple case of a PILOT sunsetting and moving to the tax rolls, and didn’t see how that act could affect the school district’s budgeting process.  After all, if the PILOT line item came down on the revenue side, Sachem would end up getting that money because the corresponding tax levy line would come back up to compensate.  Mr. Singer gave me a statement that appeared to shut the door on any other interpretation:

We would like to clarify some misunderstanding  of statements regarding the Brookhaven IDA.  Please be aware that The Brookhaven IDA has the authority to issue tax-exempt and taxable bonds and notes. It can also grant property tax abatements, mortgage recording tax exemption, and full sales tax exemption for qualified applicants.
The Town of Brookhaven Industrial Development Agency has issued millions of dollars in tax-exempt or taxable bonds on behalf of more than 50 companies encouraging them to either locate or expand in the Town of Brookhaven. This assistance has been extended to companies both large and small, and has resulted in the direct creation of thousands of jobs for Brookhaven residents.
As the Sachem Central School District2013-14  and 2014-15 revenue budget was revised due to the Motorola property going to FULL ASSESSMENT.  That means that the Town of Brookhaven taxpayers have been the beneficiary from the higher assessed value of that property.  While Motorola previously paid a PILOT through the IDA, they currently pay their full assessed value taxes through the Town Tax Receiver's office.
In addition to the Full Assessment of the Motorola property, they continue to maintain their presence on Long Island which generates employment.

That’s an official statement from the school district and the IDA.  If it’s not already up on the Sachem.edu website, it will be shortly.

After he provided this statement, Mr. Singer provided some additional information that shows the situation is actually a lot more complex than I originally thought.  According to Mr. Singer, a changing PILOT situation affects how we calculate the school district’s maximum levy under the tax cap law.  Once this calculation is made and submitted to the state, Mr. Singer says it cannot be retroactively changed.

In October, the school district needs to submit its levy figures to the state for the coming year. They’re using actual numbers from the prior year and projections for the next to come up with the Maximum Allowable Levy, which is the maximum amount of money they’ll be able to raise through taxes for the next year.  When combined with state aid, this maximum levy makes up the revenue side of the budget and tells us how much we’ll have to spend.

Here’s where it gets hairy.  According to Mr. Singer, if you learn something is moving from PILOT to the tax rolls in, say, May, it’s too late and the district can’t go back and change the PILOT and tax levy line items and still be in compliance with state law.  I’ve seen the calculation.  It adds in PILOT payments we’ve received, multiplies that number by the growth factors provided by the state, then subtracts out any anticipated PILOT payments for the coming year to come up with the number for the maximum for the tax money that can come from the community.

So, what happens when you don’t receive an anticipated PILOT?  According to Mr. Singer, you lose the revenue because you never receive it, but your maximum levy is already calculated, so you never receive it on the tax side.  Even if you’ve been given advance warning of several months.

Two things:

  1.  I’m taking Mr. Singer at his word with regard to the number not being able to change, per state law.
  2. This now begs the question: If the school district doesn’t get the money, where does it go?

I will work to confirm #1.  With regard to #2, I have a conference call tentatively scheduled with the town assessor and someone from the IDA on Tuesday morning.  So stay tuned.

In a discussion with Councilman Foley yesterday and IDA Deputy Director Tullo yesterday, one of the things that became clear is that the IDA’s responsibility ends with ensuring the tax rolls come up to compensate for any projects coming off PILOT programs.  They do inform school districts of critical dates for these projects – I have asked for a copy of whatever was provided to Sachem for the Motorola project, and I may have to file a FOIL request to get it.  (Not due to any resistance from Mr. Tullo, but merely as a formality.)

After Mr. Tullo left yesterday’s call, Councilman Foley stayed on, and I intimated that it was possible we stumbled across an unintended consequence of the state tax cap law – something state lawmakers might not have spotted until the law was actually implemented.  If so, maybe we’ll need to figure out how to raise the issue with our representatives in Albany and get the law fixed.

To close this post up, please know that there is a lot that still needs to be confirmed and a lot more information that is still needed.  In fairness to Mr. Singer and the BOE, though, I thought it was best to issue an update.  The possibility exists that Sachem was the first school district to be negatively affected by an unintended consequence of the tax cap law, so I wanted to let people know what I was doing and where my thoughts were on this.  It’s not likely I’ll get all the information I need until next week, and that’s a long time to wait, particularly if you’re Bruce Singer and the community is confused about this PILOT situation.

Of course, the bigger issue is the tax cap law and how it affects districts statewide.  I’ll post something about that later.

Why Weren't We Warned About This PILOT Payment?

I kept hearing about Sachem's shortfall in revenue, and one particular aspect of it had me intrigued: the Motorola PILOT payment "surprise."  Board member Dorothy Roberts suggested I e-mail Associate Superintendent for Business Bruce Singer about it.  So I did.

That led me to make some inquiries of Brookhaven Town Councilman Neil Foley, concerning the IDA, and the process for how the town, the IDA and the school district work together, so that Sachem can get a handle on the revenue side of its budget equation.

From these discussions and e-mail threads, one thing is becoming clear: Sachem was not shorted over $1MM.  What's less clear is whether or not the PILOT from Motorola was anticipated anyway.  Read on and I'll attempt to explain this convoluted mess:

When I e-mailed Bruce Singer, he said the Brookhaven IDA told the board that Motorola (formerly Symbol Technologies) moved off of PILOT and on to full assessment.  What that means is that the Motorola stopped making Payments In Lieu Of Taxes (PILOTs), but paid regular taxes just like other commercial properties in the town, a large percentage of which goes to the district.  (Call it two-thirds.)  Mr. Singer claims the Board of Education was informed of this move in May of 2014.  In the context of the timeline for the budget and planning, the budget's already printed and you're starting to get to things like public hearings.

But this may not be material to the conversation.  The following was provided by the Brookhaven Town Assessor James Ryan, passed along via e-mail by Brookhaven Town Councilman Neil Foley:

"The Industrial Development Agency (ida) is an agency of the State formed under General Municipal Law. Any property owned by or under control of the agency is exempt from taxes as authorized by Real Property Tax Law Section 412a.
The IDA is authorized to grant tax exemptions for real estate tax, mortgage tax, and sales tax. The IDA typically requires a company that comes to the IDA for tax benefits to pay a PILOT (payment in lieu of tax) for the amount of tax they would have paid before construction of a building or improvements to an existing building.
The PILOT agreement is for a fixed term (generally 10 years) and at the end of the term the PILOT payment is most often an amount that would be the same as if the property were taxable. PILOT payments are made to the IDA and the IDA distributs the PILOT money to all taxing authorities in the same manner as taxes are distributed. So the School District typically receives 67% of the PILOT collected.
Once the real estate tax exemption is exhausted, that is to say once the PILOT payment is equal to the amount of tax ( as per the PILOT agreement) that would be paid were it not for the IDA, then the property is turned back to the property owner and the assessment is returned to the taxable part of the assessment roll.
Motorola was tax exempt during the 12/13 tax year because the property owned by Motorolla was owned or controlled by the IDA. At that time the PILOT amount paid to the IDA was equal to what they would have paid had the property been taxable. In the 13/14 tax year, the property was conveyed back to the Motorolla from the IDA and the assessment was made taxable. Motorolla for the 2013/2014 tax year received a tax bill in the amount of approximately $1,700,000.00 and it was paid to the tax receiver. Motorolla will continue to receive tax bills into the future.
As such, the Sachem School District is mistaken to say that the Town took away $1,000,000.00 in PILOT money since it was replaced by a real estate tax."

Those last few lines are key.  TL;DR - Brookhaven says we got the money, but it was through the usual tax channels, not a PILOT.

Until I receive more information, I'm left to speculate.  Whose responsibility is it to track properties moving off of PILOTs and back onto the tax rolls?  Were Singer and the BOE expecting the PILOT, not realizing they were already getting the money as part of normal, everyday tax payments?  I have e-mails in to both Singer and Foley asking for clarification and will post when I get more information.

I'm also looking to Foley to shed some light on the process for keeping school districts in the loop on sunsetting PILOTs and how we're supposed to learn of these things.  Singer was also supposed to get a statement from the IDA stating that we would have had no advance knowledge of Motorola moving off PILOT, but that was last week and he has yet to deliver.

I like to give people the benefit of the doubt in such situations, and all of this could be attributed to some kind of miscommunication.  But the fact remains, we got the money.  So it's time to stop running around claiming we were shorted.  Check back here for updates.

UPDATE - 9/30 - 9:45 AM: I've exchanged several e-mails and participated in phone calls with Councilman Foley and Brookhaven IDA Deputy Director James Tullo.  I have also heard from Bruce Singer via e-mail and am promised a financial analysis later today.  Please stay tuned.

UPDATE - 10/1 - 2:45 PM.  I have another post up that explains the current situation.

Let's Stop Playing "Small Ball."

This article explains the nature of the systemic problem we're having funding our schools, although I don’t agree with its conclusions.

We’re losing control over our ability to make decisions concerning our school district.  State mandates, especially the unfunded ones, are a culprit.  So is the tax cap and its exceedingly-difficult-to-pierce supermajority requirement.

In the end, most of the big decisions on the budget are already made for us and beyond our control.  The game we’re playing is, for right now, “small ball” over the few million allocated to optional things like clubs, sports, and other things the state doesn’t mandate we carry.  The scary thing is that if things keep going the way they’re going, we’re not going to be able to support programs that we’re required to have.  We’ll quickly march from educational insolvency to financial insolvency.  And it won’t be just Sachem.  Similar problems will be experienced by school systems statewide.

In that way, the above-linked article’s conclusions are correct.  Eventually, the only option we’re going to have in order to cut costs is to cut teachers.  Nobody wants to see that happen.

But accepting a death spiral means we’ve exhausted all avenues.  And we haven’t yet.

To fund our school district, we need to stop playing small ball.  People who play small ball end up arguing endlessly about sports vs. clubs, Arrowettes vs. full-year kindergarten or administration salaries vs. equivalents in the private sector.  Small ball people argue about the tiny, flexible portion of the budget that makes a very small difference to the overall picture.

Nope.  We need to focus on the big picture.  IMHO, here’s how we do it.

1)      Vote in state elections.  Vote to sweep out incumbents.  If you value your childrens’ educational experience, we need to send the message to Albany that when they need a couple billion dollars in revenue to balance the budget, they can’t take it from education and simply expect us to cope.  We also need to get rid of the tax cap, or at least get rid of the supermajority requirement to pierce it.

2)      Work with local politicians to help the Long Island economy.  This is the fix that’s more difficult to connect to the situation, and the remedy that’s going to force me to say some things that are not going to be well-received.  But suffice it to say that we need to attract more of the right businesses to Long Island, and we need to do it in a way that’s not damaging to our tax base.

So with #2, here’s the unpopular bit: Vast swaths of Long Island have become what I call “Economic Flyover Country.”

When I was a kid, we used to have real industry on Long Island.  The kids I played with had parents who worked for Grumman or Arrow or at the Shoreham Nuclear Power Station.  The departure of the aerospace/defense industry on Long Island is an old story, but more recent developments give me pause.

We get excited when UPS announces they want to hire 3,000 seasonal workers locally, but we’re not outraged when JP Morgan Chase announces they’re laying off 195 and closing their offices in Garden City.  “Big deal,” you might be thinking.  “What’s 195 in comparison to 3,000?”

We need sustainable jobs out here on Long Island.  The good corporate jobs.  Not the short-term contract service jobs.  And notice that when you see announcements about jobs coming to or leaving Long Island, it’s the service jobs that are coming, and the corporate ones that are departing.

You might not think this is a big deal, and that’s it’s reflective of the U.S. economy’s move to a service base.  But think about it in the context of our schools.

When you have a corporate headquarters in your school district, the corporation cares about what happens locally.  They source employees locally.  They care about education in that case, because if you have a good school system, it’s easier to convince employees to relocate.  It’s also easier to keep the people you have.  Whether they’re contributing through property taxes or PILOTs doesn’t really matter – they’re part of the tax base and part of the community and we ought to be doing what we can to encourage them.

While our local politicians are working hard, and they have some important victories to crow about, I have two problems.  The first is that property tax breaks are too often dangled out there as an incentive.  This has the exact opposite effect intended, because wherever these companies land on Long Island, the school district loses out on revenue while needing to support an influx of students.

My second problem is that we’re not selling our proximity to New York City, the quality of our workers or our other qualities very well, and as a result, New Jersey and other locales are kicking our butts when we compete to bring good jobs to Long Island.  We’ve had some awful losses the past few years.  

High cost of living, brain drain and tax issues are the likely culprits.  (If we’re not careful, transportation and infrastructure could become others, but that’s another topic for another blog post.)  But the truth is that we should have these companies headquartered on Long Island and we should be reaping the benefits. 

There are a kajillion programs designed to help bring business to Long Island.  We’ve got incubators and accelerators and business zones – all sorts of things.  They may have some limited success getting startups to locate here, but what about the big boys?  When was the last time we convinced a major public company to relocate its headquarters to Long Island?

For the long term, we need to invest in attracting quality businesses to Long Island.  Incubating and accelerating startups is a good start, but our politicians need to get in the game and do what they can to be competitive.

So, as we’re thinking about voting out the state politicians who gave us the tax cap and cut our state aid, we need to also be thinking about who might be good at helping attract businesses to Long Island.  And we need to vote for them.

We need to take advantage of our size.  Sachem is huge.  And with a number of interested, involved voters in the district, perhaps we should think about forming some sort of special interest group.  As a voting bloc, if many of us could align behind restoring education cuts, repealing tax cap legislation, controlling state mandates and investing in bringing business to our area, that would be something I could get behind.