DENVER – Denver Auditor Timothy M. O’Brien, CPA, recommends the city adopt a more accurate and transparent way to account for state funds the city passes on to Denver Public Schools and other government entities, an accounting adjustment that would set an example in the state.
“Details matter when it comes to accounting,” Auditor O’Brien said. “What we’re recommending isn’t just form over substance; it’s a critical accounting adjustment to guarantee the city’s financial statements are accurate and that other entities’ bondholders are assured funds are recorded accurately.”
A recent audit of the property tax assessment process found the Department of Finance was incorrectly recording state reimbursements for the Senior and Disabled Veteran Property Tax Exemption, commonly known as the Senior Homestead Exemption. By reclassifying the reimbursement from “property tax” to the more appropriate “government-mandated nonexchange transactions,” the Department of Finance would be able to better ensure compliance with accounting practices.
State law mandates the city provide a property tax exemption each year to eligible seniors and disabled veteran homeowners. This reduces or eliminates the amount of property taxes owed by those homeowners and the amount of taxes collected by the city. The state then reimburses the city for amount of the exemptions.
In 2018, the city received a reimbursement from the state in the amount of $13 million. Of this, about $8.8 million was passed through to other government entities, including Denver Public Schools.
In the past, the city has recorded the reimbursement for these exemptions as property tax revenue and then reported it through to other entities as distributions of property tax. However, because this money comes as a reimbursement from the state and not directly from property tax revenues, auditors, after consulting with officials from the Governmental Accounting Standards Board, believed it should be accounted for differently.
“Government-mandated nonexchange transactions” are money or other resources provided by a government entity at one level, such as a state government, to another government entity, such as a county. Those resources are restricted for specific use and require the recipient government to take certain actions.
“While how these funds get recorded has no impact on the city’s overall finances, overstating property tax income and understating other income is inaccurate and not transparent for outside parties reviewing financial statements,” Auditor O’Brien said. “Clear accounting is essential to safeguarding the investment of the people of Denver.”
And as our auditors noted in the report, there could be repercussions for the other government entities’ bond agreements as a result of incorrectly reporting property tax income. Failing to properly classify and disclose revenue could cause these entities to run afoul of bond and debt agreements or incur other legal penalties.
Auditors also noted other government entities receiving the pass-through money might not realize the tax distributions are not all property taxes and could accidentally misclassify the revenue in their own financial statements.
Although the Department of Finance agreed during a presentation to the independent Audit Committee that the reimbursement funds are not property taxes, they disagreed with our recommendation to change the accounting classification.
Finance officials said they believe a government-mandated nonexchange transaction is not the correct label, adding they believe it is more practical to continue reporting the funds as property taxes. However, our audit team stands by the assessment that the funds should be reclassified in the general ledger.
The Department of Finance also disagreed with our recommendation to make sure other government entities receiving funds are aware of the nature of the revenue and whether it is property tax or not.
“The Department of Finance appears to be already starting to do this, so I am not sure why they disagreed with our recommendation,” Auditor O’Brien said.
Auditors also found the Department of Finance needed to improve oversight of some aspects of the property tax system and processes, particularly as related to waived interest and fees. State law allows the Treasury Division to waive fees and interest on overdue accounts up to $50. The Treasury Division interpreted that to mean they could waive up to $50 on accounts with any amount of interest owed. However, the audit team interpreted the state law to mean Treasury might only be able to waive interest when the total amount owed was $50 or less. For example, if a taxpayer owed $40 in interest for delinquent taxes, the law allows Treasury to waive that amount, but if the amount owed were $51, officials could not waive any of the penalty. We recommended Treasury to get clarification from the City Attorney’s Office on the correct interpretation of the law.
We also noted Treasury allowed waivers of interest and fees over $50 with supervisor approval, which is allowed. However, that approval was not always documented.
Auditors found Treasury needs to establish and document criteria for which fees and interest can be waived. Without a properly documented criteria for waivers, some people might end up having to pay while others don’t.
“While I’m sure the intent of Treasury employees waiving fees was good, we need documented standards for waiving fees to ensure equitable treatment of all Denver residents,” Auditor O’Brien said.
Other recommendations in the audit concerned tightening up policies and procedures for the property tax assessment process and accurate monitoring of state leases. Auditors noted discrepancies in the tracking spreadsheet for 28 of 52 state leases of Denver property, or a little over half. Four of these properties were either over- or underbilled for property taxes due to miscalculated exemptions.
“It is important to take a close look at all of the city’s financial records to make sure our work is clear, transparent, and accurate,” Auditor O’Brien said.
The auditees agreed with eight of our 10 recommendations.