June 12th City of Lakewood Balanced Budget Update

[Jennifer Pae]

Good Afternoon,

These are periodic updates of the City of Lakewood, Ohio's concurrent initiatives to create financial strength and flexibility for 2009 and beyond as prescribed by Joint Resolution #8167-07 and Resolution #8292-08

8167-07.pdf

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Attached is the Monthly Financial Report as of May 31, 2009, and the benchmark of budget estimates versus the amount spent at this point in time is 42%.

05-31-09 City of Lakewood Month End YTD Financial Report.pdf

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A couple items to note include:

- General Fund Revenues are currently slightly above (at 46%) the overall estimate at this point of the year, but is due to the timing of Property Tax disbursements - the City receives all of theses funds during the first half of the year. Several revenues to watch since they are significantly below Division of Finance estimates as of May 31st are: Building Permits (21%); Net Profit Income Taxes (32%); and, Municipal Court Costs & Fines (36%).

- Overall General Fund Expenditures are still slightly below budget (39%), and are lower than actual expenditures at this point in time in 2007.

- Other revenues to keep an eye on since they are currently below estimates include: Street Construction, Maintenance & Repair (SCMR) that is derived from gasoline & motor vehicle taxes (39%); Emergency Medical Services (EMS) Transport Charges (38%); and Water, Sewer & Wastewater Treatment billings (37-38%).

Also, the City has not yet received its Community Development Block Grant (CDBG) and Emergency Shelter Grant (ESG) funds, although we have been given notice of the City's disbursement amounts.
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Since the last Balanced Budget Update, there has been some public discussion about the City of Lakewood's Income Taxes, and the impact of leaving the Regional Income Tax Agency (RITA) on November 1, 2005.

Attached is a document that presents a comparison of Revenues and Expenditures of the City of Lakewood's Income Tax Collections from 2002 until 2008.

Lakewood vs RITA Comparison.pdf

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It is important to note the ratio of expenditures to collections, which was at a high of 4.77% in 2003 (with RITA) to a low of 3.2% in 2007 (In house). This ratio has been at or below 3.5% since leaving RITA, where the ratio was historically above 4%.

Here is the 2007 estimate of costs if Lakewood remained with RITA:

RITA Standard Services*: $434,506
Outside Law Firm: $ 55,428
Lakewood Staff: $167,000
Total RITA Estimate: $656,934
*does not include researching fees, small claims / civil complaints, and filing of subpoenas

City of Lakewood In House Collections Total Costs in 2007: $572,192 - a savings of nearly $85,000

The City of Lakewood's Income Tax software contains a database of the entire city that identifies each address and classifying it as an owner-occupied or rental property in order to track residents, businesses and property owners. It also tracks if a return was filed from that address, which effectively identifies non-filers that the Income Tax Division aggressively pursues.

To our knowledge, RITA has been in the process of updating its computer system for several years, and is still using an outdated server that could not provide and track a database of Lakewood addresses like the one the City has been using since leaving RITA.

RITA currently has 158 member communities with a total population served of over 1.5 million. They have stated "the expansion in membership means RITA's operating costs are shared by an even larger group - thus each members' share is reduced."

This was not the experience of Lakewood as a member of RITA as it saw its ratio of expenditures to collections increase over time. Also, with a rental base of nearly 50% of its residents, the City of Lakewood believes stringent maintenance and analysis of its taxpayer database is the key to revenue growth.

The City of Lakewood is in the process of finalizing an agreement with the City of Cleveland this summer for Internal Revenue Service (IRS) data sharing. Cleveland has had IRS data for several years, and Lakewood will be in a position this year to access IRS data prior to RITA being able to complete IRS audits for its members and begin to implement its IRS data share system.

It was the City of Lakewood's experience that RITA did not fully utilize its taxpayer information. For example, Lakewood found that data share information received from the State of Ohio Division of Taxation was used to prepare a one time delinquent letter, however, the information was not input into the RITA database. This allowed Lakewood residents, even homeowners, to avoid paying taxes for years.

The City of Lakewood inputs the State of Ohio taxpayer information into is database annually and aggressively pursues non- or under-filers.

Even when the City was part of RITA, Lakewood employed three positions to audit returns, file small claims / civil complaints, and issue subpoenas, since these are additional costs charged by RITA for these services, including researching fees.

Although RITA stated that any audit functions were included in the fees charged, it has since been discovered that many tax issues were missed by RITA at a cost to the City of Lakewood.

For example, recently the Lakewood Income Tax Division issued a substantial refund to a past resident that paid local tax on capital gains (not taxable on the local level) to RITA for eight straight years. The tax returns clearly show this income was derived from capital gains and even had the Federal Schedule D-Capital Gains attached to the tax return. This is an audit item that should not have been missed, especially for eight straight years.

RITA is a well-run and respected income tax agency that benefits many communities throughout Ohio, but it was found and proven that the City of Lakewood could provide these services better to its taxpayers at a lower cost.
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For more information regarding the City of Lakewood's Finances, go to: http://www.onelakewood.com/Finance/Default.aspx

And as always, if you ever have any questions or need clarification regarding a City of Lakewood Financial matter or issue, please feel free to contact me.
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Thanks for reading & have a great day!
~Jenn
Jennifer R. Pae
Director of Finance
City of Lakewood
(216) 529-6092
http://www.onelakewood.com