NUMBER THREE IN A SERIES: HOW TO BE ASSURED THE MONEY IS GOING WHERE IT OUGHT TO GO

It seems every few months we read about a government clerk who has siphoned off thousands of dollars. We shake our heads and ask ourselves how could that be allowed to happen, but, be honest, how do you know it is not happening right now in your own unit of government?

You may answer that you know and trust your people. But the people you read about were also trusted employees until they were caught. Sadly, trust is not an accounting control.

Sometimes the auditors make these discoveries, but not often. A smart crook will always leave behind convincing documents for audit purposes. Usually, when a person is caught, it is a result of an anonymous tip, a mistake on the part of the perpetrator, or a simple confession by someone in too deep.

Besides, if the auditors catch the problem that means it is too late to avoid it. The black mark will affect the public’s perception of the perpetrator and the government unit. Much better to avoid these problems before the auditors arrive.

Fortunately, accountants have developed standard procedures for providing reasonable assurance, in advance, that disbursements are authorized and properly recorded. The following principal applies to all disbursements of funds.

SAFEGUARDING PUBLIC ASSETS, RULE NUMBER TWO*:

    THE PERSON WHO ACCOUNTS FOR AN ASSET SHOULD NOT BE THE SAME PERSON WHO HANDLES THE ASSET.

For example, the person who receives the invoices and enters them into the accounting system should not be the person who prints or mails the checks. If the same person performs all of these functions, that person can control any disbursement and how it will appear in the reports. If a disbursement is misdirected, you may have no way to know.

And, don’t forget the payee name trick: Even if a person is not able to print or mail a check, he or she can control the disbursement via access to the list of payees that are allowed to be printed on the check. Any person involved in handling invoices – even someone outside the accounting department — can create a fake invoice and arrange for a check to be made payable to a fake name with a false address. Consequently, it is important not only to have an independent person print and mail the checks, but also to have a separate person with exclusive access to the list of approved payees that can be printed on a check.
Here are some specific recommendations:

    1. Payee Master File

The accounts payable clerk should not routinely handle the verification and inputting of new payees into the accounting system.

Good internal control dictates that employees involved in the invoice approval function should not be able to modify the payee master file or to input payees names. Otherwise the lack of controls would allow payments to be made to unauthorized or unapproved payees.

Most accounting systems allow certain functions to be performed only at certain work stations or by certain users. All clerks should be locked out of the master payee file, except those authorized to add or modify payees.

We recommend that an employee other than the accounts payable clerk be responsible for verifying the existence of the payees, receiving and processingW-9 Forms, entering new payees into the accounting system, updating payee address records, and preparing 1099 Forms.

    2. Cash disbursements

The accounts payable clerk who records invoices should not routinely print and mail the checks. Good internal control dictates that these duties should be segregated to assure that payments made are the same as payments recorded on the accounting system.

We recommend that an employee other than the accounts payable clerk be responsible for the printing and mailing of checks. One way to help assure compliance is for the blank checks to be stored in a secure place available only to the person authorized to print and mail checks. Also, computer systems should be set up to allow certain users to enter invoices and others to print and mail (or transmit) payments.

    3. Creating payment vouchers for utilities and other payments split among departments

Typically, operating departments receive the original invoices, create and certify
payment vouchers, submit them to the accounting department for processing, and
later review reports from the accounting department to compare invoices to
the payments that were actually made. However, for items such as utilities that are
split among the departments, someone in the accounting department often handles the
creation and certification of payment vouchers.

The accounting department exists in part to provide a check and balance over other departments. The fact that individual departments receive and approve their own invoices, but must submit them to an independent accounting department for payment, provides a control over both offices. However, that control does not exist for transactions that are initiated within the accounting department.

For these transactions, it is preferred that a separate person, as opposed to the accounts payable clerk, receives the invoices, creates the vouchers, and authorizes the payment. Such a separation imposes a check and balance similar to that for transactions that are initiated by another department.

We recommend that the accounting department design staff assignments so that a person other than the accounts payable clerk is responsible for signing off on payment vouchers that, due to their nature, will not be approved by an operating department.

* RULE ONE: NEVER ALLOW THE BANK TO MAIL THE BANK STATEMENT TO THE BOOKKEEPER OR ANYONE IN THE ACCOUNTING DEPARTMENT

Stay subscribed to our series, and we will continue to send practical ideas on this and other topics of interest to Indiana local officials.

If you have questions or would like further information about additional appropriations and transfers, please contact us at: Coonrod@Coonrodcpa.com

Revised 01/03/17
__________________________________________________________________________________________________________________
This article is intended to provide information of general interest to local government officials in Indiana. The information is not guaranteed to be applicable or appropriate in particular circumstances. Local officials should consult competent professionals before acting on any information contained in this article. We are not attorneys. Advice of a legal nature should be sought only from qualified attorneys.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
Copyright © 2013, 2017 C. L. Coonrod & Company

NUMBER TWO IN A SERIES: GHOST EMPLOYEES YOU DIDN’T KNOW YOU HAD

There are two kinds of ghost employees – do you know which kind is more dangerous?

The kind of ghost employee that gets the most publicity is the least dangerous. We have all heard of the occasional government official who puts a friend or relative on the payroll, but does not expect that person to show up and work. Obviously that is unethical and probably illegal. But it is not a danger to you, as a public official, because you already know about it. If you are doing it, you know you are doing it.

Granted, you may not be aware a trusted employee may be doing some personal or political work while he is on government time. Technically, that is ghost employment. It can lead to trouble, but such violations are usually petty and seldom lead to serious losses.

The greater danger is the ghost employees you don’t know about. You may think that could not happen, but think again.

    Here are examples that can happen in almost any size organization, and the boss may never know:

The ex-employee trick:

An employee resigns or retires. The position remains vacant for a while. The boss assumes no paycheck is being issued, but how does he know? It is possible for a thief to slip in a fake time sheet or simply leave the employee on the payroll list. A paycheck is issued and cashed by the thief. If electronic funds transfer is used, the thief may be able to turn in a changed bank account number.

The new employee trick:

A position is vacant. A thief turns in a fake time sheet or simply adds a fake name to the payroll. A check is issued and is cashed by the thief. A variation involves adding a ghost employee even if there is no vacant position.

The “I deserve a raise” trick:

The thief simply gets into the system and increases his own pay rate, or the rate of a friend. Variations include padding overtime, comp time, vacation time, or other compensation add-ons.

WHO SHOULD YOU WATCH?

Any clerk or supervisor who handles time sheets or turns in names of new or terminated employees is in a position to create ghost employees. If that person is the same person who passes out the paychecks in his office or department, then there may be practically no control over the payroll. It is easy to picture a person turning in a fake time sheet then receiving back the ghost paycheck, and cashing it.

WHAT SHOULD YOU DO?

First of all, don’t rely on the bank to protect you. In practice, banks are not liable if you allow a fraud to take place in your office. You should accept that any reasonably smart crook can cash any check in any name. Good luck complaining to the bank that the endorsement was forged or the payee did not exist. The bank will say it is not their fault you had poor accounting controls and allowed a criminal access to your payroll system. They will win the argument. Banking laws favor the banks.

Instead, you should employ a bedrock rule of internal accounting control:

SAFEGUARDING PUBLIC ASSETS, RULE NUMBER TWO*:

THE PERSON WHO ACCOUNTS FOR AN ASSET SHOULD NOT BE THE SAME PERSON WHO HANDLES THE ASSET.

    For example, the person who turns in time sheets and employee data should not be the person who passes out the paychecks. If a fake employee is created by a supervisor or clerk, a different person passing out the checks will catch it before it is too late.

    [When I was a county auditor, I required that each department assign two people to deal with my payroll department, one to bring in the time sheets for processing, and a different person to pick up the final printed checks — CLC.]

    The principle is the same for electronic paychecks. The person who enters the names and time worked should not be the same person who enters the employee bank account numbers.

    In any pay system, pay rate changes and overtime authorizations should not be adjusted by the payroll clerk, or even by the accounting department, but preferably by the personnel department.

    * RULE ONE: NEVER ALLOW THE BANK TO MAIL THE BANK STATEMENT TO THE BOOKKEEPER OR ANYONE IN THE ACCOUNTING DEPARTMENT

    Stay subscribed to our series, and we will continue to send practical ideas on this and other topics of interest to Indiana local officials.

    If you have questions or would like further information about additional appropriations and transfers, please contact us at: Coonrod@Coonrodcpa.com

    Revised 12/20/16
    __________________________________________________________________________________________________________________
    This article is intended to provide information of general interest to local government officials in Indiana. The information is not guaranteed to be applicable or appropriate in particular circumstances. Local officials should consult competent professionals before acting on any information contained in this article. We are not attorneys. Advice of a legal nature should be sought only from qualified attorneys.
    To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
    Copyright © 2010, 2016 C. L. Coonrod & Company

NUMBER ONE IN A SERIES: SAFEGUARDING PUBLIC ASSETS

“How do I know I can trust all these people?”

A newly-elected official once asked us that question. He inherited a staff from his electoral opponent, the former office holder. He wanted continuity of operations, so he did not want to fire everyone. He knew, these people from his time on the fiscal body. Basically, he trusted them, but he did not hire them. He did not want any of them to get him into trouble.

Here was our advice: Even if you think you know people, you don’t. Besides, public office is a public trust. Your job is not simply to trust people you know, but to put in place sound security systems to safeguard public assets.

Think back on news articles about government clerks stealing money. Often they have been on the job ten, twenty years. Everyone was shocked, especially the boss.

Accountants have devised ways to provide reasonable assurance that assets are safeguarded. It is the duty of public administrators to put such systems in place. They need not be time consuming and costly. The best controls are the ones that are simple and employ common sense.

We plan to provide a series of suggestions that will be practical for all Indiana local governments, starting with the simplest rule we can offer.

SAFEGUARDING PUBLIC ASSETS, RULE NUMBER ONE:

    NEVER ALLOW THE BANK TO MAIL THE PRIMARY BANK STATEMENT TO THE BOOKKEEPER OR ANYONE IN THE ACCOUNTING DEPARTMENT

This rule is violated 99% of the time, but to the peril of public officials everywhere. It is natural for the bookkeeper to arrange for the bank statement mailed to his own attention at the address of his own office. It is a matter of convenience, and usually no one else cares. The bookkeeper receives the statement, opens it, and reconciles it. Unfortunately, the result is a loss of control by higher ranking officials over public cash accounts. Even if someone else is supposed to review the bookkeeper’s work, that seldom happens in practice.

WHAT PROBLEMS CAN RESULT?

The simplest way for a person in the accounting department to divert funds is to divert deposits or divert checks. If no one else sees the bank statement, it is unlikely the diversion will be noticed.
Not all errors are intentional. If the bookkeeper makes mistakes or falls behind, and fails to keep accounts in balance, the first evidence may be notices from the bank. If the bookkeeper is the only person to see these, they may not be shared with officials higher up.

WHAT IS THE SOLUTION?

The elected official or other responsible official should contact the bank directly and ask for all banks statements and bank notices to be sent to himself. Copies may be sent to the bookkeeper or accounting department. The official’s copy should be sent to a separate address or post office box that the bookkeeper cannot easily access. Use a home address if necessary. The responsible official should open each bank statement and bank notice himself, look for anything unusual, and then hand deliver the documents to the bookkeeper.

    The official need not reconcile the account or do any accounting work himself, just look at the statement and notices.

The review need only take five or ten minutes, but it will do a world of good.

What items would be unusual? Here are examples

• Notices for overdrafts or other penalties
• Payments to vendors or employees whose names you don’t recognize
• Payments to employees you thought were terminated
• Checks in amounts that seem too high
• Checks to vendors when you don’t recall owing the money
• Endorsements on checks that don’t look genuine
• Failure to make tax withholding payments or other regular payments known to be due each month
• Electronic transfers you don’t recognize
• Balances that seem too low
• Unusual payments to taxing authorities, possibly representing tax penalties

WHAT ARE THE BENEFITS?

• The review tends to keep honest people honest, and makes it more likely any problems will be reported in advance
• If there are errors, the review makes it more likely the responsible official will identify them
• The review gives the responsible officials a better understanding of the transactions being made in his name
• The review tells the accounting department that the responsible official cares about what they do, and is watching

WHAT IF YOU HAVE ALREADY BEEN AUDITED?

It is a fallacy to assume that a successful audit proves you do not have a problem. Think again about the horror stories you have heard and read about, involving clerks who were skimming money for years from public funds. All of these units were audited. If the audit played a role at all, it may only have been to publicize what had been found by other means. Unfortunately, it is not the Board of Accounts’ job to tell you how to avoid future problems, only to report problems after they have been discovered.

Stay subscribed to our series, and we will continue to send practical ideas on this and other topics of interest to Indiana local officials.

If you have questions or would like further information about additional appropriations and transfers, please contact us at: Coonrod@Coonrodcpa.com

Revised 12/20/16
__________________________________________________________________________________________________________________
This article is intended to provide information of general interest to local government officials in Indiana. The information is not guaranteed to be applicable or appropriate in particular circumstances. Local officials should consult competent professionals before acting on any information contained in this article. We are not attorneys. Advice of a legal nature should be sought only from qualified attorneys.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

Copyright © 2010, 2016 C. L. Coonrod & Company

Property Tax Shortfalls

Did you receive your share of property taxes?

property_tax

Mayors, trustees, clerk-treasurers, and controllers all should be concerned about whether the correct amount of property tax has been received from the county. It may surprise you to know that settlement of property tax is not an exact science. Rarely does a unit receive exactly the amount of property tax that was approved in its annual budget process. Variances up to 3% are not uncommon. For almost any unit, 3% of the property tax settlement is an amount worth investigating. If you receive less than the expected amount, your unit will be short cash. This article will explain how you may be able to recover that shortfall. It is also a problem if you receive too much. If a levy excess is received, it must not be expended. Instead it must be set aside in a levy excess fund. Otherwise you can get into trouble.

 

So how can we have a shortfall?

Here is the usual reason: When State and county officials certify your levy and rate, they are usually basing their certification on estimates. The nature of an estimate is that it is likely to be a little too high or a little too low.

Rate cap (“circuit breaker”) credits

If rate cap credits are deducted from your unit’s tax distribution, your unit will, of course, receive less than the budget levy. The rate cap credits are not considered part of the shortfall, but a shortfall can make matters worse. If your unit has rate cap credits, you should still determine if any additional revenue was lost due to a property tax shortfall.

Why do the County and State use estimates to set levies and rates?

They use estimates because the assessments are a moving target. Property owners are constantly making changes in their property and assessors are constantly updating their data bases. Often, there are taxpayer appeals, and sometimes they take years to resolve. It is simply impossible for State and county officials to know, exactly, what rate to set for your unit. So, they make an estimate. These estimates are usually quite accurate, but even a small variance can mean significant dollars.

Are delinquencies the problem?

Delinquencies are probably not the problem. In most jurisdictions, all the taxes get paid; otherwise, the owner risks losing the property. Taxpayers sometimes pay late, but they make it up the next year plus penalty and interest. The current year’s delinquencies tend to be offset by catch up payments from past years, plus penalties and interest.

So, how do we know if we had a shortfall?

Early in the year, your fiscal officer receives a budget order from the Department of Local Government Finance. The budget order tells you exactly what amount was approved as property tax revenue for each of your funds. If you cannot find your copy, you can call the Department and ask them to fax it to you. The county auditor sends forms along with the settlement checks, telling you how much of the settlement should be deposited into each of your funds. This form is called Form 22. If you don’t have it, you can call your county auditor. Compare the amount on the budget order with the amounts on Forms 22. If the total amount on Forms 22 is less, you have a shortfall. If it is more, you have a levy excess.

Tell me again, how is it possible we can receive more than we are supposed to?

When the property tax rate is estimated, the estimate can either be too high or too low. If it is too high, the amount of revenue will be too high. That is called a levy excess.

Why is it a problem if we have a levy excess?

The law says if you receive too much, it must be set aside in a levy excess fund and used in a subsequent year to offset shortfalls or to reduce future tax levies. If you are not aware of this requirement and simply expend the money, the result may be problems with the Department of Local Government Finance and the State Board of Accounts.

What do we do if we have a shortfall?

Fortunately, there is a remedy. If you have a shortfall, and it is not due to delinquencies, the law recognizes that the taxpayers were undercharged. You are allowed to make up that amount in the next budget cycle. However, it is not automatic. You must petition the Department of Local Government Finance for permission to increase your property tax levy in the subsequent year in order to make up for the shortfall.

 

If you have questions or would like further information about property tax shortfalls and levy excesses, please contact us at: Coonrod@CoonrodCPA.com

 

This article is intended to provide information of general interest to local government officials in Indiana . The information is not guaranteed to be applicable or appropriate in particular circumstances. Local officials should consult competent professionals before acting on any information contained in this article. We are not attorneys. Advice of a legal nature should be sought only from qualified attorneys.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

Copyright © 2016 C. L. Coonrod & Company

Why do Indiana local officials need to learn about GAAP?

Indiana now requires some cities, towns, and counties to publish financial statements in accordance with GAAP (Generally Accepted Accounting Principles).

IC 5-11-1-4 now requires GAAP financial reporting for counties, cities, and towns that issue bonds, on the following schedule:

CITIES AND TOWNS:

Calendar year 2016 (reports filed in 2017) for cities & towns over 250,000 population

Calendar year 2018 (reports filed in 2019) for cities & towns over 100,000 population

Calendar year 2019 (reports filed in 2020) for cities & towns over 75,000 population

COUNTIES:

Calendar year 2016 (reports filed in 2017) for counties over 250,000 population

Calendar year 2018 (reports filed in 2019) for counties over 175,000 population

Calendar year 2019 (reports filed in 2020) for counties over 100,000 population

 

 

How does GAAP differ from the standard Indiana accounting practices developed over the years by fiscal officers and the State Board of Accounts? The standard system focuses on budgets just one year at a time.  Little attention is directed at the future. GAAP builds on that system by recognizing transactions, especially liabilities, affecting future years.

 

Old accounting practices fail to report huge liabilities, such as retiree benefits. That is detrimental to the holders of municipal bonds, who may not be paid if cash runs short. It is also detrimental to taxpayers, who will ultimately pay the bills. GAAP reporting forces units to report liabilities fairly. Units with too many liabilities may lose their favorable credit ratings and find themselves unable to borrow more.

 

However, GAAP is costly. Most Indiana units do not have staff with the expertise to prepare them. They will need to beef up their staffing or hire consulting accountants to perform the work. Many people believe the cost will be offset by more favorable credit terms on bonds. That is why several Indiana units have issued GAAP statements for years, even when it was not required.

 

Most units with audited GAAP statements will probably opt to submit a comprehensive annual financial report (CAFR) to the Government Finance Officers Association (GFOA) for evaluation. A CAFR includes the GAAP statements along with several pages of other information. The Indiana law does not require a CAFR, but they are favored by bond rating agencies like Standard & Poor’s. For units issuing bonds, the hope of a better rating could be a motivation to spend the additional money to prepare a complete CAFR and submit it to GFOA.

 

Our firm is especially well suited to answer questions and assist counties, cities and towns interested in GAAP financial statements. Our principal accountant is a former assistant national director of government accounting for a national CPA firm. He spent years supervising the preparation of GAAP statements – Click his name to view Curt Coonrod.

 

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If you have questions or would like further information, please contact us at: Coonrod@Coonrodcpa.com

This article is intended to provide information of general interest to local government officials in Indiana. The information is not guaranteed to be applicable or appropriate in particular circumstances. Local officials should consult competent professionals before acting on any information contained in this article. We are not attorneys. Advice of a legal nature should be sought only from qualified attorneys.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

Copyright © 2015 C. L. Coonrod & Company

Budget Disaster! Don’t Overlook An Extra Payroll in 2015, 2016, or 2017

halleyscomet

Like Halley’s Comet, the calendar is cranking around to another odd year in which an extra payroll may be due. That could cause a budget disaster for units that are unprepared.

Most units pay employees every two weeks. In most years, that means the budget includes 26 paydays. From year-to-year, the only budget concern is whether to offer a raise and whether to add or eliminate job slots.

However, the 26-payday cycle does not fit perfectly into a 365-day year. In most years, there is one extra day. In leap year there are two. Over several years, the extra days add up. As a result, once in a while, 27 paydays will fall into a single year.

In case that does not seem like a big deal, imagine what would happen if the 27th payday were overlooked in the budget. At Holiday time, every single department would be short a whole payroll.

It takes a lot of money to add a whole payroll. Not all units will have that much cash. Then what?

We urge you to check your 2015 and 2016 calendars and determine if your unit will have a 27th payday.

BE CAREFUL. IF YOU PAY EVERY TWO WEEKS, AND YOU HAVE A PAYDAY ON FRIDAY, DECEMBER 18, 2015, YOU MAY THINK THAT IS YOUR LAST PAYDAY OF THE YEAR. THE NEXT PAYDAY WOULD NORMALLY BE FRIDAY, JANUARY 1, 2016. HOWEVER, JANUARY 1, 2016, WILL BE A HOLIDAY, AND THE PAYROLL MAY BE GIVEN A DAY EARLY. IF SO, THE LAST PAYDAY IN 2015 WILL BE THURSDAY, DECEMBER 31, 2015, AND IT WILL BE A 27TH PAYDAY.

Some units may be able to defer this problem from 2015 to 2016. If the unit pays by direct deposit, payroll is always funded a day or two in advance. Perhaps the direct deposits can be dated January 1, 2016, even though that is a holiday. Likewise, paper checks issued the last week of the year could be dated January 1, 2016. However, we cannot assure you the State Board of Accounts will condone predating of these disbursements.

Deferring the problem to 2016 will not solve the problem. It will pop up again in 2016. Given a two-week pay cycle, and payday on Friday, it will be impossible to avoid an extra pay period in budget years 2015, 2016, or 2017.

Not all units have a payday on December 18, 2015. IF YOUR UNIT PAYS EVERY TWO WEEKS AND YOU HAVE A PAYDAY THAT WOULD NORMALLY FALL ON DECEMBER 25, 2015, YOU PROBABLY WON’T HAVE A 27TH PAYDAY FOR SEVERAL MORE YEARS. Obviously, units that pay weekly are on a different cycle. They need to be concerned about having a 53-pay year as opposed to a 52-pay year. Units that pay on the 15th and last day of the month can probably avoid the problem altogether.

Some units try to address this problem by treating their “salaries” as “annual” and, therefore, they simply divide the annual salary by 27 rather than 26. The problem with that approach is that it cuts each employee’s take-home pay. The employee may have a difficult time understanding why, due to an accident of the calendar, he is suddenly taking home less money every two weeks.
On the other hand, for elected officials, you may have no legal choice but to divide the salary by 27, even though it will not seem fair to the elected officials. Special laws apply to the pay of elected officials, so you should treat them accordingly.

The best solution is to plan far ahead. Every year, you should budget enough money to pay for a full 365-day year and an extra day in leap years. Some appropriations will be left over each year, and these should be encumbered. If that encumbrance is carried forward year after year, it will grow into enough money to cover most of the 27th payday, when it happens.

 

[Revised July 20, 2015]

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If you have questions or would like further information, please contact us at: Coonrod@Coonrodcpa.com

Contact Us

You may contact us by filling in this form any time you need professional support or have any questions. You can also fill in the form to leave your comments or feedback.
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This article is intended to provide information of general interest to local government officials in Indiana. The information is not guaranteed to be applicable or appropriate in particular circumstances. Local officials should consult competent professionals before acting on any information contained in this article. We are not attorneys. Advice of a legal nature should be sought only from qualified attorneys.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

Copyright © 2014, 2015 C. L. Coonrod & Company

Local Governments can expect a 2.5% increase in their maximum property tax levies in 2016

Each year, the maximum amount of property tax revenue (levy) that may be generated by a local civil government unit is adjusted to account for growth and inflation. This article is intended to explain this calculation and the impact on your 2016 budget.

How is the annual adjustment to maximum levy calculated?

Legislation stipulates the six-year moving average increase in Indiana, non-farm personal income (as published by the federal Bureau of Economic Analysis) is the factor used to adjust the maximum levy each year.

Will the amount of my local unit’s property tax revenue increase as a result of this annual adjustment?   

Not necessarily. Factors such as lost revenue from property tax rate cap credits and delinquencies/non-payment of property tax bills also affect property tax revenue.

Does my local unit have to increase its tax levy each year?

No. A local unit does not have to increase its tax levy each year. However, the maximum amount of tax that may be levied will increase each year as a result of this adjustment.

Are all funds of my local unit affected by the annual adjustment to the maximum levy?

No. The general rule is that the total combined levies for all funds cannot be greater than the maximum levy for the local unit. However, there are several exceptions. For instance, debt and cumulative fund levies usually are not subject to the maximum levy, and other laws/rules dictate how these funds’ levies are adjusted each year.

How does the State make local units aware of the adjustment to the maximum levy?

In past years, the State Budget Agency has released a memo to the Department of Local Government Finance (DLGF) around June/July showing the ensuing year’s maximum levy increase. However, the federal Bureau of Economic Analysis has already published the necessary information to calculate the increase for 2016. We expect 2.5% will be the 2016 levy increase, but the official factor will be known only when it is announced by DLGF in the summer.

If you have any questions or would like further information about how to work with the maximum levy, please contact us at:  roeger@coonrodcpa.com

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Are your Cumulative Funds in good standing?

statehouseIf you have a cumulative fund of any kind, or if you want to establish one, June is a good time to do some checking.

The end of July is a firm deadline for establishing or reestablishing a cumulative fund. If you are SURE there have been no past reductions in your cumulative fund rates, or if you are sure you do not want to establish a new rate or increase an old one, you probably don’t need to take any action.

However, if a cumulative fund rate was lowered in the past, if it was never at the maximum rate, or if you want to establish a new one, you must give a ten day notice and hold a public hearing in order to make the change. All of the paperwork should be filed with the Department of Local Government Finance by the end of July.

Here is a list of cumulative funds that are options for municipalities, counties, and/or townships:

  • Voting System Purchase Fund
  • Cumulative Channel Maintenance Fund
  • Cumulative Bridge Fund
  • Cumulative Building Fund for intrastate air transportation
  • Cumulative Building Fund to provide for the erection of levees, gates, and pumping stations, other facilities, or the addition to or improvement of the facilities on the levees
  • Cumulative Improvement Fund for the construction, additional construction, or repair of the works of a conservancy district
  • Cumulative Building Fund for the erection of new hospital buildings, the repairing, remodeling, and enlarging of old hospital buildings, and the equipment of new, enlarged, and old hospitals
  • Cumulative Building Fund to erect hospital buildings, additions, or other buildings, remodel buildings, or acquire equipment
  • Cumulative Firefighting, Building, and Equipment Fund
  • Public Transportation Corporation Improvement Reserve Fund
  • Cumulative Building Fund for the county courthouse
  • County Cumulative Capital Development Fund
  • Cumulative Building Fund, Sinking Fund, and Debt Service Fund for certain law enforcement purposes
  • Municipal Cumulative Capital Development Fund
  • Municipal Cumulative Building or Sinking Fund
  • Municipal General Improvement Fund
  • Cumulative Township Vehicle and Building Fund
  • Cumulative Building Fund for municipal sewers
  • Cumulative Drainage Fund
  • Cumulative Building Fund for building, remodeling, and repair of park and recreation facilities or purchase of land for park and recreation purposes
  • Cumulative Building and Sinking Fund for parks, land, and improvements
  • Township Park and Recreation Cumulative Building Fund

Please contact us today for assistance in getting the maximum out of your cumulative fund.

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