The city of New Orleans may have improperly diverted millions of dollars in property taxes — meant for schools, drainage, public safety and neighborhood security — to several state retirement systems.
That’s according to a lawyer for the Downtown Development District and documents filed in its lawsuit seeking a refund of about $400,000.
According to state Supreme Court rulings and an Attorney General’s opinion, local governments are not allowed to use property taxes for expenses not approved by voters. From at least 2014 to 2016, the city used between $3.7 million and $4.2 million of those taxes to contribute to state pension funds.
In March, The Advocate reported that the Downtown Development District had demanded hundreds of thousands of dollars that the city had collected on its behalf and diverted to the retirement funds.
The district sued the city in April. It argues that its tax, which is levied on downtown properties, can be used only to fund its activities, such as sidewalk improvements, a new homeless shelter and security in the Central Business District.
The improper withholdings may go well beyond the Downtown Development District, said Bill Aaron, its lawyer.
City-prepared spreadsheets included in the Downtown Development District’s court filings show that the city took money from a number of special taxes — including those dedicated to the Orleans Levee District, the Orleans Parish School Board, the police and fire departments and Sewerage and Water Board drainage work — from at least 2014 to 2016.
Another document shows that the city withheld the funds from the Downtown Development District in 2013 as well.
Under state law, the city is obligated to contribute to several state-administered pension funds, including those for employees of the local district attorney and sheriff’s offices.
The city “passed on its obligations to other tax recipients,” Aaron said. That’s against the law, he said, because voters didn’t authorize those taxes to be used for those pensions. “If the tax is for a special purpose, it can only be used for that purpose.”
School district spokeswoman Dominique Ellis said in a phone interview, “The Orleans Parish School Board is aware of the circumstance, and it is currently under review.”
Richard Rainey, a spokesman for the Sewerage and Water Board, said Monday that the agency is looking into The Lens’ questions about the funds but needed more time to research the issue.
According to an affidavit from Anthony Carter, finance director for the Downtown Development District, the city improperly withheld about $240,000 from the district’s property tax between 2013 and 2016. He based that on the city Finance Department’s own calculations.
The district has noted the discrepancy in its three most recent annual audits.
Carter, who declined to comment for this story, estimated that the city owed the district an additional $140,000 for 2017 and 2018.
Last week, a judge ordered the city to stop withholding money from the district’s property tax, except for a two percent collection fee, pending the outcome of the lawsuit.
The issue came to light as LaToya Cantrell prepared to succeed Mitch Landrieu as mayor. She was inaugurated Monday.
Among the taxes that Landrieu’s administration may have diverted are more than $1 million annually for schools and between $400,000 and $500,000 per year for the drainage tax.
Aaron’s position is supported by a 2007 state Attorney General’s opinion, which said the city could not use Downtown Development District taxes to pay state retirement expenses.
It also appears to be supported by the Louisiana Supreme Court. In a 2007 opinion, justices noted that the court had “consistently interpreted the constitution to prohibit the use of dedicated and special taxes for purposes other than those for which they were levied.”
That ruling predated Landrieu’s administration, but according to Carter’s affidavit, the administration was well aware of it: In 2014, Norman Foster, Landrieu’s chief financial officer at the time, handed Carter a copy of the ruling.
The city is required to contribute to five state retirement systems, for the offices of the clerk of court, sheriff, registrar of voters, district attorney and parish assessor. Those contributions are set at a percentage of all the property taxes it collects, including general taxes and taxes earmarked for specific purposes.
The city sends between $4 million and $5 million per year to the retirement funds, according to the spreadsheets. That’s about one percent of the $500 million or so it collects from all property taxes in a year.
Much of that $500 million is collected on behalf of outside agencies, like the school board and the Sewerage and Water Board. Some other taxes are dedicated to specific city departments, like police and fire.
In fact, just one property tax isn’t dedicated to a specific purpose. That leaves just that source of revenue to pay the pension funds, the city argued in the 2007 lawsuit. The tax generates about $50 million per year; the annual payments to the pension funds come to about 10 percent of that.
There is a wrinkle: Under a state law passed in 2012, the city may be able to divert some property taxes to the retirement funds, Aaron said. The law requires government agencies seeking new, increased or renewed property taxes to give notice that they may use a portion for that purpose.
Several property taxes have been approved or reauthorized by voters since 2014. That means the amount that may have been improperly diverted could be lower since 2015 — perhaps substantially lower in the last couple of years.
But Aaron said that doesn’t apply to the Downtown Development District tax or any other tax approved by voters before 2013, when the law went into effect.
According to The Advocate, Landrieu’s administration told Cantrell’s transition team about the problem with the Downtown Development District.
A recent court filing indicates that Cantrell’s administration may be discussing a settlement with the district. Given the change in administrations, “the city believes that the matter may be resolved by agreement,” an assistant city attorney wrote.
But it’s not clear what, if anything, the city will do about the taxes for other agencies and city departments.
“At this time, the matter is in litigation and the City is determining the most appropriate path forward,” Landrieu’s spokesman Craig Belden said last week in a statement to The Lens.
Beau Tidwell, Cantrell’s communications director, cited the lawsuit and declined to comment.