SR-11-26-2013-7DTo: Mayor and City Council
From: Gigi Decavalles- Hughes, Director of Finance
Subject: Introduction and First Reading of an Ordinance amending Section
2.12.260 of the Santa Monica Municipal Code Granting Limited Authority
to the Finance Director to Waive Debts and Taxes Deemed Uncollectable
and Make Available as a Matter of Public Record a List of the Largest Tax
Delinquencies
Recommended Action
Staff recommends that the City Council introduce for first reading the attached
ordinance granting limited authority to the Finance Director to waive debts and taxes
deemed uncollectable and making available as a matter of public record a list of the
largest tax delinquencies and businesses operating without a business license.
Executive Summary
The Finance Director currently has broad authority to settle tax disputes by reducing or
waiving penalties or interest on delinquent City tax obligations and fees. However,
waiving debts owed to the City from taxes or fees that are deemed uncollectible is not
included in that authority. Although the broader policy to limit the Finance Director's
authority is well founded, in limited cases when a debt is past due and uncollectable, the
Government Finance Officers Association "Best Practices" on revenue control provides
that management of accounts receivable should include periodic write -offs to ensure
that accounts receivable balances are not overstated.
The write -off process is a critical component in valuing receivables. This process would
provide the Finance Director with limited authority to waive uncollectable debts and
would be consistent with the Finance Department's responsibilities to maintain the City's
financial records and prepare its financial reports.
In the Department's continuing efforts to enhance revenue collections from taxes and
fees, and as a part of public record, the department seeks to routinely publish the
names of all companies that are delinquent in paying business - related taxes, such as
business license, transient occupancy, or parking facility taxes; and the names of all
companies that have been identified to be operating without a business license.
1
Background
The Finance Department is responsible for the fiscal administration of the City. The
Finance Director, who also serves the City's Controller and Treasurer, is authorized by
Section 2.12.260 of the Santa Monica Municipal Code (SMMC) to settle tax disputes by
reducing or waiving penalties or interest on delinquent City tax obligations if such
reduction or waiver serves to promote the City's fiscal welfare. Section 2.12.260 was
amended by Council at its March 9, 2004 meeting to clarify the responsibilities of the
Finance Director to settle such disputes.
One of the Department's key objectives is to enhance revenue by collecting and
accounting for City taxes and fees. The department has taken steps to further this
objective. For example, at its June 25 2013 meeting Council adopted a master fee
resolution that included a 10% monthly late penalty on fees for service to encourage on-
time payment. Additionally, the department sought and received approval from Council
at its July 9, 2013 meeting to enter into an agreement with a collections agency to
ensure that delinquent debts due to the City are collected.
The Department also has contracts with third party firms to audit businesses to ensure
compliance and identify underpayment of business - related taxes, such as sales taxes,
business license taxes, and parking facilities taxes. Finance staff maintains the
responsibility to identify and bring into compliance businesses operating in Santa
Monica but not paying the appropriate business license tax, what is commonly referred
to as "discovery". Furthermore, to ensure focus and accountability on the collection of
debts due to the City, Council approved at its October 22. 2013 meeting to upgrade an
existing budgeted analyst position to a Billing and Collections Administrator.
Discussion
Although the steps taken by the Finance Department further the objective of improving
collections of delinquent tax and fee revenue, in some cases debts that are due to the
2
City may be uncollectable, even after repeated collection attempts have been made. A
debt may be deemed uncollectable if 1) the debtor has died or cannot be located; 2) a
business entity is dissolved or liquidated; or 3) the cost of further collection efforts would
exceed the estimated recovery amount.
The Government Finance Officers Association (GFOA) notes among its "Best
Practices "' that management of accounts receivable should include periodic write -offs
to ensure that accounts receivable balances are not overstated. The write -off process
is a critical component in valuing receivables. In accordance with generally accepted
accounting principles (GAAP) and GFOA "Best Practices ", the City has established an
allowance for doubtful accounts to reflect those outstanding accounts receivable which
are not expected to be collected.
Granting the Finance Director with the authority to waive individual debts from taxes and
fees that do not exceed $50,000 per account, and where the debt is deemed
uncollectable, would provide the department with the authority to "write -off' the
uncollectable debt. Staff anticipates large write offs of more than $1,000,000 in the first
year due to the aging accounts receivables that extend back up to ten years. In future
years, write offs will be dependent on collection rates.
Finance staff is taking steps to ensure that collections efforts are made more effective to
minimize the need for write offs. For example, at its June 25, 2013 meeting Council
adopted a master fee resolution that included a 10% monthly late penalty on fees for
service to encourage on -time payment. Additionally, the department sought and
received approval from Council at its July 9 2013 meeting to enter into an agreement
with a collections agency to increase collection of delinquent debt. Furthermore, to
ensure focus and accountability on the collection of debts due to the City, Council
approved at its October 22. 2013 meeting the upgrade of an existing budgeted analyst
' Creating a Revenue Control and Management Policy, Committee on Treasury and Investment
Management, Approved by GFOA Executive Board, October 2012
3
position to Billing and Collections Administrator. This position will provide focus on the
citywide billing and collections.
The Finance Department is also drafting a new Billing & Collections Administrative
Instruction to replace Administrative Instruction IV -6 -1 Collection of Delinquent Accounts
Legally Due to the City, which was implemented in 1986. Staff anticipates that the
revised Administrative Instruction would facilitate centralized citywide billing policies and
procedures, and provide clear guidelines on what constitutes an "uncollectable debt' as
well as ensure that timely collection of outstanding debt citywide.
Largest Tax Delinquencies
When businesses do not pay their fair share of taxes, it places an unfair burden on all
other members of the community. Closing this gap is in the best interest of the City, its
residents, businesses, and visitors alike. These revenues pay for critical City services,
including but not limited to fire and police protection, street and sidewalk maintenance,
libraries, and parks. Publishing lists annually in the December /January time frame of
tax delinquencies that are more than 90 days old and in excess of $5,000, as well as
businesses that are operating without a business license, would provide the City with a
tool to encourage compliance. If a list were published today, there would be 20
businesses delinquent with total outstanding delinquent taxes due of more than
$310,000. California and New York, as well as the City of Los Angeles, publish tax
delinquent lists as a tool for encouraging compliance.
The new Billing & Collections Administrative Instruction, discussed earlier in the report,
would detail protocols for publishing the list, which would include a notification to the
taxpayer of the intent to include the business on the list, allowing them an opportunity to
voluntarily settle their liability.
A business would be able to avoid being placed on either of the lists by establishing an
installment agreement, entering into a settlement agreement, or substantiating a
Ell
bankruptcy filing. Including a business on the delinquency list or unlicensed business
list would not prevent pursuing other collections, enforcement, or legal actions.
Financial Impacts & Budget Actions
There is no immediate financial impact or budget action necessary as a result of the
recommended actions. However, the waiver of taxes or fees would impact the City's
fund balances by way of clearing out uncollectable accounts receivables through write
offs and will not have an impact on budgeted revenues as these numbers are based in
part on actual collection rates.
Prepared by: Salvador M. Valles, Business & Revenue Operations Manager
Approyed:
QQ0 L� 'J t/
Gigi Decavalles',IAbghes
Director of Finance
Attachment: A. Ordinance
5
Forwarded to Council:
Rod Gould
City Manager
City Council Meeting: November 26, 2013 Santa Monica, California
ORDINANCE NUMBER (CCS)
(City Council Series)
A ORDINANCE OF THE CITY COUNCIL OF THE CITY OF SANTA MONICA
AMENDING THE SANTA MONICA MUNICIPAL CODE SECTION 2.12.260 GRANTING
LIMITED AUTHORITY TO THE FINANCE DIRECTOR TO WAIVE DEBTS AND TAXES
WHEN DEEMED UNCOLLECTABLE AND MAKE AVAILABLE AS A MATTER OF
PUBLIC RECORD A LIST OF THE LARGEST TAX AND LICENSE DELINQUENCIES.
WHEREAS, the City of Santa Monica is committed to utilizing best practices in all
aspects of the public's work including, in particular, fiscal management; and
WHEREAS, in 2004, the Council granted the Director of Finance the authority to
settle tax disputes by waiving interest and penalties; and
WHEREAS, the Director of Finance has carefully exercised this authority to
reasonably settle disputes and enhance the City's tax collection process; and
WHEREAS, in the course of administering the City's finances, debts may
become uncollectable; and
WHEREAS, experience at all levels of government has shown that writing -off
uncollectable debt promotes transparency and enhances government accountability.
NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF SANTA MONICA
DOES ORDAIN AS FOLLOWS:
SECTION 1. Santa Monica Municipal Code Section 2.12.260 is hereby amended
to read as follows:
1
2.12.260 Department head and duties.
(a) The head of the Finance Department shall be the Director of Finance who
shall be appointed by the City Manager. The Director of Finance, who shall also be the
City Controller, shall coordinate and supervise all activities of the Finance Department.
The Director of Finance shall have the authority to settle tax fee or other accounts
Payable disputes by reducing or waiving amounts due or establishing payment plans,
and owning as penalties or interest on delinquent City tax ebligations if such payment
Ip ans, reduction or waiver serves to promote the City's fiscal welfare by expeditious
payment, enhancing revenue, or otherwise.
(b) The Director of Finance is authorized to waive tax, fee or debt principal
owed to the City only when such tax fee or debt is deemed uncollectable consistent
with the following provisions:
(1) All reasonable efforts have been made to collect the tax fee or debt.
(2) The waiver is in the public's interest and will not cause undue harm to the
City's fiscal welfare.
(3) The amount to be waived does not exceed fifty- thousand dollars $50,000
per account.
(4) The waiver of any tax fee or debt principal is not for the purpose of
settling a legal dispute except where collection is clearly foreclosed by statute of
limitations as determined by the City Attorney.
E
(c) The Finance Director may publish and make available as a matter of
public record a list of the largest tax delinquencies and their associated taxpayers,
where all of the following apply:
(1) The tax delinquency is in excess of five thousand dollars ($5,000).
(2) The tax has been delinquent for more than ninety (90) days.
(3) The taxpayer is not on an approved payment plan or filed for such
payment plan which is under review.
(d) The Finance Director may publish and make available as a matter of
public record a list of the businesses that are operating without a license and have failed
to apply for or renew a business license.
SECTION 2. Any provision of the Santa Monica Municipal Code or
appendices thereto inconsistent with the provisions of this Ordinance, to the extent of
such inconsistencies and no further, is hereby repealed or modified to that extent
necessary to effect the provisions of this Ordinance.
SECTION 3. If any section, subsection, sentence, clause, or phrase of
this Ordinance is for any reason held to be invalid or unconstitutional by a decision of
any court of competent jurisdiction, such decision shall not affect the validity of the
remaining portions of this Ordinance. The City Council hereby declares that it would
have passed this Ordinance and each and every section, subsection, sentence, clause,
3
or phrase not declared invalid or unconstitutional without regard to whether any portion
of the ordinance would be subsequently declared invalid or unconstitutional..
SECTION 4. The Mayor shall sign and the City Clerk shall attest to the
passage of this Ordinance. The City Clerk shall cause the same to be published once
in the official newspaper within 15 days after its adoption. This Ordinance shall
become effective 30 days from its adoption.
APPROVED AS TO FORM:
El