By David Nakamura, Nikita Stewart and Yolanda Woodlee
Washington Post Staff Writers
Thursday, November 15, 2007
The D.C. auditor urged city government officials three years ago to "closely monitor" the flow of real property tax revenue after she noticed a spike in the amount of money refunded to property owners.
Deborah K. Nichols's reports, made in the summer of 2004, did not suggest wrongdoing in the Office of Tax and Revenue, the department now at the center of the largest financial scandal in the city's history. But she noted that the amount of property tax refunds was 105.7 percent higher than projected over three fiscal quarters, a jump not easily explained. She suggested that officials take a closer look.
Nichols said yesterday that the refunds "raised a red flag because they were running so high when fewer appeals had been decided during that time."
Chief Financial Officer Natwar M. Gandhi, who is under increasing pressure to explain how the burgeoning tax refund scam happened on his watch, said yesterday that he was aware of Nichols's report. He added that the refunds did not seem extraordinary because so much revenue was being generated by a hot real estate market.
"We were dealing with huge sums of real property tax revenues," he said, adding that he had talked with tax office managers, who "gave me assurances that things are all right."
Gandhi has ousted 10 employees, including the tax office's director, Sherryl Hobbs Newman, saying they must be held accountable even if they were not directly implicated. The city has lost more than $20 million at a minimum, authorities said, and according to a Washington Post analysis of tax records, that amount could reach more than $31 million. Two office workers have been arrested and charged with fraud for allegedly producing phony property refund checks.
Nichols's report came a year before Hobbs Newman took over the tax office, which has had a history of troubled leadership under the four directors Gandhi has hired in the past seven years. He hired Hobbs Newman to lead the 600-person department in 2005 despite being cautioned by aides to Anthony A. Williams (D), the mayor at the time, that she had served poorly in two Cabinet posts.
Yesterday, government leaders announced that the D.C. inspector general will review Gandhi's office and that the D.C. Council will conduct a separate investigation. Some officials are suggesting that Gandhi and his 1,250-person, independent agency need stricter oversight. Gandhi, who was hired in 1997 as part of the team assigned to rescue the city from financial ruin, is set to appear at a council hearing today, along with Hobbs Newman and Nichols.
"I'm not a quitter," Gandhi said during a combative news conference at the John A. Wilson Building. "I will not end my professional career with this blot on my record."
Mayor Adrian M. Fenty (D) called the corruption case a breach of public trust but added that Gandhi should be judged on his 10 years of helping the city recover after nearly being bankrupt.
"I continue to stand right beside Natwar Gandhi," Fenty said. "He has managed the city's finances exceptionally, and he's good for the future of the city."
Gandhi's ousters were meant to signal to city officials and business leaders that the alleged scheme was an aberration that should not cast doubt on the city's financial integrity. But Hobbs Newman has released a statement defending her tenure, and another ousted employee, Thomas Branham, is demanding that he be reinstated.
John M. Clifford, the attorney for Branham, said his client had not wanted to take the management position, agreeing in July to serve on an interim basis after being pressured by superiors. Branham had spent six years as chief assessor.
Wall Street analysts said this week they are not considering downgrading the District's bond ratings. But even some of Gandhi's closest allies said the scandal could erase much of the District's improved image.
"No one believes in him more than I do," said Williams, who appointed Gandhi to fiscal chief in 2000. "But do not underestimate the blow this is to the District. From an accounting point of view, it's immaterial. But one of the things we did, Nat and I, was restore the faith of people in the District. This really fundamentally undermines that."
Some have suggested that Gandhi can move forward only with increased oversight. The Office of the Chief Financial Officer was established by Congress in 1996 as an independent agency. Appointed by the mayor, the chief financial officer can be fired only for cause through a mayoral resolution approved by two-thirds of the council.
"I don't know how aggressive the oversight of the council has been on him, because he's like an extension of Congress," said the council's chairman, Vincent C. Gray (D). "We've all operated in this post-control board dynamic, and maybe that needs to be changed."
Nichols, the city auditor, who works for the council, examined the tax office's revenue collections and refunds in 2004 in the middle of a real estate boom. From 2001 through this year, real property tax revenue soared from $635 million to $1.45 billion. That has helped the city's bond ratings, which had hit junk status, rise to A-plus, an improvement for which Gandhi has been largely credited.
In two reports in 2004, Nichols raised questions about dramatic increases in property tax refunds. In a July 30 report, Nichols wrote that the amount of property tax revenue was lower than expected, in part because of an increase in refunds. Instead of returning a projected $7.3 million to property owners who had overpaid in the first two fiscal quarters, the tax office had refunded $11.9 million.
In a second report, dated Sept. 7, Nichols noted that by the third quarter, the real property tax refunds for fiscal 2004 had reached $21.3 million, $10.9 million more than projected. She wrote that the 2004 refunds were 149.8 percent higher than the refunds for the same period in fiscal 2003.
The city had recently switched from assessing properties on a three-year cycle to annually, which had generated a large increase in appeals. Nichols took note of that in her report. But, she concluded, "District officials should closely monitor this revenue source."
During fiscal 2004, the city refunded $26.4 million in real property taxes, a huge increase over the $12.5 million refunded in 2003. The Post analysis of real property tax records showed that a pattern of suspicious refunds dates to at least 2001 but ramped up in 2003.
Gandhi was asked yesterday whether the city was so flush with cash that the tax office might not have been worried about the refunds. "That impression can be made," he said.
In an interview last week, Gandhi said he relies on his deputies to be vigilant.
"The dilemma here in management is, as you go up, it's like you're traveling in a plane and look outside and things look so beautiful," he said. "Only when you go down, then you realize that, 'My God, there are problems here.' This was so down in the valley that you did not feel it, could not see it. But those that are down there have to check these things out. That's why they are there and I am here."
Yet Gandhi's hiring record for tax office directors has been troubled. Herbert J. Huff, who took the job in 2000, resigned two years later after a female staff member accused him and his wife of leaving a threatening message on her answering machine. Huff's successor, Phil Brand, lasted about a year before departing for the private sector. He was replaced in early 2004 by Daniel L. Black, who took a leave of absence after his father died and then resigned in 2005.
Gandhi turned to Hobbs Newman that year. She was a tax collector in New York in 1997 when Williams, then the chief financial officer, hired her. Gandhi, who was director of the tax office, put Hobbs Newman in charge of customer service.
When Williams became mayor in 1999, Hobbs Newman became his Department of Motor Vehicles director. She initially won raves for improving customer service, but she made missteps. During her tenure, a new computer system crashed, residents received the wrong car registration stickers and the department acknowledged overcollecting $800,000 in ticket fines.
At the start of his second term, Williams moved Hobbs Newman to the role of secretary of the District. Four former high-ranking Williams aides, who requested anonymity because they now work for private companies, said they were surprised by the new appointment because of her DMV performance.
"I was cautioned about that," Gandhi said of the criticism of Hobbs Newman. "I was willing to take her because I had worked with her. I had confidence in her."
In two e-mails, Hobbs Newman defended her record, adding that her anonymous critics are hiding "under the cover of darkness."
"I am proud of my accomplishments," she wrote, noting that during her tenure the office generated $53 million in additional revenue by revamping collection procedures and reducing customer waiting times.
Staff writer Clarence Williams contributed to this report.
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