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Using the RFF/BFF and Our Utility Charges to Cover the Financial Shortfall Caused by Washoe County’s Withhold/Offset of District Ad Valorem Taxes

IVGID 101 Posted on by

As demonstrated elsewhere, general improvement districts (“GIDs”) are limited purpose special districts. Therefore their powers are to be strictly construed and limited1 to those provided by the Legislature2 as explicitly conferred by their County Boards of Commissioners (“County Boards”) in GIDs’ initiating ordinances3 as supplemented, if at all, by: those “additional basic power(s expressly) granted4…pursuant to NRS 318.077;”5 “sections of this chapter (NRS 318) designated therein;”3 and, none other1. Thus with the foregoing clearly understood, and

Introduction: As with the propriety of all governmental powers, we begin our analysis with the Nevada Constitution given it “is the ‘supreme law of the state which ‘control[s] over any conflicting statutory provisions.’”6 Nev. Const. Art. 8, Sec. 8 instructs that the Legislature shall provide for/restrict the powers of all general purpose governments. Since the Legislature has created the GID law7, and the Incline Village General Improvement District (“IVGID”) is a GID8, IVGID’s powers are recognized/restricted by NRS 318.

With that said NRS 318.100(1) instructs that GID “board(s) shall have each of the basic powers enumerated in…chapter (NRS 318 which are)…designated in the(ir District’s) organizational…and reorganizational proceedings…taken pursuant to NRS 318.077 and other provisions supplemental thereto in this chapter, or otherwise authorized by law.” Given GID Boards may levy ad valorem taxes9, the District clearly has the power to assign the ad valorem taxes it levies to its General Fund10, and to pay for the costs it assigns to that fund. However, that’s not the question we raise. Rather,

The Question Herein Raised: is whether the District’s RFF (“Recreation Facility Fees”) and/or BFF (“Beach Facility Fees”) and the water/sewer utility charges local property owners are compelled to pay11/guaranty can legitimately be used to pay for that portion of the general governmental services furnished by the District assigned to its General Fund due to the loss of ad valorem tax revenues caused by the county’s withhold and offset of IVGID’s portion due to court mandated refunds12? For the reasons stated hereinafter, we say no!

The Particulars: “Beginning in 2010, the District…had a portion of its property tax(es)…offset…by Washoe County13…to settle a court ordered tax refund.”14 “On October 6, 2009 a Washoe County District Court ordered that a refund (was) due…taxpayers. On July 7, 2011 the Nevada Supreme Court denied Washoe County’s Appeal and ordered (the) tax refund. On August 23, 2011 the Washoe County Board voted to reduce future tax settlements to governments that (had) received property taxes during the periods covered by the Court Ordered Refunds (i.e., IVGID), to recover their proportionate share…The final offset occurred September 2013 (which) completed…payment of the recorded…$1,244,628…obligation.”15 In other words, the District was deprived of $1,244,628 of prospective ad valorem tax revenue because of Washoe County offsets. So what did the District do to address this loss of revenue?

The District financially reports its ad valorem tax revenue in its General Fund16. So any loss of revenue assigned to this fund disrupts expenditures assigned to the same. Moreover to complicate matters, like each of the District’s other funds, staff budget to spend more than the revenues they assign to this fund! This overspending is subsidized by allocated “Central Services Cost” transfers (which arguably pay for services furnished to these funds by the District’s General Fund17) from other District funds. In other words, transfers from the District’s Utility, Community Services and Beach Funds18 which arguably pay for services furnished to these funds by the District’s General Fund18. Therefore when the county announced it would be disrupting the District’s ad valorem tax revenue source, the District was faced with four (4) possible options:

First, cut over spending. This is something staff will never, never do because General Fund over spending by-and-large directly benefits staff19.

Second, increase existing Central Services Cost transfers from the District’s Community Services, Beach and Utility Funds20.

Third, assign investment interest income realized on huge Community Services, Beach and/or Utility excess Fund balances to the District’s General Fund21 instead.

And finally, use portions of the RFF and/or BFF as direct financial subsid(ies) – disingenuously labeling them as “reserves.”

Here the District chose the latter option22. Thus the District assigned each parcel/dwelling unit: $40 for 2011-12, $75 for 2012-13, and $49 for 2013-14 to make up for the loss of $1,244,628 in General Fund ad valorem tax revenue23. And what’s noteworthy about this labeling is that for at least the four (4) years preceding 2012-1322, as well as the eight (8) years following 2014-1523, no portion of the RFF was assigned to “Reserves for Recreation.” In other words, the idea that a portion of the RFF was actually going towards 2012-14 Community Services “reserves” was and is falsehood. Pure and simple it was a revenue substitute.

The District’s Limited Funding Sources: Because of their limited powers (see discussion above), one of the problems all GIDs face is their lack of adequate size and tax base to financially support the extensive services some (like IVGID) attempt to provide24. So GIDs are on the constant quest for revenue. Although one of the few straightforward revenue sources available to GIDs are ad valorem taxes25, they aren’t anywhere close to those a county is permitted to levy26. Given here staff had already spent ad valorem tax revenues subject to refund, mostly on themselves27, rather than returning these ill gotten gains to the District’s General Fund, they forced local parcel owners pay for them a second time. But staff had nowhere else to look other than the District’s RFF/BFF and the water/sewer utility rates charged to every parcel/dwelling unit within the District’s boundaries!

Excess Central Services Cost Transfers: Since the Board budgets to overspend in the District’s General Fund28, that over spending requires financial subsidy from somewhere. And that somewhere is central services cost transfers from the District’s Community Services, Beach and Utility Funds. Similarly because of Community Services Fund overspending29, the RFF local parcel/dwelling unit owners are compelled to pay is ultimately that subsidy30. And because of Beach Fund over spending31, the BFF local parcel/dwelling unit owners with beach access are compelled to pay is ultimately that subsidy32.

And let’s not forget that a portion of the excess fund balance created in the District’s General Fund comes from Utility Fund transfers. Therefore replacement of the financial shortfall caused by the county’s offset/withhold of District ad valorem taxes will also come from the subsidy of unjust, unreasonable and excessive utility rates33 local parcel/dwelling unit owners are compelled to pay/guaranty.

Interest Earned on Community Services, Beach and Utility Fund Balances: The financial shortfall caused by the county’s offset/withhold of District ad valorem taxes was also funded from interest earned on fund balances in the District’s Community Services, Beach and Utility Funds. Although what we describe did not literally occur in 2011-14, in principle, it could or in the future can!

According to Audit Committee member Cliff Dobler, “since 2019, the District has been holding in excess of $20 (million) in Cash, Cash Equivalents and Investments (‘CASH’) for (its) governmental funds most of which have been invested”34 in various income producing vehicles. “Investment income of all funds for fiscal year 2019 was $563,325…based on the average CASH of $20.5 million held during the fiscal year. (In contrast) the average cash for the General Fund was only $3.9 million representing only 19% of total CASH(. Yet it) received $327,817 or 58% of the investment income. Properly allocating the investment income based on average CASH held during the year, only $107,168 should have been allocated to the General Fund. (Thus there was) an overstatement of approximately $220,647”35 in the District’s General Fund. Actually, the overstatement was even more.

On June 30, 2019 there was over $31 million on deposit in the District’s various funds. Although the ending fund balance in the District’s General Fund was approximately twelve percent (12%) [$3,765,586 to be precise], the District reported that over fifty-five (55%) of investment interest ($327,815) had been assigned to the District’s General Fund36. In an era of essentially zero interest rates, this would represent a return of nearly ten percent (10%). Impossible! The true explanation is simply that interest earned on balances in the District’s other funds was being assigned by staff to the District’s General Fund.

“Investment income for fiscal year 2020 was $482,109…based on the average CASH of $23.8 million held during the fiscal year. (In contrast) the average cash for the General Fund was only $5.1 million representing only 21% of total CASH(. Yet it) received $372,676 or 77% of the investment income. Properly allocating the investment income based on average CASH held during the…year, only $102,389 should have been allocated to the General Fund. (Thus there was) an overstatement of $270,287”36 in the District’s General Fund. Again, the overstatement was more.

On June 30, 2020 the balances in the District’s various funds had increased to over $37 million. Although the ending fund balance in the District’s General Fund remained at a bit more than twelve percent (12%) [$4,630,149 to be precise], the District reported that nearly forty-nine (49%) of investment interest ($432,643) had been assigned to the District’s General Fund37. Again an Impossibilty! The explanation is simply that interest earned on balances in the District’s other funds was again being assigned by staff to the District’s General Fund.

All told, a minimum of $490,934 in excess interest income was assigned by staff to the District’s General Fund. But wait; there’s more! According to Mr. Dobler the foregoing discussion “only addresses the past two fiscal years” of improper allocations. “But (similar) improper allocations have been going on since, at least, fiscal year 2015.”34 This means that improper interest allocations to the District’s General Fund total a whole lot more than $500,000!

History is About to Repeat Itself: In 2021 there was a second disruption to the District’s ad valorem tax revenue source, and really, it was for the very same reason which took place in 2011-14. “A settlement agreement was reached between Washoe County and…Incline Village/Crystal Bay taxpayers…for the alleged overpayment of (additional) taxes and accrued interest (owing). As part of the settlement, the District is responsible for refunding an (additional) estimated $1,359,757.”14 And where will these funds come from? According to staff they “have…been restricted within the District’s (excess) General Fund” balance14. In other words, again, excess central service cost transfers (essentially funded from the RFF/BFF and utility rates collected) have been made over the last several years in anticipation thereof.

The District’s Justification: We believe there is none. However, if the reader would like to consider the Board’s/staff’s perceived justification and our response, you’re directed to our Staff’s/the Board’s Justification For Exceeding the Limited Powers the District May Permissibly Exercise discussion.

Moreover, Those Who Pay/Guaranty Payment of the RFF/BFF and the Utility Charges the District Assesses Have Already Paid For the Financial Shortfall Caused by the County’s Withhold/Offset of District Ad Valorem Taxes: If you’re a property owner, take a look at your county ad valorem tax bill. There you will see that you pay IVGID its own separate ad valorem tax. For 2021-22 the District has budgeted to receive nearly $2 million in ad valorem taxes from local parcel owners38 just like you. And in addition, the District has budgeted to receive an additional $1,640,534 in consolidated taxes38 (“C-Taxes”). Look where the District assigns the revenues it receives from both of these taxes38. That’s right the District’s General Fund. Since the District’s General Fund is supposed to be used to pay for governmental services which benefit the general public as a whole (see discussion below), and staff have been building up an excess fund balance in the District’s General Fund to pay for the financial shortfall caused by the count’s withhold/offset of the District’s ad valorem taxes (see discussion above), aren’t local property owners already paying more than their fair share? So why is the District disingenuously charging local parcel/dwelling units multiple times for the same expenditure?

Using the RFF/BFF Local Parcels/Dwelling Units Are Compelled to Pay For General Fund Shortfalls Make Them Impermissible Local and Special Taxes: Covering the financial shortfall in the District’s General Fund, provides governmental services which arguably benefit all residents, inhabitants, visitors, property owners, businesses, and real properties (including those not assessed the RFF/BFF) in our community. Therefore “the (subject fees)…levied…(by IVGID can)not survive scrutiny under the first prong of (the)…Medeiros39 test because the (services they pay for)…directly benefit…the public-at-large — (and) not (just) th(os)e…who pay the” fee. This makes the District’s use of this portion of the RFF/BFF local parcels/dwelling units involuntarily pay impermissible special taxes because they are nothing more than “incidental to (their) true purpose (i.e., general revenue)…When it appears…that revenue is its main objective…the enactment is a revenue measure.” And where as here it is a revenue measure, it “is an impermissible local and special tax.”40

NRS 205.300(1): To staff it doesn’t matter how the District generates revenues. Nor does it matter on what that money is spent. Since all revenues get deposited into a single account41, as far as staff are concerned those moneys are all available to be spent. And spent they are!

In contrast the District represents (as elsewhere discussed) that: the RFF/BFF pay for the (mere) availability to access and use the public’s recreation and beach facilities; the District’s water rates pay for the just and reasonable42 costs it incurs for the water services it furnishes; and, the District’s sewer rates pay for the just and reasonable costs it incurs for the sewer services it furnishes. But by using these revenues to pay for the financial shortfall caused by Washoe County’s withhold and offset of District ad valorem taxes, we submit there is a violation of NRS 205.300(1)43. So where exactly do staff get off using funds collected for completely other purposes to pay for the District’s loss of ad valorem tax revenue? And what does this revenue shortfall have to do with “recreation,” the availability to recreate, or “reserves for recreation?”

Conclusion: In our opinion it was and is a misuse of the NRS 318.197(1) (the power to fix rates, tolls and charges) to use the RFF/BFF and water/sewer utility charges to pay for the subject portion of the general governmental services the District furnishes because its ad valorem taxes were withheld and offset, as if they were a tax!

  1. See A.G.O. No. 63-61, p. 102, at p. 103 (August 12, 1963).
  2. See NRS 318.116.
  3. See NRS 318.055(4)(b).
  4. See NRS 318.055(4)(a).
  5. NRS 318.077 allows a GID “board (to) elect to add basic powers not provided in its formation, in which event the board shall cause proceedings to be had by the board of county commissioners similar, as nearly as may be, to those provided for the formation of the district, and with like effect.”
  6. See Thomas v. Nev. Yellow Cab Corp., 130 Nev. Adv. Op. 52, 327 P.3d 518, 521 (2014).
  7. See NRS 318.010.
  8. NRS 318.015(1) instructs that “each district organized pursuant to the provisions of this chapter shall be a body corporate and politic…quasi-municipal corporation” and general improvement district. 
  9. See NRS 318.225 which states GID “board(s) shall have power and authority to levy and collect general (ad valorem) taxes on and against all taxable property within the district.”
  10. NRS 354.534 instructs that a local government’s General Fund shall be “used to (financially) account for all financial resources except those required to be accounted for in another fund.” There is no other fund which mandates ad valorem taxes be reported in any other fund.
  11. ¶1.0 of Policy No. 16.1.1 mandates that unless expressly exempted (see ¶4.0 of Policy No. 16.1.1), all “qualifying real properties (in the)…District will (be) charge(d) the prescribed Recreation Fee, and if applicable, the Beach Fee.” ¶14.05 of the District’s sewer ordinance and ¶9.06 of the District’s water ordinance both mandate that “the Owner of any building…structure…or…premise…shall be…responsible for payment” of charges for public sewer and water services furnished by the District.”
  12. When one budgets to overspend and rely upon a financial subsidy like the RFF/BFF to cover the shortfall, it’s disingenuous to “cherry pick” what overspending is being subsidized. The fact of the matter is that every expenditure contributes to that overspending!
  13. Washoe County is the District’s agent when it comes to collection of the District’s ad valorem taxes [according to NRS 318.225 “such…collection (is) to be made…in conjunction with the county and its officers as set forth in this chapter.”].
  14. See page 2 of Paul Navazio’s and Indra Winquest’s January 22, 2021 letter to the “Board of Trustees for the Incline Village General Improvement District and Citizens of Incline Village and Crystal Bay, Nevada” included in the Introduction portion of the 2020 CAFR.
  15. See note 15 at page 45 of the District’s 2014 Comprehensive Annual Financial Report (“the 2014 CAFR“).
  16. See Schedule B-9 at page 8 of the 2022 Budget.
  17. For a more detailed explanation of central services costs, go to our discussion at https://ivgid101.com/central-services/.
  18. For 2019-20 central services income (excluding that assignable to the General Fund) totaled $1,367,400 (see page 114 of the 2019-20 Budget).
  19. Take a look at Schedule B-11 at page 10 of the latest 2022 Budget. There you will see that 51.4% ($2,074,007) of General Fund expenses have been assigned to personnel salaries and benefits. In contrast, this is more than the ad valorem taxes ($1,948,010) the District has budgeted to collect (see Schedule B-9 at page 8 of the 2022 Budget)!
  20. A technique honed in subsequent years. Between 2019-2022 the IVGID Board increased central services cost transfers by a whopping 32.82% from $1,493,757 (see page 124 of the 2019 Budget) to $1,984,124 [see page 47 of the packet of materials prepared by staff in anticipation of the Board’s May 26, 2021 meeting (“the 5/26/2021 Board packet“)].
  21. Another technique honed in subsequent years (see our discussion on this subject at https://ivgid101.com/funding_new_admin_bldg/).
  22. Yet rather than truthfully calling this reimbursement what it really was, it was disingenuously labeled “Reserves for Recreation” (see page 75 of  the 2014 CAFR).
  23. See page 90 of the 2020 CAFR.
  24. See ¶II, at page 9 of Legislative Commission of the Legislative Counsel Bureau, State of Nevada (“LCB”), Bulletin No. 77-11, Creation, Financing and Governance of General Improvement Districts, September 1976 (LCB Bulletin 77-11).
  25. See NRS 318.225 which states “the board shall have power and authority to levy and collect general (ad valorem) taxes on and against all taxable property within the district, (and) such levy and collection (shall)…be made…in conjunction with the county and its officers as set forth in this chapter.”
  26. Each fiscal year the Nevada Department of Taxation’s (“NDOT’s”) Local Government Services Division publishes its equalization of property tax rates for all local Nevada governments which levy an ad valorem tax (those rates are certified by the Nevada Tax Commission) given NRS 361.453(1) caps the maximum statewide tax rate at 3.64% per $100 of assessed valuation, This publication is commonly known as the “Redbook.” If the reader examines page B-10 the NDOT’s latest (2021-22) Redbook he/she will find that the tax rates for both Washoe County and IVGID. Washoe County’s is 1.3917% per $100 of assessed valuation, and IVGID’s is 0.1328%. In other words, the county’s tax rate is nearly 10,5% times IVGID’s!
  27. Take a look at the District’s latest (2021-22) budget. Salaries, wages and benefits assigned to personnel ($2,074,007) exceed the ad valorem taxes the District has budgeted to receive ($1,948,610).
  28. Take a look at the District’s latest (2021-22) Budget. At Schedule B-9, page 8 it reports $4,788,553 of estimated actual year ending June 30, 2021 revenues. At Schedule B-10, page 9 it reports $4,521,650 of estimated actual year ending June 30, 2021 expenditures. But $1,471,440 of revenues come from “central service cost allocation(s).” And as elsewhere explained, this allocation is really a financial subsidy to the General Fund which comes from the RFF, BFF and the utility rates and charges local parcel owners are compelled to pay/guaranty. When this subsidy is deducted from revenues, we see that for 2020-21 the District actually overspent $1,204,537! When you budget to overspend, it’s disingenuous to “cherry pick” any single source and assign payment. It’s every expenditure! And so here the Board has budgeted to overspend for State legislative advocacy services.
  29. See Schedules B-12 at page 17 and B-13 at page 18 of the 2019-20 Budget. For instance, the District’s Community Services Fund was budgeted to incur $27,197,671 of expenditures (see Schedule B-13, at page 18 of the 2019-20 Budget). Yet revenues were only budgeted to total $16,815,665 (see Schedule B-12, at page 17 of the 2019-20 Budget).
  30. For 2019-20: $561,800 of transfers from other funds (see Schedule B-12, at page 17 of the 2019-20 Budget); $4,037,091 of draw downs from the Community Services Fund balance (see Schedules B-12, at page 17 and B-13, at page 18 of the 2019-20 Budget); $5,783,115 of RFFs (see Schedule B-12, at page 17 of the 2019-20 Budget); and, the excess balance in the District’s Community Services Fund created from past excess RFFs
  31. See Schedule B-14 at page 19 of the 2019-20 Budget. For instance the District’s Beach Fund was budgeted to incur $3,105,629 of expenditures (see Schedule B-14, at page 19). Yet revenues were only budgeted to total $1,511,300 (see Schedule B-14, at page 19).
  32. For 2019-20: $625,729 of draw downs from the Beach Fund balance (see Schedule B-14, at page 19 of the 2019-20 Budget); $968,500 of BFFs20; and, the excess balance in the District’s Beach Fund created from past excess BFFs.
  33. NRS 704.040(1) instructs that “charges made for any (utility) service rendered or to be rendered, or for any service in connection therewith or incidental thereto, must be just and reasonable.” Just and reasonable utility rates are defined as those which are “simply high enough to produce revenue sufficient to bear all costs of maintenance…operation…interest charges on bonds and…accumulation of a surplus…sufficient to (service) all outstanding bonds” [see Springfield Gas & Electric Co. v. City of Springfield (1920) 292 Ill. 236, 126 N.E. 739, 744 (affirmed at 257 U.S. 66, 42 S.Ct. 24) – this case has been cited as authority for the proposition stated in Nevada by the Office of Attorney General (“OAG”) at A.G.O. No. 53-231 (February 9, 1953)]. Since here the District has a monopoly on the water and sewer services it furnishes, its only justification for going into the utility business is that public welfare will be subserved (Springfield Gas, supra, at 126 N.E. 748), profits are impermissible [See Clean Water Coalition v. The M Resort, LLC. (2011) 127 Nev. 301, 255 P.3d 247, 256; City of Madera v. Black (1919) 181 Cal. 306, 314, 184 P. 397]. We submit that the central services costs staff assign to the District’s Utility Fund are excessive. And because they are excessive, not only are the utility rates the District charges its customers unjust and unreasonable, but the excess portion represents an impermissible local and special tax (see discussion below).
  34. See page 129 of the packet of materials prepared by staff in anticipation of the Audit Committee’s August 10 2021 meeting (“the 8/10/2021 Audit Committee packet“).
  35. See page 130 of the 8/10/2021 Audit Committee packet.”
  36. See pages 27-30 of the District’s 2019 Comprehensive Annual Financial Report (“the 2019 CAFR“).
  37. See pages 25-28 of the District’s 2020 Comprehensive Annual Financial Report (“the 2020 CAFR“).
  38. See Schedule B-9, at page 8 of the 2021-22 Budget.
  39. See State v. Medeiros, 89 Hawaii 361, 370, 973 P.2d 736, 745 (1999).
  40. See Clean Water Coalition v. The M Resort, LLC., 127 Nev. 301, 255 P.3d 247, 257-258 (2011).
  41. That’s right. The District maintains but a single checking account. But for investments in income producing vehicles like certificates of deposit, day-to-day revenues and expenses are made into/out of a single checking account. Those transactions are reported in various accounting funds through a chart of accounts legend which assigns unique identification names and numbers to each transaction. Summaries can then be prepared using one or more software sorting programs.
  42. See NRS 704.040(1) which instructs “the charges made for any (utility) service rendered or to be rendered, or for any service in connection therewith or incidental thereto, must be just and reasonable.”
  43. Which states that “any bailee of any money, goods or property…with whom any money, property or effects have been deposited or entrusted, who uses or appropriates the money, property or effects or any part thereof in any manner or for any other purpose than that for which they were deposited or entrusted, is guilty of embezzlement, and shall be punished in the manner prescribed by law for the stealing or larceny of property of the kind and name of the money, goods, property or effects so taken, converted, stolen, used or appropriated.”

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