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Paying The Piper
CRIM plans to collect $300 million more in property taxes by 2003 by bringing records up to date and by appraising new construction, improvements, and additions to existing homes.
BY JOSE L. CARMONA
July 19, 2001
Cleaning up CRIM: The Municipal Revenue Collection Center has been plagued with problems from corruption, obsolete computers, and hopeless bottlenecks to incomplete, erroneous, and inefficient records. Can CRIM Executive Director Norman Foy bring this administrative and fiscal nightmare to an end and regain the publics trust in the agency?
"You can't tax what you can't see." Property that has not been segregated or appraised is "invisibile" to tax collectors.
Since property tax is the main source of revenue for the island's 78 municipalities, any efforts by the Municipal Revenue Collection Center (CRIM by its Spanish acronym) to increase the amount collected is welcome news to towns all over Puerto Rico. Actually, any good news about CRIM is welcome, given the chaos and corruption that has reigned there since shortly after it was created in 1991.
New CRIM Executive Director Norman Foy recently announced an ambitious plan to bring property tax records up to date within nine months and increase property tax collections by more than $300 million by 2003.
This huge effort involves bringing to light an estimated 100,000 lots and 300,000 real estate properties that have not been appraised or segregated (vernacular from the Spanish for land division), and including them in the agencys catastral (real estate property tax code) maps.
The plan, called the Massive Appraisal and Collections Plan, involves appraising new construction, as well as improvements and additions to existing homes, identification of non-valid property tax exemptions, and adjudication of exemptions that have been granted, but not processed.
The fewer properties appraised and entered into the property tax registry, the fewer funds municipalities have available to provide needed public services and infrastructure.
Properties will be appraised according to their value. Subdivisions, condominiums, apartment complexes, businesses, and land lots will be given top priority, as these generate the most revenue.
According to CRIM regulations, any home improvement or additionsuch as a swimming pool, room, carport, gazebo, or patiomust be reported to CRIM and to the mortgage company before Dec. 31 of each year.
Plagued with problems
But thats just the tip of the iceberg. The agencycreated as a result of the Autonomous Municipal Law of 1991 to provide the islands municipalities with their own source of revenuehas been plagued with numerous problems including corruption, an outdated and poorly handled computer system, centralization of the segregation and appraisal process, incorrect revenue distribution, even the sale of property seized by liens without proper corroboration of the debts.
This, along with years of inaccurate and inefficient record keeping, has resulted in an administrative and fiscal nightmare for CRIM and the municipalities, as well as the loss of the publics trust in the agency and its purpose of collecting the correct amount of taxes for the municipalities, so that they may each serve their general public and businesses more efficiently and effectively.
Behind the daunting task to turn CRIM around is Executive Director Norman Foy, who took over the agency in February.
The man for the job
A certified public accountant and lawyer, Foy is no stranger to CRIM. Between 1989 and 1993, he was part of the group that developed several legislative bills that made way for the creation of the municipal reform law and CRIM.
"I had the honor to be part of the group that created the municipal reform, CRIM, and its structure." Foy told CARIBBEAN BUSINESS during an exclusive interview. "We set it all up, and in July 1, 1993 we handed it over to its first executive director, Eduardo Burgos."
Eight years later, Foy returns to CRIM, this time as executive director. The picture he encountered upon his return to the agency was not a pretty one.
"The best way I can compare the state of CRIM when I left in 1993 with the state I found it in 2001 is that everything is about the same. In eight years, nothing much has happened here," said Foy. "Just a lot of problems."
When Foy arrived at CRIM in February, he found the same computer system he had installed eight years agonow deemed obsolete, employees with the same wage scales of eight years ago, plus the same problems the agency was facing back in 1993 (such as unsegregated and unappraised properties), but now on a much larger scale, and then some.
Even the sale of $360 million in property tax debts in 1998which was supposed to help bring additional revenue to municipalitiesended up being a nightmare for CRIM, because information on many of these debts had not been updated prior to their sale. As a result, taxpayers were coming to CRIM in droves to have their alleged property tax debts corrected, out of fear their properties would be seized.
The LIMS Project
According to Foy, the root of all of CRIMs problems lies in the Land Information Management System, a.k.a. the LIMS project.
The purpose of the LIMS project was to digitalize all real estate property tax code or catastral maps. To perform this task, in 1995 CRIMs Governing Board contracted a consortium of three firmsEntec Corp., CEPI, and HLRivas.
Computer contractor Tommy Habibe, owner of Entec along with his son Tommy Jr., bought CEPIs participation in the project. A few months later, the project was transferred entirely to Entec.
"The project had a good purpose, which was the digitalization & photometry of the catastral maps, but the project was the start of all the federal accusations that surfaced out of CRIM," said Foy. "This was a project that was supposed to cost $15 million to $20 million at the time, but ended up costing CRIM $56 million. As a result, there are several civil lawsuits pending and individuals accused in federal court."
On March 20, CRIMs first Executive Director, Eduardo Burgos, pleaded guilty to Federal Judge Hector Laffitte after admitting he received money from Habibe for adjudication of the $56 million LIMS project. For his crime, Burgoswho cooperated with federal authorities in the investigationcould receive between 57 and 71 months in jail.
Habibe is expected to plead guilty as well. The computer contractor is accused of 11 felony accounts, including conspiracy, interstate commerce interference, money laundering, and confiscation.
Habibe was arraigned last August along with Lebron and 16 others, including the former mayors of Corozal and Villalba, Carlos Serra and Bernardo Negron, respectively.
Habibes next court date is scheduled for Nov. 15, and he has until Oct. 15 to file a guilty plea.
Centralization makes it worse
As a consequence of the LIMS project, the agencys operations relating to segregations and appraisals were centralized at the agencys main offices in Rio Piedras, instead of being performed at CRIMs nine regional offices.
"Thats one of the reasons the number of properties requiring segregation or appraisals kept increasing so dramatically, because these were not done," said Foy. "It created a bottleneck. You cant expect one office to do the job of nine. Its impossible."
As a consequence, the number of properties not included in the property tax registry quadrupled.
"When the transition between the Puerto Rico Treasury Department (Hacienda) and CRIM began in 1991, there were many properties that had not been segregated or appraised," said Foy. "That number has now quadrupled. Today we have more than 100,000 new lots that have not been duly segregated, and another 200,000 lots that have never been appraised, meaning we have approximately 300,000 unappraised properties on the island."
To correct this, Foy plans to give the task of property segregation and appraisals back to the regional offices.
"There is no reason why these tasks have to be performed at the central office. If the staff at the regional office knows how to do these, then there is no need to have them done here," Foy said. This is a simple process, that has been complicated to the extent that it is now inoperative."
The sale of property tax debts
To complicate matters even more, in 1997, a portfolio containing some 96,000 property tax liens from 1974 to 1996, worth $360 million, was sold to the Public Financing Authority (PFA)a subsidiary of the Government Development Bank. In 1998, the PFA then contracted JER Revenue Services, with the intention of collecting as much money from these property tax debts as possible.
"The sale of these debts had a very good purpose, which was to try to collect these unpaid property tax debts. But the way it was implemented, with a weak prior debt sale record updating process, and a collection method that was not the most desirable or pleasant, made things worse," indicated Foy. "As a result, many taxpayerswho had paid correctlygot debt sale certificates, and started running to our offices, fearing that their properties would be seized."
Faced with an unusually high number of taxpayers at its offices, most of CRIMs staff of 600 employees had to concentrate on helping the hundreds of taxpayers who were coming in daily to get help with their situation, including the group of 100 employees who normally dealt with segregations and appraisals, thus putting their tasks further behind.
"The Debt Sale Lawwhich allowed the sale of these debtsstates that CRIM and the municipalities must replace non valid debts with valid ones," said Foy. "We now must substitute those non-valid debts with current ones from years 1997 to 2000. If we dont do it, the municipalities may end up with no revenue."
Most of the porfolios debts were sold at $0.70 on the dollar, which means they will have to be replaced with a debt of at least $1.60 on the dollar in order to cover costs, Foy indicated.
In the end, municipalities received $130 million from the sale, corresponding to debts from 1992 to 1996, while the central government received $70 million, corresponding to debts from 1984 to 1992.
Debts from 1974 to 1984 were given a zero value, meaning these debts were classified as non-collectable.
The Government Development Bank is evaluating the Debt Sale Law, as well as looking into other alternatives, so that this situation doesnt happen again, noted Foy.
Deficit Law of 1998
Another problem that Foy found at CRIM was that due to incorrect disbursement calculations made during the past administration, some municipalities received more revenue than they were supposed to, while others received less than they expected. As a consequence, these municipalities have a $150 million deficit.
"In order for CRIM to pay what is owed to the municipalities that were underpaid, the municipalities that were paid in excess must pay CRIM back. But because the number of mistakes was so large, there was no way these municipalities could pay CRIM pay back," said Foy.
Using the Deficit Law of 1998, the Government Development Bank approved a line of credit payable in 10 years to give municipalities an opportunity to pay in installments what they owe to CRIM.
Increase collaboration with municipalities
"We are in a process of clearing up all taxpayers debts. There are a lot of debts that are not valid from taxpayers that have a property tax exemption, but have not been properly applied. There are many unprocessed payments that have been received, but never credited. And many of the non-valid debts ended up in the portfolio that was sold," said Foy.
According to Foy, one of his greatest challenges is to purge old debts, clarify them, and bring all taxpayers records up to date. To accomplish this daunting taskwhich Foy estimates can be done in nine monthshe is seeking the cooperation of the municipalities and of the banking industry, which have most of the information CRIM needs to cross-check and verify taxpayers records such as deeds, certificates of exemption, payments, etc.
"Once debts are clarified and updated, there will be no reason for taxpayers to come to this office," said Foy. "That way our staff can concentrate on serving those taxpayers with real problems in a more efficient and expeditious way, instead of putting out fires as we are doing now."
Since the only way municipalities can increase revenue is by identifying new sources of property tax, Foy wants to strengthen the relationship between CRIM and the municipalities and increase the level of cooperation between them. In fact, he encourages municipalities to sign collaborative agreements with CRIM.
"The municipalities can help us with the collection process by identifying exempt properties as well as new properties needing to be segregated or appraised," said Foy. "There is a lot we can do together."
In spite of the construction boom the island has experienced in the last few yearsincluding home additions and improvementsFoy contends CRIMs figures have not increased accordingly, which proves there are many properties that have not been segregated or appraised.
"If we do our job, we estimated we can bring annual property tax revenues to more than $1 billion by 2003," said Foy. "The only way we can increase revenue is by going out to the field (with the help of the municipalities) and start segregating and appraising properties. Thats one of CRIMs obligations, and it was not being done."
CRIM collected $682.6 million in property taxes during fiscal year 2000, which included real estate and non-real estate property (see chart).
Foys first order of business when he joined CRIM in February was the acquisition of a new computer system to replace the one in place at the agency since 1993.
"We must have an efficient and dependable computer system. The current system is running at 96% capacity. It has no room for growth, it is obsolete," said Foy. "We have acquired a new system for $1.2 million, which is more efficient and will allow us to provide access to the municipalities, the banking industry, and taxpayers."
A study is underway to analyze the possibility of providing information and services through the Internet, which will reduce traffic at the regional offices and provide taxpayers with easy access to their property tax records.
The new computer system, which is expected to be operational in September, is separate from the controversial LIMS project.
"The digitalization of the catastral maps (LIMS project) is complete, but many properties have not been entered into the system because they have not been segregated or appraised," said Foy. "The LIMS project also involved photometry, which is now being done."
In photometry, an aerial photograph is taken of a property and compared to the digitized catastral maps. This is done to identify home additions and improvements, as well as new properties not yet in the system.
According to CRIM regulations, any home improvement or additionsuch as a swimming pool, room, carport, gazebo, or patiomust be reported to CRIM and to the mortgage company before Dec. 31 of the year its constructed.
Better pay for employees
Another issue to which Foy is committed is the upgrading of wage scales and working conditions for CRIM employees.
"When I came back in February, employees were still on the same wage scale as in 1993. There is no way a person can survive today earning the same wages of eight years ago. Its not fair," said Foy. "Employees have not been taken care of."
The first thing Foy did was increase the governments monthly contribution to the employees health plan from $65 to $100, and is in the process of revising it again, along with their salaries.
"Salary increases have been minimal around here," said Foy. "They are long overdue. They are definitely coming, but in tune with the current fiscal situation."
Foy also intends to make improvements to employees working areas.
For the first time, CRIM has established a Collections Unit, dedicated exclusively to property tax debt collection efforts. Foy is also contemplating the implementation of an account billing statement for taxpayers, something never done before.
"Once we update taxpayers records and know of a valid property tax debt, you can be sure CRIM will do whatever it takes to collect that debt, even seize a taxpayers property," said Foy emphatically. "Why do we have to wait 10 years to collect?
Under Law 83, known as the Municipal Law on Real Estate Property, CRIM may impose taxes on non-appraised properties up to five years retroactively, from the time such property is appraised. (See related story.)
Another thing Foy has proposed is the revision of the non-real-estate property tax regulation, which dates back to 1985 and is considered obsolete.
"The non-real estate property tax regulation was revised in 1989, but since it was never published, it does not exist," said Foy. "It will be completely revised and updated, including the non-real-estate property tax form."
Non-real-estate property includes cash, inventory, materials, equipment, and machinery used for business purposes. Taxpayers must file a non-real-estate property tax form on or before May 15 of each year.
There are currently 55,000 taxpayers who file the non-real-estate property tax form, a number Foy considers too small, considering the number of businesses in Puerto Rico.
In fiscal year 2000, non-real-estate property taxes represented 46% of CRIMs total revenues, amounting to $317.2 million.
Although politicians and non-politicians alike have suggested the elimination of CRIM, Foy is a firm believer in the agency and the role it plays.
"If I had thought for one second that eliminating CRIM was the best solution, I wouldnt be here," said Foy. "This agency provides a valuable and noble service."
Foy acknowledged that his goals for updating all property tax records in nine months and increasing collections to $1 billion by 2003 are ambitious, but is confident he can turn the agency around and regain the publics trust.
"My goal is that all properties in Puerto Rico are appraised. If I achieve that and bring collections to $1 billion in 2003, then CRIMs job will be well done, because the municipalities will increase their revenues," said Foy. "And with more revenue, there are more public works, and everyone is happy."
Two weeks ago, a 10-member Evaluating Committee named by Gov. Sila Calderon held public hearings around the island. The committee is expected to turn in their recommendations by Sept. 30.
President of the Evaluating Committee is Caguas Mayor William Miranda Marin, who is also president of CRIMs Governing Board.
Municipal Revenue Collection Center
Fiscal Years 1991 to 2000
(In Millions of dollars)
Source: Municipal Revenue Collection Center
Caguas Mayor William Miranda Marin (Board President)
Trujillo Alto Mayor Pedro Padilla Ayala
Mayaguez Mayor Jose Rodriguez
Lares Mayor Luis Oliver
Arroyo Mayor Reinaldo Pirela
Cabo Rojo Mayor Santos Padilla
Manati Mayor Juan Cruz
Government Development Bank President Juan Agosto Alicea
Barbara Sanfiorenzo, Municipal Affairs Commissioners Office
Source: Municipal Revenue Collection Center
Caguas Mayor William Miranda Marin (Committee President)
Carolina Mayor Jose Aponte
Lares Mayor Luis Oliver
Modesto Agosto Alicea, president of Senate Treasury Committee
Barbara Sanfiorenzio, Municipal Affairs Commissioners Office
Pedro Cintron, Government Development Bank
Juan Zaragoza, Arthur Andersen
Hector ONeil, president of Mayors Federation
Source: Municipal Revenue Collection Center
This Caribbean Business article appears courtesy of Casiano Communications.