News Column

Kitsap County reconciles million-dollar mistake

August 16, 2014

By Chris Henry, Kitsap Sun, Bremerton, Wash.

Aug. 16--PORT ORCHARD -- The Kitsap County Treasurer's Office has reconciled more than $1 million in errors made as it distributed real estate excise taxes to the county and its cities.

The errors stemmed from a software programing change made in 2013 that allows title companies to electronically input information on real estate sales. Real estate excise taxes are assessed on real estate transactions and distributed to cities and counties specifically to pay for capital projects and infrastructure.

The city of Bainbridge Island contacted the county early in 2014 about a potential problem, said Kitsap County Treasurer Meredith Green.

"We just noticed that our real estate excise tax revenues weren't tracking where we thought they should be," said City Manager Doug Schulze.

Real estate sales on the island started an upward trend last year, mirroring nationwide trends, Schulze said.

The city and county worked over several months to analyze the apparent shortfall. In July, a review of electronic records back to 2009 showed Bainbridge had been underpaid by a net $978,963. The city of Bremerton was shorted by $84,769, and Poulsbo was owed $42,107, according to a letter sent by the treasurer's office to the cities on July 31.

Records show the county had been overpaid by $896,512 and Port Orchard received $218,293 more than it was owed. That money has already been paid back and distributed to the three cities, minus each city's proportionate share of $8,965 in administrative fees due to the county.

All but a handful of errors occurred in 2013 and 2014, after the new eREET system had gone live. The error stemmed from discrepancies between two codes used to describe parcel locations, the "excise code" and the "parcel location code." Both link to the county's land information system (LIS) database.

Tests of the eREET system did not catch the potential for discrepancies due to coding errors. The errors occurred as the county imported data from the title companies.

"We take our responsibilities for accurately processing transactions very seriously and apologize that we did not detect this situation earlier," Green wrote to city officials.

The county has changed its program to take only the location code directly from the LIS when it processes eREET transactions, and Green has implemented monthly reports that allow cities to audit REET receipts.

That satisfies Schulze.

"I think the most important thing is the error has been identified and has been corrected," Schulze said. "It was good news. It was very positive news for the city."

The sudden influx of $978,963 won't have an immediate effect on Bainbridge Island's plans for capital projects, Schulze said. The city in 2014 made no big plans for capital undertakings, continuing a conservative budgeting strategy that dates to the recession. Depending on the continued recovery of the real estate market, the city may begin discussing larger projects, such as the city's police station, Schulze said.

"I'm very pleased that Meredith found this and when it was found she corrected it," said Poulsbo Mayor Becky Erickson. "My hat goes off to her that she handled it all appropriately."

"Mistakes will happen. This was a big one and one of the biggest that I've been around," Green said. "I don't like making them, but we do make them sometimes, and they do need to be corrected."

Although REET and general fund revenues are kept separate and allocated for different purposes, Poulsbo's REET reimbursement will take pressure off its general fund and allow for greater budget flexibility, Erickson said.

Like Schulze, Erickson is pleased with the increased accountability, but she would like to see the county add a staff position for large volume data analysis to assist the treasurer, assessor and other departments track and routinely test the accuracy of data management systems.

For the city of Bremerton, repayment of nearly $85,000 was "great news," said Cathy Johnson, director of finances. "We've been struggling in that area, so these funds are definitely welcome."

Like most jurisdictions these days, Bremerton uses much of its REET revenue to pay off debt on capital projects undertaken during the real estate boom that preceded the recession. Bremerton is making payments on its portion of costs for the Norm Dicks Government Center, opened in 2004.

But as Bainbridge, Bremerton and Poulsbo benefit from reconciliation of the error, what about Port Orchard and Kitsap County, which had to pay for the reimbursements?

Once again conservative budgeting implemented during recession will cushion the effect for both jurisdictions.

"No budgeted projects are impacted," said Port Orchard Treasurer Allan Martin. "Port Orchard's real estate excise tax fund maintains a healthy balance of $1 million, even after correcting the transaction."

Port Orchard's REET in 2014 pays for debt on its city hall, completed in 1999, street paving projects and a telephone system upgrade.

Kitsap County's REET revenues have been showing steady improvement since 2012, when they were 28 percent higher than in 2011. In 2013, the year the Kitsap Mall sold, they were 51 percent higher than in 2012. Although the county isn't banking on another windfall like the mall sale, the outlook for REET is positive, said Amber D'Amato, director of administrative services.

"Because of this, the reduction of almost $900,000 appears to be manageable at this time," she said.

The county now has a practice of maintaining one year's worth of debt payments in an emergency reserve fund within REET. The $896,512 it paid out to reimburse the three cities will draw the emergency reserve below the target balance, but it should be replenished within a few years, D'Amato said.


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Source: Kitsap Sun (Bremerton, WA)

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